CANADA

A taxing dilemma

Governments are badly split over how to end cigarette smuggling

TOM FENNELL February 14 1994
CANADA

A taxing dilemma

Governments are badly split over how to end cigarette smuggling

TOM FENNELL February 14 1994

A taxing dilemma

CANADA

Governments are badly split over how to end cigarette smuggling

TOM FENNELL

Like children at a birthday party, they sang, danced and joked. And when they were finally handed their prizes—cartons of cigarettes for $20—the young men and women gleefully waved them in the air. The contraband cigarettes, which sell legally for $47 a carton, were being sold as a protest last week by Montreal shopkeepers, who claim that the sale of illegal tobacco in Quebec is so widespread that it is forcing them into bankruptcy. While police eventually moved in to stop the sale, the rally only reMontrealers clutching discounted cigarettes: protests

inforced what most Canadians al-

ready know: tobacco smuggling is out of control. And politicians—even those in the same party—are badly divided over what to do about it. At a stormy Liberal caucus meeting in Ottawa last week, a number of MPs ar-

gued that taxes on legal cigarettes should be cut, while others argued strongly that making cigarettes cheaper would undermine public health policy. At week’s end, though, it appeared that Ottawa was prepared to an-

nounce tax cuts as early as this week as part of a plan to curb the sale of illegal cigarettes.

The debate touched another contentious area when Prime Minister Jean Chrétien said that he wanted to hit smuggling at its source by cracking down on Indian reserves, where many cigarette smugglers operate. RCMP officials say that a large percentage of the cigarettes that are being smuggled into Canada are first exported legally by cigarette manufacturers. Exported cigarettes do not carry Canadian or provincial taxes, and, once sold to tobacco dealers who smuggle them back into Canada, they return at a discounted price. The cigarettes are usually sold illegally at $3.50 to $4.50 a pack, compared with the legal price of about $6.50. The RCMP say > the bulk of those shipments are I moving through the Abwege sasne Mohawk reserve, which s straddles the Canada-U.S. borá der 95 km southwest of Montreal. The reserve was em-

broiled in the 1990 Oka crisis,

but Deputy Prime Minister Sheila Copps said sternly that “living on a reserve does not give you the right to break the law.” Still, Mohawk Grand Chief Mike Mitchell told Maclean’s

that police could easily spark another armed

CANADA

confrontation. Added Mitchell: “Oka is the nightmare that you don’t want to revisit.” Governments are split on how to proceed. Under the tax rollback proposal being discussed by Ottawa and the provinces, the federal government would reduce its taxes on cigarettes by about $1 a pack, and that amount would be matched by the provinces. That would cut the legal price of a carton of cigarettes in half to almost $25. But only Quebec, where smuggling is most widespread and has become a pressing political issue, agreed to the rollback. Some Liberal strategists theorize that Chrétien was considering

the tax cut at the urging of his top advisers, who include several Quebecers. But several provinces, including Ontario and New Brunswick, strongly oppose cutting taxes because of the health issue. And Copps said Ottawa was negotiating with the provinces over a program that could include tax cuts, plus a beefed up anti-tobacco advertising and education campaign. “The Prime Minister is continuing discussions with the provincial leaders,” Copps said as the government struggled to come up with a solution that would balance the competing interests—from the Quebec government, to the tobacco industry, to

health-policy groups, to its own need for tax revenue on cigarettes. ‘The strategy is in place but it’s not a complete puzzle yet.”

Ottawa is under mounting pressure to act. In Quebec last week, the country’s largest tobacco companies appeared to issue the government an ultimatum: cut taxes or they will shut down. Spokesmen for Imperial Tobacco Ltd. and Rothmans Benson & Hedges Inc. said they are suspending cigarette exports for at least two weeks. The cigarette industry employs more than 3,000 people in Quebec, and an end to exports would threaten many of those jobs. And Imperial Tobacco spokesman Michel Descoteaux said that the tobacco industry wants to see Ottawa come up with a final solution to the problem. Added Descoteaux: “Until they do, we are standing still.”

Health groups were outraged by the industry’s move. Said David Sweanor, senior counsel with the Non-Smokers’ Rights Association (Canada): “The tobacco industry is dictating fiscal and health policy in this country.” At the same time, Sweanor’s group and others were confused by the mixed signals on tobacco policy coming out of Ottawa. The health groups, as well as many premiers, were caught off guard when the idea of a tax cut was first floated in Ottawa. On Jan. 30, representatives from nearly a dozen powerful health-care groups, including the Canadian Cancer Society and the Heart and Stroke Foundation of Canada, met with Finance Minister Paul Martin and Solicitor General Herb Gray in Ottawa in an attempt to derail the idea. They were blunt in their criticism, and they also took out full-page newspaper ads last week accusing the tobacco industry of benefiting financially from criminal activity. Pressure on MPs increased as letters and telephone calls protesting a possible tax cut poured into Ottawa.

The intense debate over tobacco split the Liberal caucus between those who believe that cutting taxes will increase smoking, and those determined to take decisive action against smugglers. “By cutting taxes we definitely will increase premature deaths,” said Rey Pagtakhan, the Liberal MP for Winnipeg North and a medical doctor. But Don Boudria, the MP for Glengarry/Prescott/ Russell, countered: “A big reduction will succeed in stopping those who engage in smuggling.”

Still, the tobacco industry’s move to suspend shipments appeared to be designed to shift the argument from health to economics. But cigarette exports are too lucrative to suspend for long. In fact, according to Statistics Canada, the value of exports of tobacco products to the United States soared to $500 million in the first 11 months of 1993, compared with just $39.3 million in 1990. Meanwhile, at Akwesasne, Mitchell called on the government to negotiate a settlement. But last week, nothing was resolved and many smokers were still thumbing their noses at police on the streets of Montreal.

TOM FENNELL with WARREN CARAGATA in Ottawa