TALK OF TAX HIKE CHEERS ANTI-SMOKE LOBBY

Spectre of smuggling rises as governments discuss raising tax to pre-'94
levels

The fight against tobacco addiction may soon be getting a new ally - the tax
collector.

"As the price goes up, consumption goes down," anti-smoking activist David
Sweanor said.

It's a simple equation that works.

That's why the possibility that the federal government and five provinces,
including Ontario, may soon agree to boost tobacco taxes to pre-1994 levels
comes as such good news to health groups.

While Imperial Tobacco, Canada's largest cigarette company, warns that a
dramatic tax hike will cause widespread smuggling like that of the early
1990s, Sweanor and the RCMP say those fears are largely unwarranted.

Federal sources have said an official announcement on a tax increase of at
least $12 a carton isn't expected until June or July.

The sooner the better, say advocates.

Every day that goes by, new young people pick up smoking. The single most
effective factor in changing that pattern is raising the price, said
Sweanor, senior legal counsel for the Non-Smokers' Rights Association.

"The most price-sensitive part of the tobacco market are teenagers. They are
at least two to three times as price-sensitive as adults."

That means the rate of youthful smoking can be directly linked to a rise or
fall in prices.

In 1981, 46 per cent of Canadians 15 to 19 were smoking.

By 1991, when the price of a pack of cigarettes had risen to nearly three
times higher, the rate was down to 21 per cent.

When prices fell in 1994, by about $20 per carton, the smoking rate in that
group surged to more than 30 per cent again, Sweanor said.

While health groups are thrilled at the prospect of more expensive
cigarettes - and are hopeful more money will go to anti-smoking education -
talk of a tax hike has inevitably given rise to concerns about cigarette
smuggling.

Tobacco taxes were rolled back by the federal government and five provinces
(Ontario, Quebec, Nova Scotia, New Brunswick and Prince Edward Island) in
1994 to end the multi-million-dollar cigarette-running trade.

More than 90 per cent of the smuggled cigarettes in Canada originated in
Canadian factories and were exported to the United States tax-free, only to
return to Canada as contraband.

Much of the contraband came through the border-straddling Akwesasne Reserve,
near Cornwall. The reserve has land in Ontario, Quebec and New York State.

But that won't happen again, RCMP spokesperson Staff Sergeant Andre Guertin
said.

"The situation in 2000 is quite different than it was in 1993," Guertin
said.

"We're much, much better prepared now than we were then."

In 1993, when "smuggling was out of control," the RCMP had 270 full-time
officers across Canada assigned to the problem.

Today, there are 600 full-time officers across the country working to stop
smugglers, he said, adding that cigarette smuggling didn't disappear
entirely when the tax was rolled back.

And there has been some recent success.

"A lot of kingpins have been busted over the past few years," Guertin said.

In 1997 they seized $92.9 million in contraband tobacco products. In 1998
that number fell to $6.1 million; by 1999 it was only $4.7 million.

Improved equipment and increased manpower resulted in 1,652 charges being
laid in 1997 and 1998, and $57 million charged in fines for tobacco
smuggling, Guertin said.

"I don't think we will ever eradicate smuggling," he said. "But we're more
equipped to retain a level of control."

But Michel Descoteaux, a spokesperson for Imperial Tobacco - which holds 70
per cent of the Canadian market - isn't so sure.

"The government did all they could (in the early 1990s) and they couldn't
stop it," Descoteaux said about the smuggling.

Just as anti-smoking groups speak about the connection between price and
consumption, Descoteaux speaks about the link between tax and smuggling.

"If (the governments) are talking about small tax increases at regular
intervals, then it's business as usual. If they are planning on doing it
much faster and by bigger increments, then we'll see smuggling again, no
question about that."

The only difference between now and the early 1990s, he said, will be the
type of cigarettes being smuggled.

Because of an export tax - if a company exports more than 3 per cent of its
total tobacco production it is taxed at the same rate as if the cigarettes
were to be sold on the domestic market - contraband likely wouldn't be
Canadian, he said.

"Smugglers would have to get their cigarettes elsewhere, and there's no
shortage of that," Descoteaux said.

But the export tax is just one of many factors that make widespread
smuggling less likely and far less profitable now than it was in the early
1990s, Sweanor said.

Because of a series of billion-dollar settlements by tobacco companies in
the United States, who have raised their prices to compensate - and because
of increased state taxes and the falling Canadian dollar - U.S. cigarettes
are now more expensive than those in Ontario and Quebec. In 1993, Canadian
cigarettes cost two to three times what they did south of the border,
Sweanor said, making smuggling profitable.

But even then, most of the cigarettes smuggled into Canada weren't American,
he said.

"The smuggling that occurred before was largely orchestrated by the tobacco
companies themselves," he said, referring to recent court verdicts.

A former executive for tobacco giant RJR-Macdonald Inc. is serving a
70-month sentence in the United States for his role in the
cigarette-smuggling operation, the first tobacco executive to be convicted
in connection with 1990s smuggling.

In Canada, the federal government has launched a $1 billion (U.S.) lawsuit
against RJR-Macdonald Inc., alleging it defrauded Ottawa by smuggling
cigarettes into Canada.

Northern Brands pleaded guilty and was fined $15 million for helping
smugglers slip exported Canadian cigarettes back into Canada.

Ontario and B.C. are suing tobacco companies to recover health-care costs
associated with smoking-related illnesses.

In 1998, tobacco companies settled lawsuits filed by 46 states for $206
billion (U.S.).

With those court decisions and the possibility of others looming over
tobacco companies, they are much less likely to become involved again,
Sweanor said.

With "the combination of the civil and the criminal concerns, a tobacco
executive would have to be absolutely crazy to decide that they wanted to
further facilitate smuggling," he said.

And if they can't supply the market, they have a vested interest in ensuring
that other people don't, Sweanor said.

While Descoteaux defends Imperial Tobacco, saying it went to great lengths
and "lost a fortune" to ensure it didn't sell to smugglers in the early
1990s, he does agree that the company has a vested interest in stopping
smuggling.

"We would be an ally to the government" in deterring smuggling, he said.

"We don't like smuggling; it disturbs the market and our share in it."