[Intl-tobacco] list update; Canada raising taxes

[Robert Weissman]

Dear Friends:

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Robert Weissman
Essential Information			|   Internet:	rob@essential.org

EDITORIAL: When it comes to cigarettes, tax 'em if you got 'em Ottawa and
some provinces slashed tobacco taxes in 1994 to reduce smuggling.  
Fortunately, times have changed

Source: Globe and Mail, Friday, 5/12/00

After a few years spent licking its wounds, the federal government is
talking of a rematch with the tobacco smugglers. This is excellent news.

As a matter of public policy, raising taxes on cigarettes is a no-brainer.  
Tobacco is a proven health hazard. Making it more expensive encourages
smokers to kick the habit and helps discourage others, particularly young
people, from starting. If governments receive a financial windfall in the
bargain for such programs as health care, so much the better.

That was Ottawa's reasoning when it sharply increased cigarette taxes in
1989 and 1991, raising the average price of a carton to $48. However,
since the same cartons were selling in the United States in 1991 for $22 a
carton, the incentive was there for a massive smuggling operation.
Canadian cigarettes were exported to the U.S. free of Canadian tax, and,
if earmarked for other destinations, free even of U.S. tax. They could
then be smuggled back into Canada at enormous profit.

Consider the case of Les Thompson, who worked for a subsidiary of R.J.
Reynolds Tobacco Co. called Northern Brands International, and who pleaded
guilty in U.S. court to money-laundering and defrauding the Canadian
government of $72-million (U.S.) in taxes. The loop he used was simple.
U.S. customs officials were told that cigarettes exported from Canada were
destined for Russia and Estonia, but the cartons were in reality handed
off to smugglers who took them back to Canada. They did so by way of the
Akwesasne Reserve straddling the Canada-U.S. border; its New York section,
the St. Regis Mohawk Reservation, is a short boat ride from the section in
Quebec and Ontario. (The Mohawk Council of Akwesasne last December decried
the social damage done to the reserve by tobacco smuggling.)

This and similar activity was so great that, by 1994, contraband
cigarettes accounted for an estimated 40 per cent of those sold in Canada;
80 per cent of cigarettes exported from the country were being smuggled
back in. The federal government and provinces east of Manitoba collapsed
under the pressure and reduced the price of a carton by as much as $20.
(Western Canada, under less pressure, didn't join in.) The proportion of
young people smoking promptly rose.

Now federal Finance Minister Paul Martin and his provincial counterparts
in Central and Eastern Canada are considering raising the taxes on a
carton by as much as $15. Though smuggling is far from a dead issue, they
can take heart from two developments.

For one, the activities of tobacco companies during the period of massive
smuggling have been put under the microscope.

Ottawa last December filed a civil suit in U.S. Federal Court against
Toronto-based RJR-Macdonald, alleging, as Justice Minister Anne McLellan
phrased it for reporters, "that the RJR-related companies used an
elaborate network of smugglers and offshore shell companies to ensure an
abundant supply of cheap cigarettes to the Canadian market." Documents
from 1994 made public by British American Tobacco PLC, as part of the
settlement of a U.S. court case, suggest that Imperial Tobacco made its
major brands available to smugglers to regain market share from
competitors who were benefiting from smuggling. The tobacco companies have
strongly denied any involvement in the smuggling.

Whatever the resolution of these allegations of complicity, cigarette
manufacturers may feel a keener sense of obligation this time round to do
what they can to discourage the contraband traffic.

The finance ministers will also benefit from an increase in the price of
cigarettes in northern U.S. border states. According to yesterday's
article by Globe reporter Shawn McCarthy, a carton there costs as much as
$15 more than one in Central and Eastern Canada. That leaves room for
Canadian prices to climb a great distance before they whet the smugglers'
appetites.

Mr. Martin and his colleagues should use every inch of that distance to
make cigarettes more -- and, for the sake of those who might otherwise get
or remain hooked, prohibitively -- expensive.