Canada Cut Tobacco Taxes and Crushed the Black Market

Australia should study what worked, then improve it with legal access to safer nicotine products.

Australia is told that reducing tobacco excise cannot weaken the illicit market. Canada proved otherwise.

By early 1994, contraband cigarettes supplied about 40 per cent of Canada’s tobacco market. Canadian manufacturers exported billions of cigarettes across the United States border before much of the product was smuggled back untaxed. Exports reached 17 billion cigarettes in 1993. Canada’s vast land border with a larger country selling far cheaper cigarettes made enforcement exceptionally difficult. Organised crime, intimidation and violence followed.

On 8 February 1994, the federal government cut cigarette excise from C$10.36 to C$5.36 per carton of 200. Because provinces levy their own tobacco taxes, federal action alone was insufficient. Five eastern provinces, Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island, joined with substantial reductions of their own.

The tax reset was accompanied by an export tax, stronger border enforcement, controls distinguishing domestic from export cigarettes, a surtax on tobacco company profits, public education and youth protections. The government understood that police could not control an illicit market of this size while criminal profits and consumer savings remained overwhelming.

The results were dramatic. Canadian cigarette exports fell from 17 billion in 1993 to seven billion in 1994 and five billion in 1995. The US Government Accountability Office reported that US cigarette imports from Canada fell 96 per cent between 1993 and 1996. A contemporary study said the contraband market had effectively dried up.

Canadian-born public health academic Becky Freeman recently described this as merely “some reduction” in illicit sales. That is an extraordinary understatement from somebody familiar with Canada. A fall of 96 per cent in the principal cross-border flow is not “some reduction”. It is a policy success.

Freeman now supports freezing Australian excise, saying there would be no health gain from another increase. Simon Chapman, however, argues that freezing or cutting excise by less than 50 per cent would be “equally inconsequential”. Their disagreement exposes how uncertain the defence of current policy has become.

Laura Hunter says calls for lower excise are attempts to increase tobacco company profits. But motive does not answer the economic argument. Companies may recover legal sales, but that does not explain collapsing revenue, a vast illicit market or why consumers pay criminals instead.

Chapman’s argument is equally weak. Because a legal packet would remain dearer than the cheapest illicit packet after a 50 per cent cut, he concludes the reform would achieve nothing. That treats demand as binary. Markets work at the margin. Price elasticity asks how much purchasing changes when relative prices change. Legal cigarettes do not need to reach identical prices before some consumers prefer a lawful, reliable and convenient product, particularly when enforcement raises the cost of buying illegally.

UNSW economics professor Richard Holden goes much further. Writing in the Australian Financial Review, he proposed cutting excise to zero temporarily to destroy the illegal market, then rebuilding it step by step. Australia need not accept his precise prescription to recognise what it demonstrates: serious economists regard radical excise reform as legitimate, not an industry talking point.

Sequencing matters. First reduce the illicit market’s price advantage. Then intensify enforcement as consumers return to legal supply and police face a manageable volume. Enforcing first, while half the market is illegal, asks police to empty the ocean with a bucket.

Excise reform should also be paired with licensed specialist vape shops selling regulated products to adults under strict age, manufacturing and marketing rules. High cigarette prices can push smokers away from combustion, but accessible and cheaper vapes can pull them towards a lower risk substitute. The current pharmacy model has instead left illicit retailers supplying much of the market. A Cochrane review finds high certainty evidence that nicotine vapes help more people quit than nicotine replacement therapy.

Australia’s data invite humility. The 2025 National Drug Strategy Household Survey estimated daily smoking fell from 8.3 to 5.6 per cent, but the NSW Population Health Survey reported 9 per cent in 2025. ABS wastewater based modelling estimated nicotine consumption rose almost 40 per cent from 2017 and illicit sources supplied 80 per cent in 2025. The ABS calls its allocation method experimental because it must estimate which products generated the nicotine detected. That does not justify ignoring the wastewater signal.

Even if the national survey is correct, it cannot prove current policy caused the fall when illegal suppliers dominate the nicotine market. Canada faced the facts, changed the economics and broke its contraband system. Australia should do the same, then use regulated safer alternatives to avoid Canada’s principal mistake of making cheaper cigarettes the only attractive escape from the black market.