Reprinted from The Washington Times , 5am -- May 22, 1998
Contraband cigarettes infiltrate high-tax areas
By Samuel Goldreich
THE WASHINGTON TIMES
Domestic cigarette smugglers have long made Washington state a favorite target, attracted by smokers trying to escape paying the nation's second-highest excise tax.
Officials there now report an influx of illegally imported Chinese cigarettes, which some say is a sign of things to come nationwide if the Senate bill that would raise prices by $1.10 per pack becomes law.
"In the past year or so, our Department of Finance has been seizing Chinese cigarettes and they're still trying to figure out where they're coming from," said John Hough, Washington's senior assistant attorney general. "They've been packaged to look like American brands, complete with the surgeon general's warning label."
Based on the experience of high-tax states, smokers already are engaged in a quiet campaign of civil disobedience the scale of which has been unseen since people flocked to speakeasies during Prohibition.
The youth-smoking bill before the Senate includes hundreds of pages that cover everything from regulating the nicotine content in cigarettes to banning Joe Camel. But efforts to curb smoking likely will be decided based on the willingness of smokers -- adults and children alike -- to break the law to buy cheap smokes.
Public health advocates, like the American Cancer Society, say price increases work, noting that adult smoking in Canada dropped 38 percent and youth smoking declined by 60 percent between 1981 and 1992, when rising taxes almost doubled the price of cigarettes.
Critics of the tobacco bill say raising cigarette taxes to discourage smoking is not worth the price, citing the latest estimates that states already lose $1 billion to domestic cigarette smuggling.
If the Senate tobacco bill passes and the Food and Drug Administration eventually orders a reduction in cigarettes' nicotine levels, raising prices would further fuel a black market, said Senate Judiciary Committee Chairman Orrin G. Hatch.
"If you reduce the nicotine content, then people are going to want to buy the contraband, which has no standards at all," the Utah Republican said at a hearing last month. "And so you lend even more support to the racketeers and criminals and Mafia and everybody else to get into the business."
That's what happened in Canada and is happening in some states with high cigarette taxes, the General Accounting Office reported last week. Citing a Washington Department of Health study, the GAO estimated that $674 billion in state tax revenues was lost nationwide to cigarette smuggling in fiscal 1995, ending June 30, 1996.
"It's been a fairly consistent pattern across the nation that states with high excise taxes see a dropoff in sales while surrounding states with lower taxes report collecting higher revenues," Mr. Hough said.
In Washington alone, smuggling cost tax collectors $51 million in fiscal 1995. Now, state revenue officials estimate that the bill is $110 million per year.
Locally, Washington, D.C.'s 65-cent excise tax cost it $7 million in lost revenues in 1995, and Maryland's 36-cent tax cost that state $17 million, the GAO reported.
But the biggest tobacco-producing states --which have among the lowest cigarette taxes --either lost no money to smuggling or received windfalls, according to the GAO analysis.
No smuggling losses were reported in fiscal 1995 in either Virginia or North Carolina, where taxes were 2.5 cents and 5 cents per pack, respectively. Kentucky, which had a 3-cent tax, gained $5 million in tax revenues as a result of cigarette smuggling.
Those three states are the major suppliers of bootleg cigarettes to high-tax states, said Gary Black, a tobacco stock analyst for Sanford C. Bernstein in New York.
The problem is expected to grow worse, after several states implemented large excise-tax increases. Alaska, for example, boosted its levy to $1 per pack last year, up from 29 cents in fiscal 1995.
The search for cheap smokes explains why U.S. cigarette imports from Canada soared 11 times to 550 million packs between 1990 and 1993, when taxes were increased. Taking advantage of duty-free Canadian exports to the United States, smugglers bought up cigarettes on a Native American reservation straddling the border in New York, then shipped them back to Ontario and sold them through contraband networks.
The result was that the Canadian border town of Cornwall became overrun by criminals who were able to sell smuggled cartons of cigarettes for $18 apiece to smokers who didn't want to pay the excise tax, which drove the price to $50, said the town's former mayor, Ron Martelle.
"At the height of the crisis, law enforcement agencies estimated that at least 50,000 cartons of cigarettes crossed the St. Lawrence River into Canada every day," he told the Senate Judiciary Committee. "For me and my fellow residents of Cornwall, it was a time of anger and fear; anger because our once peaceful community had been stolen from us, fear because it had become so violent."
He described a period of terror, when rival gangs exchanged gunfire across the river, a shopping mall was destroyed, his life was threatened, and police placed him and his family in hiding.
Mr. Martelle, now a private investigator and sometime consultant to the tobacco industry, helped lead efforts that resulted in sharp reductions in cigarette taxes.
But David Sweanor, legal counsel to the Canadian Non-Smokers Rights Association, told the Judiciary Committee that smuggling on the scale that Mr. Martelle and the GAO report cannot happen without cooperation from cigarette makers.
"The Canadian operations of the tobacco companies simply started exporting vast quantities of Canadian brand cigarettes ... into places like upstate New York to come back into the country," he said.
Mr. Sweanor said the United States has a legal market of about 500 million Canadian cigarettes per year, serving mostly Canadian tourists in places like Florida. But he said Canadian tobacco companies exported about 20 billion cigarettes into the United States at the height of the smuggling frenzy.
To avoid feeding a black market in the United States, the Clinton administration supports the tobacco bill written by Senate Commerce Committee Chairman John McCain, Arizona Republican, which would license and regulate everyone in the cigarette distribution chain. The bill would require licensed tobacco makers and wholesalers to restrict their sales to other licensed sellers and require that packages be marked for intended domestic and export markets.
But Sen. Dianne Feinstein, California Democrat, scoffed at the notion that cigarette smugglers would be dissuaded by licensing requirements.
"We can't do it for drugs," she said. "How are we going to do it for cigarettes?"Copyright 1998 News World Communications, Inc.
Reprinted with permission of
The Washington Times.
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