Black market cigarettes may cloud future Excessive tobacco taxes could create illicit trade in U.S., author warns


TAX TOBACCO like crazy, squeeze billions of dollars out of the tobacco companies, and save a generation of kids from smoking.

That's the formula government and anti-tobacco activists are pushing these days. If the government cracks down enough, some believe, tobacco use could dwindle to nothing in our lifetime.

Congress recently began debating far-reaching tobacco legislation that includes a hefty tax on cigarettes. But politicians would do well to heed the recent experience of other countries that have tried such measures in attempting to reduce tobacco consumption.

Take Canada. Under similar pressures from the anti-smoking lobby, the Canadian government cranked up tobacco taxes in the early 1990s.

In the late 1980s, a carton of cigarettes cost about $25 in Canadian currency. By 1993, a legal carton of cigarettes cost between $40 and $60, while illegal cartons were going for between $20 and $30, according to an estimate by the office of Canada's Solicitor General.

The result was predictable: a black market.

High profits

After being exported to the United States, Canadian cigarettes were brought back over the border and sold at a high profit, with organized crime gangs vying aggressively for a share of the market. The Akwesasne Mohawk Indian reserve, at the crossroads of the U.S. border and the Canadian provinces of Quebec and Ontario, became a key point of entry, with police scrambling in vain to curb well-organized, armed smugglers.

For a while, Canadian smokers seemed free and easy about the illicit thrill of buying cigarettes from "a friend of a friend." Small retailers endured slumping cigarette sales - and holdups from bandits seeking to make off with cigarettes.

Soon, an estimated one-quarter to one-third of cigarettes smoked in Canada came from the black market. The loss of federal taxes to smuggling was estimated at about $1 billion Canadian, with provincial governments losing about the same amount.

In 1994, the Canadian government responded by knocking down combined federal and provincial tobacco taxes by as much as 50 percent. At the same time, it announced new smuggling enforcement initiatives. But sharp differences in taxation levels between Canadian provinces have remained. Interprovincial smuggling continues to be a significant problem. In 1996, Canada's Auditor-General estimated that approximately $630 million in tobacco revenue was being lost to smuggling.

Some might argue that a certain amount of social and financial pain is worth the creation of a smoke-free generation. But do high prices keep kids from smoking?

In 1993, Canadians paid an average of $5.65 for a pack of cigarettes, up from $2.64 in 1984. During that period, teen smoking rates fell by 60 percent, with total smoking rates declining 38 percent.

In British Columbia, a pack of cigarettes costs $5.25 ($3.85 in U.S. dollars). Yet a significant number of youngsters continue to smoke. It might turn out that they will pay any price for what they want, whether it's cigarettes or ridiculously overpriced brand-name sneakers.

In fact, it is entirely possible that the combination of high-priced legal cigarettes, a black market and strong-arm enforcement against sales to youngsters might have an effect opposite of what is intended - tempting some youngsters into illegal activity and thereby subjecting them to the influence of hard-core criminals.

Canada is not the only place where high taxes have spawned criminal activity and loss of government revenues and control.

After steep tax increases in Sweden, the quantity of smuggled cigarettes jumped from 6 million in 1995 to 39.5 million in 1997. The government responded by dropping the tax by 27 percent. Denmark is also looking to reduce cigarette taxation.

In Britain, high taxation has led to an exploding black market of cigarettes from countries in continental Europe where prices are lower.

During the last couple of years, German streets have seen violent gang warfare over control of the illicit tobacco trade.

Sinister innovations

Smugglers have taken advantage of the discrepancy in taxes from one jurisdiction to another. But if governments persistently tax tobacco past what the market will bear, we can expect even more sinister innovations from black marketeers.

The economics of this are obvious. Cigarettes cost only about 30 cents a pack to manufacture and transport. In a black market, the difference between that and the price to the final purchaser is pure profit for the smuggler.

Now consider this. In the United States alone, there are 49.1 million smokers -- 26 million men and 23.1 million women -- according to the American Heart Association. Other estimates indicate that approximately one-quarter of the North American population smokes. With that sort of market potential, how long will it take the drug cartels to grow and manufacture their own tobacco products?

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