The Irish Revenue recently released their annual report for 2020.

According to the findings, there has been a 250% increase in illegal cigarettes seized since 2019. The sharp increase represents an urgent need for the Irish government to reconsider its approach towards fighting illicit trade. Contrary to popular opinion, taxes are not effective in achieving that.

Illicit trade is a consequence of restrictive policies that create valuable incentives for criminals to provide consumers with a cheaper — and less safe — alternative. Irish fiscal policies aimed at cutting down the demand for cigarettes, for example, such as a 50 cent increase of the excise duty on a pack of cigarettes, plays to the benefit of smugglers seeking quick profits. 

Smugglers exploit a regulatory disparity within Europe, in particular that concerns countries that are in close territorial proximity to the EU. In Minsk the price of a pack is around 1.40 EUR, 10 times cheaper than in Ireland. In 2020 alone, Latvian authorities confiscated 21 million illegal cigarettes from Belarus through a single border entry. It is important to keep in mind the numbers include only the detected cases, and, in reality, the scope of criminal undertakings is much greater. 

The same applies to products across the board, such as drugs. In February, in Cork, the Revenue made one of the largest seizures of cocaine valued at 12.04 million EUR. These are illicit products that can threaten consumer well-being. Some 20 per cent of Irish teenagers have consumed illegal drugs at some point in their lives, and the only way to obtain these is through the black market, where no regulations or age-restrictions apply.

Black markets exist not only because there are groups willing to take the risk of smuggling products across borders, but also because there is a demand for overregulated products. A survey conducted by iReach for the Forest Ireland in October 2020 found that 70% of adults (including 67% of non-smokers) in Ireland agree that it is “understandable” that consumers might choose not to buy cigarettes and tobacco from legitimate retailers in Ireland. 

Ireland as a tobacco high-cost country is, therefore, especially vulnerable to criminal activities, and while detection efforts should be extended, decisive steps in the form of tax cuts or commitment to abstain from further tax increases should be taken. 

A 2010 study on the impact of cigarette tax reduction on consumption behaviour in Canada published by CIRANO (Centre interuniversitaire de recherche en analyse des organisations) in Montreal found that each additional dollar in final applicable taxes raises the incentive to resort to consuming contraband cigarettes by 5.1 per cent, while each additional dollar in tax cuts decreased it by 5.9%. Therefore, higher taxes increase the attractiveness of the black market, and the deeper the tax cuts, the higher the likelihood of stopping smuggling.

While it is true that the cigarette prevalence in Ireland has been consistently dropping, it doesn’t mean that if the government cut taxes the rates would shoot back up. Canada provides a valuable example. In 1994, the Canadian government slashed taxes on cigarettes to tackle the booming illicit trade. Despite alarmist expectations, the smoking prevalence dropped, and the trend has persisted. Compared to pre-tax cuts times, illicit trade has also significantly decreased.

The Irish Heart Foundation’s recommendation to annually increase the price of cigarettes so that the overall cost of a pack reaches €20 by 2025 doesn’t stand up to scrutiny, and will only lead to further spikes in illegal trade in Ireland. 

In order to succeed, the Irish government should escalate detection efforts to target the supply side of the illicit market, and consider significant tax cuts, or, at least, disregard calls for more increases of tobacco excise taxes.

Originally published here.

Last year, the Irish Revenue seized more than €32m worth of illegal cigarettes, 326 weapons, a crocodile head and a turtle shell, among other assorted contraband items. Alcohol has also been smuggled in massive quantities, with over 764,174 litres worth €4.17m seized in 2020 alone.

As criminals continue to improve their methods of concealment, the scope of undetected activities expands further. We should all be concerned by this. Not only do black markets bypass all regulatory oversight, meaning there are no controls for safety or quality, they create an incentive and funding model for additional criminal behaviour, such as arms or human trafficking, while also depriving the government of tax revenue and putting legitimate businesses at a disadvantage.

There is no silver bullet for solving this enormous challenge, and the Irish government should start by implementing smarter anti-illicit trade policies. But it should beware that many of these black markets evolve as a reaction to overregulation and over-taxation, which is something that the government could, with the right political will, address relatively easily.

We know that illicit trade is, in many ways, a consequence of restrictive policies such as sin taxes, which drive criminals to provide consumers with a cheaper alternative. Ireland’s policies, such as the recent 50-cent increase in excise duty on a packet of cigarettes, likely plays to the benefit of smugglers seeking quick profits, while doing very little, if anything, to help people quit smoking.

If the government’s aim is to reduce smoking, it could endorse reduced-risk nicotine products, like e-cigarettes and vaping, through reduced taxation and more accurate public information campaigns on the relative health benefits. Not only would this achieve the broader goals put forward by public health regulators, as research by the European Policy Information Center has found, but it could also help discourage the illicit trade of tobacco.

Within Europe, regulatory disparity encourages the illegal flow of cigarettes from low-cost countries such as Belarus and the Ukraine into the European Union. In Minsk, for example, the price of a pack is around 1.40 EUR, ten times cheaper than in Ireland. In November last year, over 5.5m cigarettes originating from the Ukraine were seized at the Dublin Port ,with the budget loss estimated at around €2.5m.

Smugglers exploit these countries’ territorial proximity to the EU, and by entering through countries such as Latvia, counterfeit tobacco products can make their way into western Europe.

Of course, black markets exist not only because there are groups willing to take the risk of smuggling products across borders, but because there is demand for overregulated products. Surveys aren’t everything, but one conducted by iReach did find that 70 per cent of adults (including 67 per cent of non-smokers) in Ireland agree that it is “understandable” that consumers might choose not to buy cigarettes and tobacco from legitimate retailers in Ireland. 

Tobacco high-cost countries such as Ireland are especially vulnerable to criminal activities, and while detection efforts should be extended, the government should consider taking decisive steps in the form of tax cuts or, at the very least, abstaining from further tax increases. 

The evidence to support this is compelling. A 2010 study published by CIRANO in Montreal found that each additional dollar in taxes raises the propensity to resort to consuming contraband cigarettes by 5.1 per cent, while each additional dollar in tax cuts decreased it by 5.9 per cent. It is clear, therefore, that higher taxes increase the attractiveness of the black market, and that the deeper the tax cuts, the higher the likelihood of stopping smuggling. 

The overarching goal behind excise tax increases, regulators claim, is to reduce smoking rates in Ireland. While it is true that the cigarette prevalence in Ireland has been consistently dropping, this doesn’t mean that if the government were to cut taxes the rates would shoot back up. 

The Irish government need only look to Canada where, in 1994, the government slashed taxes on cigarettes to tackle the booming illicit trade and, despite alarmist expectations at the time, the prevalence of smoking dropped and continues to fall. Illicit trade has since also significantly decreased.

In order to piece together a more coherent strategy, the Irish government should continue to target the supply side of the illicit market, but it would be a mistake not to consider significant tax cuts and smarter regulation. A multi-pronged approach will be the only way to reduce illicit trade and avoid the problems associated with it.

Originally published here.