Paving a Bootleg Tobacco Road?

Today President Clinton will discuss a tobacco tax bill that industry officials say would spur cigarette smuggling.

A new social scourge will soon appear on America's doorstep. Along with illegal narcotics and endangered wildlife, US border agents will have to search for bootleg tobacco. On city streets and in mall parking lots, contraband smokes will be surreptitiously sold to teenagers out of car trunks.

At least that's the way the tobacco companies paint the future if Congress goes ahead with its plans to add a $1.10-per-pack tax on cigarettes. Such a large fee, they say, will spawn smuggling reminiscent of Prohibition days.

"The price increases they're talking about will create a black market overnight," warns Steven Goldstone, chairman of RJR Nabisco Holdings Corp.

That message is likely to be part of an advertising campaign starting this week attacking proposed tobacco legislation in Congress.

Antismoking advocates are skeptical about such dire predictions. "It's their favorite scare tactic anytime any government proposes a tax," says John Bloom, manager of international issues for the Campaign for Tobacco-Free Kids.

The prospect of seeing its proposed law undermined has not escaped Congress's notice. New Jersey Sen. Frank Lautenberg (D) has drafted a 28-page antismuggling addition to the comprehensive tobacco legislation sponsored by Arizona Sen. John McCain (R). Today, Senator McCain and President Clinton are scheduled to meet to discuss how to get the bill passed. The legislation is expected to come before the full Senate next month.

Senator Lautenberg's antismuggling proposal requires serial numbers on every pack of cigarettes, a special label noting the country of final destination, and an export bond equal to the federal tax. Tobacco companies will also be required to get a federal license to sell their goods. Anyone caught smuggling could risk five years in jail, a $10,000 fine per offense, and seizure of any property involved in the smuggling.

"If the Bureau of Alcohol, Tobacco and Firearms [ATF] determines there is any violation by the tobacco companies, we can suspend or revoke their license and effectively put them out of business," says a Senate staff member. The ATF is expected to release its own plan to counter possible smuggling soon.

But the tobacco industry points to the Canadian experience as an indication that such laws and taxes won't work. Over a 10-year period, starting in 1982, the federal government in Ottawa increased taxes by 6 cents per cigarette. Combined with some provincial taxes, the price of a pack of cigarettes rose by 150 percent.

By 1993, smuggling had become endemic, with then-Prime Minister Jean Chrtien claiming 40 percent of all cigarettes consumed were smuggled in from the United States. Despite a very limited US market for Canadian brands, the industry, claiming it had legitimate export orders, shipped cigarettes across Canada's border to one huge warehouse in New York. Many of the smugglers then shipped the same cigarettes back into Canada, often passing through Indian reservations.

Although the tobacco industry said it was just filling export orders, many antitobacco advocates suspected the industry of active participation. "They hoisted the black flag and pumped billions of exports a few miles across the border with the whole purpose of being smuggled back into their own country," claims Mr. Bloom.

These suspicions were heightened in 1993, when the Louisiana State Police pulled over a van that failed to stop at a weigh station. The police discovered 150 cases of Canadian cigarettes that were on their way back north. An executive of Brown & Williamson Tobacco, which owns Canada's Imperial Tobacco, later pleaded guilty to smuggling. But there was no evidence the company was involved.

In Canada, tobacco companies helped make smuggling a public issue. "The industry had people traveling around the country saying, 'Everyone's doing it,' which gave the smuggling social acceptability," says David Sweanor at the Ottawa-based Non-Smokers' Rights Association, which figures that about 25 percent of the cigarettes consumed were contraband (not 40 percent as cited by Mr. Chrtien).

The disagreement over the amount of smuggling was critical, says Mr. Sweanor, since it resulted in a disagreement over the total effect of the taxes on smoking rates. With a higher smuggling rate, the tobacco industry could claim the taxes had no net effect on smoking. The Canadians eventually rolled back the tax hikes and the cross-border smuggling stopped.

Cigarette smuggling is currently a problem between some states in this country. Last year, federal and state law-enforcement agents broke up a ring that was buying three truckloads of cigarettes a week in Virginia and selling them in three other states with higher tobacco taxes. It's estimated New York alone lost about $16 million in tax revenue.

Sweanor, who has testified before the US Congress on the smuggling issue, is hopeful that the US has learned from the Canadian experience. And, he says it will be easier for the US to police its borders since it already has a sizable border patrol. "The smugglers will have to know they are playing with some serious police forces," he says.

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