HIGHER TAXES SPUR BLACK MARKETS

Despite the good intentions many people in Washington, making cigarettes
vastly more expensive and trying to regulate tobacco out of existence will
not achieve the goals that supporters of the McCain bill desire, In fact, it
will make the situation worse.

For starters, the Clinton administration and Sen. John MeCain speak of a
$1.10 increase in cigarette taxes as a means to reduce underage smoking.
This is disingenuous. What is not said is that this tax increase, combined
with the other punitive provisions of the McCain hill, other tax increases
already legislated and the impact on margins and volumes, would push the
price of cigarettes to more than $5.00 per pack. This will create a massive
black market, one in which children will find it easier, not more difficult,
to purchase cigarettes.

In the late 198Os. the Canadian government adopted a policy of escalating
cigarette taxes to discourage youth smoking. By 1994. the price of a carton
of cigarettes had reached $46. Also by then, more than one--third of the
entire Canadian market was contraband-smuggied cigarettes, unregulated and
untaxed. Government studies revealed that few in Canada had quit smoking
because of the high cost. Faced with an unofficial tax revolt and growing
lawlessness, the Canadian government made massive tax cuts on cigarettes in
February 1994.

In England today, the government is losing about 81 billion a year in taxes
to cigarette smuggling. A rash of street crime and violence associated with
smuggling is making some parts of England so unsafe residents are not
venturing out or their homes after dark. In Sweden, the government has had
to slash tobacco taxes by 27 percent to combat smuggling.

Unfortunately, the United States is not immune to this sort of thing.
According to an October 1996 study by the independent Washington-based Tax
Foundation, "cross-border shopping for cigarettes (to avoid high taxes)
increased an astounding 454 percent between 1980 and 1994, while cigarette
smuggling increased 295 percent during the same period."

Last month Washington state, which has one of the highest cigarette tax
rates in the country, reported that 27 percent of its cigarette market was
contraband. With the state losing more than $110 million a year in taxes,
the legislature shifted power to enforce the tobacco tax from the revenue
department to the Liquor Control Board, "whose agents carry guns and have
police powers," according to an Associated Press report.

Michigan's cigarette smuggling rate is estimated to be between 20 percent
and 30 percent of the market. The state increased taxes by 200 percent in
1994. Other cur-rent hot spots for smuggling cigarettes in the United States
include California and Texas -- both with long borders with Mexico, which
offers premium cigarettes for less than $1 a pack -- Florida, which is
suffering a huge "gray market" for cigarettes that is fast becoming an
illegal market. and New York.

Simple math shows why smuggling is so lucrative to organized crime. A large
truck can hold 700,000 packs of cigarettes. If cigarettes are brought into
the United States from abroad and avoid customs officials -- as is happening
in a number of major ports -- evading the 24-cents-per-pack federal tax and,
say, the license-a-pack tax in Michigan, the tax avoidance is almost
8700.000 per truckload.

Imagine the lure to organized crime should the government push the price per
pack to $5. The tax evasion would be almost 81.3 million, with total market
value of $3.5 million per truck.

There might be some value in this approach if raiing cigarette prices
actually reduced youth smoking. But it doesn't. After Canada's experiment
with high taxes failed, Health Minister Diane Marleau said that the
government's decision to cut taxes would actually reduce consumption among
youngsters, because it "will end the smuggling trade and force children to
rely on regular stores for cigarettes, where they are forbidden to buy them
until they turn 19." Illinois, Massachusetts, Hawaii and Nebraska have all
raised cigarette taxes in recent years - and seen youth smoking increase.

Just last December, members of Congress and the White House were warned by
the U.S. Bureau of Alcohol, Tobacco and Firearms, the Royal Canadian Mounted
Police and other law-enforcement groups that they should avoid raising
cigarette prices so much that a black market springs up.

Raising tobacco prices won't work, but it will create an illegal and
unregulated underground market, making cigarette smoking more, not less,
alluring to rebellious teenagers, punishing the 98 percent of smokers who
are adults and placing in jeopardy the 2 million Americans whose jobs are
tied to tobacco.

Checked-by: Melodi Cornett