Canada's Tax Cut on Cigarettes Leaves Provinces Fuming

MERCHANTS and shop owners in this chilly snow-covered capital last week found themselves on the front lines of Canada's battle against cigarette smuggling.

Until then, the fight against cigarette smuggling had been centered on an Indian reserve on the United States border near Cornwall, Ontario, about 60 miles south of Ottawa. Those battle lines have now shifted to the Ontario-Quebec border that includes Ottawa in Ontario and Hull in Quebec.

It was quiet last Friday morning in the Windsor Smoke Shop, a 20-year-old corner store in downtown Ottawa. Too quiet for Ron Desjardin, the store's part owner. Where were all his customers? ``They're all across the [Ottawa] river buying their cigarettes, milk, you name it, over in Hull or Gatineau, [Quebec],'' he said.

Mr. Desjardin isn't alone. Since the federal government and the province of Quebec in tandem dropped taxes on cigarettes last Wednesday, businesses in Ontario - where provincial cigarette taxes remain in force - have been feeling the pinch. They know that when Ontarians cross the Ottawa River to shop for cheap smokes they'll buy a lot of other things as well.

``It's a chain reaction,'' Desjardin says. ``It's not just me that will get hurt. It's the department store down the street, too.''

Slicing smugglers' profits was the only cure for rampant cigarette smuggling in Quebec, Prime Minister Jean Chretien said last Tuesday as he announced a federal tax cut of up to $10 (Canadian; US$7.44) for a carton of cigarettes. Quebec quickly lowered its taxes by $11 a carton.

The dual measures caused Quebec cigarette prices to plummet overnight from $47 down to about $22 - about the same as contraband cigarettes coming in from the US. Quebec Premier Daniel Johnson proclaimed that rampant smuggling would soon end now that profits were wiped out.

But health advocates and other provinces think Quebec's problem has been shifted onto the rest of the country. Ontario Premier Bob Rae is furious with Mr. Chretien for imposing a plan that undercuts efforts to keep teens from smoking, makes the province a target for smugglers, and saps tax revenue.

``This is not the way to run Canada,'' Mr. Rae told reporters last week. ``You can't turn one province [Quebec] of 7 million people into a tax-free zone for cigarettes without having an enormous impact on the rest of us.''

CHRETIEN tried to deflect criticism with a raft of other measures shrouding the tax cut, including a new tax of $8 a carton on Canadian cigarette exports to the US, beefed up law enforcement along the US-Canada border, and a bigger anti-smoking campaign directed at teens.

But Rae and health ministers from nine of Canada's 10 provinces say the core measure undercuts years of raising taxes to make smoking unaffordable to teens. And with cigarette prices in Ontario about $46 a carton compared with $22 in Quebec, police say it will not be long before smuggling networks in Ontario are funneling in cheap Quebec cigarettes.

Rae says Ontario will lose $200 million in tax revenue to illegal cigarette sales. If Ontario is forced to drop its own taxes altogether to fight smuggling, it will cost the province another $500 million.

The immediate cost to the federal government from the tax cut is about $300 million, but could grow if other provinces cut their taxes since the federal government has pledged to match some cuts.

Rae warns of a domino effect with provinces being forced one-by-one to drop taxes to avoid becoming a target for smuggling. If that happens, federal and provincial governments stand to lose billions.

Police add that smugglers along the US-Canada border may simply increase the volume of other contraband goods including clothing, pornography, drugs, guns, and alcohol.

Canada's three cigarette manufacturers - Imperial Tobacco Ltd., RJR-Macdonald Inc., and Rothmans Inc. - deny any connection with shady US distributors said to be reselling to smugglers, or that the tax cut means more profits for them. They also protested the new export tax as unfair.

Meanwhile, just hours after Chretien announced the tax cut, Canadian liquor manufacturers held a press conference advocating lower taxes on alcohol. Members of Parliament have already received plastic wine bottles with a rolled up message inside. But most MPs already could guess what it said without bothering to fish it out.

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