Pubdate: Tue, 26 May 1998 Source: Oakland Tribune Contact: Author: Nick Brookes, chairman and chief executive officer of Brown & Williamson Tobacco Corp. 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