Rationale: Tax policy has been used as an instrument of health for many years. Since the late 1970's increased excise taxes and duties, at federal and provincial/territorial levels, have resulted in decreased demand and lower cigarette sales in Canada. Nevertheless, in recent years, Canadian cigarette manufacturers have introduced lower priced cigarette brands, known as discount brands, in response to a number of factors. The market share of discount cigarettes increased from 2% to over 40% between 2002 and 2005. This suggests that the magnitude of the effects of tax increases may not be as large as predicted by the literature. Objective: The objective of this paper is to determine the effect of tax changes on the overall demand for cigarettes, as well as the separate effects and on discount and premium cigarettes. Methods: The data employed in this paper include monthly wholesale cigarettes sales and prices, by brand, for each Canadian province, federal and provincial taxes per carton of cigarettes, and per-capita disposable income for 2002 to 2005. Three separate models were estimated - one model for overall cigarette sales, and separate models for discount and premium cigarette sales. Monthly cigarette sales were used as the dependant variable in each model with discount and premium cigarette prices, cigarette taxes, and disposable income as the independent variables. Due to provincial heterogeneity province was employed as a random effect in all three models. All variables were converted to logs allowing the coefficients to be interpreted as estimates of price elasticity. Results: The tax variable was significant in each equation. In the equations for overall cigarette sales and premium cigarette sales, taxes and quantities of cigarette sold were significant and inversely related. The tax elasticity in the overall market equation was -0.54, consistent with previous research, while in the regular cigarette market equation, the tax elasticity was -0.91. In other words, as taxes increased sales of premium cigarettes decreased at a faster rate than the market as a whole. Consistent with this result is the finding that tax elasticity on discount cigarettes was 1.37 implying that as taxes increased, sales of discount cigarettes also increased. Conclusions: These results provide further evidence that, in Canada, recent increases in taxes have resulted in smokers switching from regular priced cigarettes to discount priced cigarettes, thus mitigating the possible effects of tax increases. In addition, these results provide an indication of the magnitude of the impact of tax increases on smokers' behaviour
