THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, October 23, 1994 TAG: 9410220027
SECTION: COMMENTARY PAGE: J4 EDITION: FINAL
TYPE: Editorial
LENGTH: Medium: 53 lines
Many states' frontal assault on tobacco use through heavy taxation is being outflanked by smugglers, who are bringing in cigarettes from low-tax states such as Virginia and North Carolina.
Recent arrests of cigarette smugglers caught in Baltimore with thousands of packs of untaxed cigarettes testify to the consequences of high taxes. It also provides us with a glimpse of the world the anti-tobacco crowd would create: one where cigarettes would be all but prohibited.
The smuggler's aim is to take cigarettes from low-tax states, such as Virginia and North Carolina, up to high-tax states in the Northeast, where they can resell them at a hefty profit. (Two phone calls reveal Marlboros sell for $2.59 in Essex, Mass., and $2.09 on Colley Avenue in Norfolk.) Since there are no border controls between states, each smuggler caught probably represents dozens who are not.
The Northeastern states that try to squeeze revenue out of smokers are learning the lesson that Canada recently was taught: Prohibitive taxation creates an underground trade. Just this February Canada had to roll back its cigarette taxes by several dollars a pack to cut down on smuggling from the United States. The Canadian government retreated, not because smuggling caused law-enforcement problems (which it did) but because its revenue fell as smokers turned to smuggled cigarettes. Smuggling paid and paid handsomely because the government had created a market for low-cost cigarettes.
Canada's experience is proof that simply taxing cigarettes on a national scale won't solve the problem of interstate smuggling. Indian reservations, which are exempt from many federal laws, would likely become a breeding ground for smuggling in the United States just as they did in Canada. One can almost write the news now of increased smuggling from Mexico or the Caribbean.
Cigarette smuggling also illustrates a widespread misconception about the nature of taxation and estimates of the revenue to be gained from it. The federal government, and many of the states with high taxes, do not factor the lost revenue from smuggling into their rosy estimates. Telling taxpayers what wonderful things could be funded by increased taxes on smokers seems like a painless way of promising non-smokers something for nothing.
Clearly, the idea of funding national health care partly via higher cigarette taxes - as the Clinton administration proposed - was a dream that could not come true. Such plans did not - or would not - take into account the revenues that would be lost via smuggling and other tax evasion. Prohibition through taxation would lead smokers to find a way to satisfy their desire and leave the rest of the taxpayers to make up the revenue to fund the new programs. by CNB