The Smoke of Canadian Politics

Rampant smuggling raises fierce debate over the benefits of high cigarette taxes

LESS than 60 miles from Ottawa, with its beehive of clean-cut civil servants, is a stretch of the United States-Canadian border police call ``smugglers' alley.''

There, where the Akwesasne Mohawk Indian reservation straddles the St. Lawrence River that forms the border, snowmobiles and small trucks can be seen in broad daylight hauling loads of cigarettes from the US to Canada. Up to C$1 million (US$750,000) worth crosses daily through the reservation, police estimate.

It may sound like a routine law enforcement problem. But in fact, the losing battle Canadian police have waged for years against rampant cigarette smuggling is becoming the first true political quagmire for Canada's new Liberal government.

The fight pits Quebec, the Canadian tobacco industry, natives, and small retail store owners against Ontario and the nation's antismoking lobby. One side is trying to persuade the federal government to cut drastically Canada's sky-high cigarette taxes. Their opponents are fighting to preserve the tariff.

Heavy provincial and federal taxes on cigarettes account for up to 75 percent of the retail price of a pack of cigarettes in Canada. A carton (10 packs) of cigarettes legally sold in Ontario or Quebec costs around C$48. A smuggled carton may sell for C$28 in Toronto or C$18 in Montreal.

Cutting into smugglers' profits by cutting taxes is, some say, the only way to stop it. But Canada's powerful health lobby, including health ministers in Ontario, British Columbia, Manitoba, and Saskatchewan, has joined with other antismoking groups in painting any plan that cuts cigarette taxes as capitulation to smugglers and the tobacco industry.

Ironically, the cigarettes are manufactured in Canada and then trucked across the border to the US where they are sold tax free to distributors there. Some distributors then sell to smugglers, who take loads of cigarettes back across the border into Canada - mostly into Quebec.

As a result, Quebec officials say their province is losing as much as C$500 million annually in taxes because 65 to 70 percent of cigarettes sold in the province are smuggled in. Last week, convenience store owners in Quebec protested by openly selling smuggled cigarettes, saying they cannot stay in business unless the taxes are lifted. Quebec Premier Daniel Johnson is demanding that Ottawa help stop the smuggling by cutting federal taxes in concert with provincial cuts. If not, Quebec is prepared to go it alone, he says.

Trying to find his way out of the mess, Prime Minister Jean Chretien will meet today with Quebec Premier Daniel Johnson to discuss a plan to curtail the smuggling. Ottawa and Quebec reportedly were close to concluding a joint plan whose key feature is a cut in federal and provincial cigarette taxes that reduces prices in Quebec by C$20 a carton.

Canada has long taxed cigarettes heavily as a matter of policy to reduce smoking. Studies have shown higher prices discourage youth from smoking. The Non-Smokers Rights Association says a 50 percent cut in cigarette prices would mean a 14-36 percent jump in smoking, with 350,000 more teenagers lighting up simply because they can afford it.

But health consequences are not the only problem. Cutting cigarette taxes poses a financial problem for Mr. Chretien and the 10 provincial premiers, all of whom are hard pressed to reduce huge budget deficits. Cigarette taxes raked in about C$3.2 billion last year for the federal government and C$3 billion for provinces, reports the federal agency Statistics Canada.

In Ontario, where smuggling is not as acute as in Quebec, provincial Premier Bob Rae says dropping provincial taxes would cost about C$800 million annually. There are even signs of a split within Chretien's parliamentary governing majority of 176 members; 98 are from Ontario.

One solution proposed by opposition members and government critics would impose an export tax on Canadian cigarettes applied directly to the manufacturer before the cigarettes leave the loading dock. Such a tax was adopted for just two months in 1992, until manufacturers threatened to move production to the US. There are about 2,500 tobacco industry jobs in Quebec.

Critics say Canada's tobacco manufacturers win either way. If smuggling continues, so do profits from growing sales. If taxes are cut and smuggling declines, the companies will still profit in the long run from the larger number of young people who begin smoking.

Canadian tobacco industry spokesmen flatly deny any connection with shady US distributors said to be reselling to smugglers. They also contend that cutting taxes will not mean higher profits.

``The broad proposition that an end to smuggling means increased profits for the companies is wrong,'' Rob Parker, president of the Canadian Tobacco Manufacturers Council told the Toronto-based Globe and Mail newspaper. ``It's much preferable to us that the market be fully legal. That's why we're in support of a tax roll back and more law enforcement.''

Curiously, while there has been no big rise in US smoking of imported cigarettes, Canadian cigarette exports to the US have shot through the roof. According to Statistics Canada, the value of tobacco exports to the US in the first 11 months of 1993 was C$500 million, compared with C$39.3 million in 1990. Law enforcement officials estimate up to 90 percent of Canadian cigarette exports to the US are smuggled back to Canada.

Chretien's public statements show he is trying not to be seen as caving in to lawlessness or the tobacco industry. ``We have asked the police very clearly to take all necessary steps to ensure the law is respected by all citizens of Canada in all parts of Canada,'' he declared last week.

Reports surfaced over the weekend that the Royal Canadian Mounted Police had plans to raid Indian reservations. Mohawk leaders said they would resist with weapons if raids occurred. While saying they do not want another crisis like the 78-day standoff in 1990 at Oka, Quebec, in which one policeman was killed, the Mohawks said defending their land comes first.