Failed tobacco tax sees hopes go up in smoke

Increased consumption of these illegal tobacco products boosts profits for the black market, which are criminal enterprises

Smokers may evade the indoor smoking ban by sneaking puffs, but evading the tobacco tax is more dangerous. The 50 percent tax hike last February increased the cost of a pack of cigarettes and smokers, like most savvy consumers looking for a deal, are finding cheaper packs can be bought on the black market.

The poorest class is always the most vulnerable to fake products or drugs, and with knowledge that the tobacco hike is increasing black-market trade, is it responsible to keep the tax in place?

While some smokers may have quit since the hike, the overall effects have been negative on the whole for community health.

Recent reports show the illicit trade is growing, and strongly. The non-duty paid cigarettes have increased by 31 percent since the tax hike on tobacco, according to a study by the Tobacco Control Concern Group.

The study also finds a 9 percent increase in the number of fakes and contraband cigarette packs since the increase nearly 12 months ago.

Easily predicted, the black market has grown and is being supported. Customs is finding close to double the number of cases concerning illicit cigarettes, a 97 percent increase in illicit market activity for the first 10 months of last year (2,531 cases, involving 1,967 people compared to 1,281 cases, involving 968 people recorded in the same period of 2008). These alarming statistics point to a swelling of black-market activity. How did this happen and should we be worried?

Such activity is on the rise specifically because of the 50 percent increase in the tobacco tax.

It's not hard to understand why black- market goods are attractive - they are less expensive.

When the government raised the tax, both consumers wanting to save their dollars and pushers and producers in the black market took advantage and moved in to profit.

The growth of the illicit trade in recent months is worrying. Smuggled cigarettes are not the worst crime the black market has to offer. However, increased consumption of these illegal tobacco products boosts profits for the black market, which are criminal enterprises. With smokers and vendors trying hard to find cheaper packs, the tax incentivizes buying from the black market, providing funding for other criminal activities. The last thing any government hopes to achieve is a vibrant black market cultivated from that government's policy.

The increase in black-market activity is a worrying factor, but more so are the harrowing spin-off effects. The greatest, the easier access youths have to cigarettes and the black market. With easier access to cigarettes, which are normally out of reach, it's only logical that other out-of-reach drugs and substances such as ketamine - which young people in Hong Kong are especially exposed to - may also be easily acquired.

At a time when the government is implementing its controversial school drug testing, it is also facilitating students with easier access.

This tax is supposed to help smokers kick the habit, and as a bonus, gain revenue from the duty paid.

If the government intended to stop people from smoking for their own health, the most effective policy would be to ban all forms of tobacco use outright.

But implementing such a stringent policy would tarnish Hong Kong's image, after all, the Nazi regime was the first to ban tobacco products.

Incentives make a difference. There must be tobacco users who have quit because of the tax hike. The remainder, however, are incentivized to find other means to acquire their tobacco products cheaply, enabling increased black- market activity and pulling our youths closer to it.

Should the government be raising tobacco tax when unsurprisingly it boosts black-market activity, which is difficult to control, that also endangers the youth, and results in loss of revenue for newspaper vendors. Others may accept that every planned policy or tax has its costs, but meanwhile, much greater damage to our community goes ignored.

Increasing the tobacco tax blindly and infinitely has caused unintended negative consequences that outsize the benefit the government intended.

Nicole Idanna Alpert is research associate with the Lion Rock Institute, a free-market think-tank