TOBACCO TAX TALK BRINGS CHEERS TO THE BLACK MARKET

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 might
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. 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 consumed in
Canada were coming 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 fact, it is entirely possible that the combination of high-priced legal
cigarettes, a black market and strong-arm enforcement against sales to
youngsters 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.

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 tobacco products?

Today's persecution of legitimate, taxpaying tobacco companies could pave
the way. And if you don't like the legal tobacco trade, hold onto your hat.
The next chapter of the Tobacco Wars might feature counterfeit Marlboros or
Camels purchased illegally by distributors from international organized
crime and sold in your local corner store, bar or schoolyard.

Does this all sound impossibly alarmist? It might to those in the United
States who have a sensitive nose for tobacco smoke and no sense of history.
During Prohibition, drinking bootleg booze took a certain amount of
courage, and not just because it involved breaking the law.

Many people were blinded or killed by so-called bathtub gin --
incompetently home-brewed liquor that was sometimes sold in "name brand"
bottles to attract unwary customers. Could a black market lead to the loss
of government control on cigarette content?

Today, it is U.S. legislators who appear to be blinded by the prospect of
filling government coffers with easy tobacco bucks while getting the
political fix that comes from appearing to be on the right side of a public
health issue. But to be truly responsible, they should consider the
probable consequences of their actions. If they don't, they might be
remembered as the architects of the worst social experiment since
Prohibition.

Checked-by: Richard Lake