Sin-Tax Success?

by John Thompson

August 8, 2002

Coercing change in consumer behavior is a bad idea -- not that this stops governments from trying it. But judging by appearances on the Six Nations Reserve in southern Ontario, success is sometimes possible.

Ottawa’s attempt to regulate smoking habits with the imposition of prohibitive ‘sin taxes’ on cigarettes in the late 1980s choked badly.

By the end of 1993, Canadian prices for a fully taxed carton of cigarettes ranged from $45 to $51… for a product that costs about $12-15 dollars without taxes or duties. The response was predictable. Ordinary citizens turned to the black market, and by January 1994, 40% of Canadian cigarettes sales were untaxed contraband -- selling for about $23-29 per carton. In parts of Quebec and Ontario, no legal cigarettes were being smoked at all. Worse, the cachet of contraband was attracting new smokers among the young.

Ottawa, joined by Ontario and Quebec, hoisted the white flag in late February 1994 and slashed taxes to undercut the black market.

The flaw in the original Sin-Tax strategy lay with the Aboriginal reserves along the Canada-US border in Ontario and Quebec. Many Canadians then (and now) did not appreciate the links between the Mohawk Warrior’s Society and organized crime, and the sin-tax price structure gave them and their entrepreneurial "Silk-Shirt" backers a chance at some easy money.

Abetted by Canadian cigarette manufacturers, billions of dollars in Canadian brands were shipped into the US — for sale to Aboriginals at untaxed prices. These were either smuggled back into Canada into the hands of organized criminals, or were sent on to Silk-shirts on the Kanesetake Reserve near Montreal, or the Six Nations Reserve near Hamilton.

In 1992-93, Six Nations was humming with illicit activity. Eighty ‘smoke shops’ sprang up all around the reserve in trailers and plywood shacks, while easy money propped up hucksters and Warrior wannabes to the detriment of traditional and elected leaders. These did booming business as thousands of good citizens — including one Paul Bernardo — swooped in for bargain cancer sticks and resold them in their hometowns.

The Silk-shirt entrepreneurs lived high off the hog. One magnate interviewed in his home, divided his attention between his interviewer, his gigantic new TV, and his negotiably affectionate Russian girlfriend: This meant he was a bit unguarded in discussing how he had made many new friends in Russia (who cleaned him out $250 million in cigarette profits with bogus business deals).

The next blow this magnate received was the 1994 tax-cut, which slashed his income and his influence on Six Nations. Hard on the heels of this came investigations and prosecution. Many of the principal silk-shirts, despite their protestations of being innocent entrepreneurs or selfless militants, got the same treatment. So did the tobacco companies.

Now, eight years later, the Sin-Tax strategy is back in full force, and prices have climbed to over $50 per carton. Already, desperate Canadians smokers have gone back to the Reserves in search of low-cost cigarettes. Alas, there is no solution for them. A recent scan of the Six Nations Reserve counted exactly five modest smoke shops — all of which were selling other products too.

There were no bargains to be had: In one shop, a tired clerk explained the new quota system to disappointed shoppers who had driven in from Peterborough. Ottawa has imposed a strict quota of low-taxed cigarettes on Canadian Reserves (about six cartons monthly per person on the band list). Any cigarettes received beyond that must be fully priced products. This store had already sold its share of the monthly quota in five days, at $48 per carton. The clerk also explained that Ottawa is looking for ways to reduce the quota.

The one loophole in the system concerns Native manufactured cigarettes from Akwesasne (mysterious brands like "DK", "Putter" and "Sago"). These are sold for about $27-30 per carton, but it seems only the most desperate smokers are buying these unknown and untested products. Still, discarded DK packs are occasionally spotted in Toronto, so somebody is puffing away at them.

Today, Six Nations looks much more relaxed (and prosperous) than it did eight years ago. A barn that once held a cache of assault rifle ammunition is now holding cattle again, clothing and handicraft stores now occupy sites that had once been smoke-shops, and the Russophile Silk-shirt’s flagship store is long abandoned.

To all appearances, this route around the Sin-Tax strategy is closed and Canadian smokers have no option but to pay through the nose — or quit altogether.

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