Sin-Tax Failure: The Market in Contraband Tobacco and Public Safety

[An Introduction to the Black Market] [The Size of the Market] [The Engine of Growth] [The Trail of Contraband] [The Native Dimension] [Other Native Involvement in Contraband] [The Warrior’s Society and the Black Market] [Other Dimensions of Violence] [Guns in Canadian Cities] [Organized Crime] [Countering the Black Market] [The High-Price, High-Tax Strategy] [Reducing the Contraband Market]

by John C. Thompson

January, 1994

Foreward

Ever since the 1990 standoff at Oka, the principal researcher at this Institute has immersed himself in the complex and fascinating worlds of the Iroquois Confederacy. These reserves and tribal lands straddling the US-Canadian border are embodiment of North American history: The Aboriginal peoples, the French and British Colonials, the division of the latter into rebels and the loyalists, Crown Treaties pre-dating the formation of Canada, and recent political and criminal shenanigans. No surprise, therefore, to find all these elements meshed together in this study of contemporary cigarette smuggling.

This is an informative study designed to present the facts as we see them. It is not a policy document. However, the prospects for sensible policy should improve if the policy-makers know what the problem consists of. To get the right answers, authorities will also need determination, imagination, co-ordination and courage, many of which seem to be in short supply. They will have to make trade-offs, and they will need to resist myths and lobbyists.

Whatever the importance of discouraging smoking on the one hand and gathering taxes and duties on cigarettes on the other, the facts revealed in this report point to less obvious but potentially graver dangers tour nation’s health. Through a combination of factors relating to cigarettes, a section of the traditionally law-abiding population is being conditioned to break the law on a daily basis, new criminal class is being mobilized on the reserves, and the old criminal class across the country is arming itself as though for urban guerrilla warfare.

These developments would be serious enough in the best of times. Canada is, heading into the worst of times with a diminished Army with creaking morale, and police forces frustrated by a weak justice system and political vacillation. The worst of times will certainly embrace the social and economic fall-out from the debt and deficit crisis, and may be further enlivened by a rift with Quebec. Civil disobedience, including tax-strikes, will likely arise when and where the imperative of near-term survival overwhelms respect for peace and order. The next step would be violence as criminals enter the fray.

None of this need happen; yet the scenario is real enough to command attention. In addressing the problem of cigarettes and the associated smuggling of liquor and guns, it seems important that laws be clarified and then enforced. Three years ago, in our report The Legacy of Oka, we concluded that "Toleration of ‘No-Go’ areas has proved a disaster wherever it has been tried." Three more years of such toleration has led to the situation described in the pages that follow.

-- Maurice Tugwell, President of the Mackenzie Institute

Chapter One

The Canadian Contribution

"If you wake at midnight, and hear a horse’s feet

-Rudyard Kipling, A Smuggler’s Song

Once a week Helen Preston participates in a criminal activity. An administrative assistant in a small downtown Toronto Investment firm, she crosses Spadina Avenue and heads towards a tiny convenience store to buy a carton of cigarettes which have been smuggled into Canada. An otherwise law-abiding citizen, Ms. Preston defends her activities as a kind of tax revolt and sees herself as "a victim of rapacious government greed." She had been content to pay $30 a carton, but as taxes in the late 1980s and early 1990s drove the price of her weekly carton to $49, Ms. Preston began looking for a Black Market supply in early 1992. A free-enterprise conservative, Ms. Preston was happy to see that the price of a tax-free carton was only $30. Loyal to her brand of Canadian cigarettes, she has since been delighted to see competition in the Black Market drive the price down to $25 per carton.

There are two aspects to Ms. Preston’s smoking habits that must be considered. The first is that she still smokes. Despite years of anti-smoking campaigns, Helen Preston will not quit. She is conscious of her health in other ways and stays trim, cigarettes are her only vice. The second aspect is that she refuses to respect Toronto’s tough anti-smoking by-laws, she openly smoking at work (with a small smoke trap to avoid offending co-workers) Knowing that Toronto’s by-law enforcement officers are rare. Moreover, she resents attempts to "legislate personal habits" as keenly as she resents high taxes. Helen points out that she is "now paying the same for cigarettes as I did six years ago" and wonders if the anti-smoking lobby really understands the indirect effect of their efforts.

On another floor in Helen Preston’s work place, Alan Gideon works as an accountant. He has always enjoyed wheeling and dealing with his various hobbies and the circle of friends he meets through them. Gideon does not smoke, although many of his friends do. All of them actively sought sources of Black Market cigarettes. Like agents of subversion, they sought out new buyers for cigarettes and passed on information about finding new sources. They enjoy "putting the boots to them [the Government], they waste the money they have, why give them any more?" Gideon Also resents what he sees as attempts to control his life-style as keenly as Helen Preston does… "Whatever they try to keep from me, I’ll try to get it."

For John, a bartender in a restaurant on the ground floor of the building where Helen and Alan work, smoking contraband cigarettes is just a matter of cost and not a political statement. John does not sell cigarettes or Black Market alcohol from his bar- "I’d be toast if I got caught doing that." He has helped his suppliers with some major deliveries, but his purchases are for personal use. His two suppliers are a Scarborough pensioner who earns about $200 a week moving cigarettes and alcohol, and a University of Toronto student who is paying his way through school by dealing cigarettes and alcohol out of his Greek Letter Fraternity.

Lal does not smoke. He is a Toronto cab-driver with a family to support and works long hours. One of his usual taxi stands was across the street from the office tower where the other three work. Quiet often his trunk contains cartons of cigarettes for delivery to convenience store owners and other taxi-drivers, most of who are also from the Punjab. Lal is vague about his supplier, but says he is an elderly European resident of Kitchener-Waterloo region. Like many cabbies, Lal is vulnerable to robbery and not a few Toronto drivers have been murdered in recent years. The person who provides him with cigarettes also sold him a revolver, which he carries with him at night. He says that some of the store owners he supplies have bought Black Market handguns from him to protect themselves. Ironically, convenience store owners are often held-up by bandits more interested in a store’s stock of cigarettes than the money in the till.

When asked if he could supply a weapon to his passenger, Lal agreed. Sadly, the interviewer became too eager and asked for a submachine gun instead of a pistol: Lal did not show up to complete the transaction three days later. We have since been informed by the RCMP that, if we had acquired a prohibited weapon in the interests of research under these circumstances, charges would still have been laid.

The store where Helen Preston buys her cigarettes is one of many tiny stores in a polyglot neighbourhood near the downtown core. The store is run by an attractive Asian woman who keeps her young children close at hand. A counter crosses the store with different packs of cigarettes sitting forlorn in the display case. A customer points out the desired brand and she disappears into another room to emerge with the appropriate cartons. Behind her, on the dusty shelves, lie a few cans of shoe polish and tins of soup to provide a thin disguise as a convenience store. None of the cigarettes has the obligatory CANADA-DUTY PAID stickers. The store keeper is shy, even with long-time customers, and gives no appearance of any fluency in English. A smile answers all questions, particularly those about the ownership of the store and where her supplies come from. Even so, at two in the afternoon, a customer enters the store every three minutes. The traffic continues until the early evening, with most purchasing three to five cartons. The store is supplied late in the evening by a trio of young Vietnamese males who park in the alley behind the store- circumstances barred further observation and their demeanor suggested that this line of inquiry be discontinued.

The three deliverymen are busy as there are other stores in the area to be supplied. One might be the convenience store, a couple of blocks, away where Karl gets his cigarettes. Karl, a customer in John’s Bar, was eager to find a supply of Black Market cigarettes to save money and "not let Rae or Chretien get any more out of me than they already do." He entered a convenience store near his girlfriend’s apartment and asked for cigarettes. When the proprietor reached for the legal cigarettes behind the counter, Karl informed him that he wanted cigarette from under the counter instead. His guess paid off and he has bought three cartons of smuggled cigarettes every tow weeks since November 1992.

Kevin Has been moving black-market cigarettes since June 1993. Kevin swings through smoking sections of Eaton Centre’s fast-food restaurants from noon until closing time. He has a nylon gym bag full of popular brands of cigarettes and sells them for $25-30 a carton. Some have CANADA-DUTY PAID stickers on them which suggest they have been stolen rather than smuggled. Kevin’s sense of security suggests just how cocky or inexperienced some Black Marketeers are… When he needs to top up his stock, he makes a call on his cell phone and arranges to meet a van a call on his cell phone and arranges to meet a van in the Centre’s parking lot. The van is driven by a young Asian male. Kevin was unemployed and is still receiving UIC cheques. He is vague about his present income, but mentioned that it was "three or four times" as much as his UIC cheque.

William has been on worker’s compensation after an industrial accident damaged his back several years ago. The Payments and other social benefits allowed him to get by without any frills. In 1990, he started driving from his home in the Cambridge-Galt area to the Six Nations Reserve to buy cigarettes for re-sale to his friends and neighbors. By 1992, he was making two or three times as much in cigarette sales than social payments for what he describes as easy work. While his profit margin on cigarettes fell in 1993, he is still also moving duty-free alcohol acquired from Six Nations.

William says he knows another distributor, a pensioner who supplements his retirement with weekly deliveries of cigarettes and alcohol to a circle of about "one hundred, maybe a hundred and fifty customers" in Kitchener-Waterloo. The pensioner began carrying cigarettes and alcohol concealed in his station wagon four years ago. Despite almost two hundred border crossings at Niagara, he has never been caught. However, dropping prices have cut the pensioner’s profits and he is now picking up supplies from Six Nations. When asked if he knew of anyone who might supply Toronto taxi-drivers with cigarettes or firearms, William said he didn’t, but added that he wouldn’t be surprised if someone from his area was doing so…"some of these guys will do anything for money and bet they’ll never get caught."

Incidentally, although many of the details of the Paul Bernardo/Teale and Karla Holmolka case remain closed to the public, it is no secret in St. Catharines that Bernardo was moving cigarettes from Buffalo and Six Nations. Numerous press reports have mentioned this without violating the ban on publication of details from Karla Holmolka’s trail.

Helen, Alan and Karl represent a very Canadian tax revolt. They will not build barricades or storm buildings, they will defy laws they feel are unjustified in inane. They actively promote the development of a Black Market. They feel that smoking has been unfairly taxed, that taxes are too high in general and resent legislation they see as "politically correct" social engineering. All of them could also be involved in the un-taxed exchanges of goods and services which has proliferated in recent years. This aspect of the Black Market lies outside the purview of this study, but those who participate in it seem to be either resentful of rising taxes or red-tape, or merely saving some money and effort.

The Vietnamese at Helen’s store, William, Kevin and Lal represent the edge of organized crime- the great beneficiaries of prohibitions and Black Markets. They are only the point people of organized crime and are readily disposable. They are not especially well-paid and there are many other people who can fill their place. Nevertheless, there is organization behind them and tobacco is only the trail-blazer.

Cut-backs on police budgets, a lax criminal justice system, and jurisdictional conflicts have all played a part in the development of the Black Market. Even worse has been a seeming lack of political will by federal and provincial governments to confront the problem. The jaws of the justice system seem toothless and invite even law-abiding citizens to defy them. When Canadian legislators enact laws to control behaviour without providing the means to enforce them, these laws will be broken. Finally, an elementary law of physics is that for every action, there is an equal and opposite reaction. This law applies to human behaviour. There are many people who, when instructed by those whom they do not respect, will deliberately take an opposite course.

The Black Market is a reaction to attempts to control people’s habits through taxation and legislation. Sin taxes inflated prices of tobacco and alcohol to a level where Canadians now pay twice as much as Americans do. Economic principles represent realities which are fundamental to human behavior and, like the forces of nature, assert themselves regardless of legislation. People will buy goods and services at prices they feel are fair. If the price is too high, they will look elsewhere. The basic laws of economics cannot be over-ruled. Massive red-tape in parts of Latin America and the formerly intrusive governments of Soviet Bloc nations resulted in extensive Black Markets. Currently, governments in countries such as Peru, Laos and Russia are not in control of large parts of their economies. Helen, Karl, Lal, and William may be the tip of the iceberg.

During the course of this study, a somewhat unscientific scratch poll in the Metro Toronto area involved the questioning of 631 smokers in shopping centres and outside public buildings. Responses are broken down by Inner City (The City of Toronto), Outer City (North York and East York) and Suburbs (Scarborough and Etobicoke). Those who were not inclined to answer (generally about 40% of those approached declined) are not included.

The following questions were asked:

In January 1993, an even more unscientific assessment of the extent of the Black Market in downtown Toronto involved rummaging in refuse containers to examine cigarette wrappers for CANADA DUTY-PAID OR CANADA DUTY NOT PAID stickers. It suggested that roughly a third of the packages of cigarettes in Toronto were contraband. The smuggler’s share of the market is growing and has yet to become fully developed.

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John Thompson is President of the Mackenzie Institute which studies political instability and terrorism. He can be reached at: mackenzieinstitute@bellnet.ca