All governments love money much more than your life.
THE SCRIBE, ANONYMOUS BLOG, 2009
It is strange when you think about it: millions of people are killed every year by tobacco, but governments don’t seem to mind very much. Worse, they bend over backwards to encourage it. Governments throughout the world promote the cultivation and manufacture of tobacco via subsidies to farmers, price supports, and agricultural training. Agricultural field stations help farmers learn how to plant, fertilize, and harvest the golden leaf, and most nations have incentives to promote its cultivation. Why do governments encourage the growing and manufacture of such a dangerous consumer “good”?
The simple answer is revenues from taxation. Tobacco is easily taxed, thanks to several key features of its cultivation and manufacture. For one thing, cigarettes are fairly homogeneous. Packages are standardized for convenience of sale and manufacture, which also renders them easily monitored for taxation purposes. Taxation is also facilitated by the fact that months or even years are required to bring the finished product to market. A tobacco leaf harvested in the fall is typically not smoked until two or even three years later, with the intervening time devoted to curing, cutting, blending, “casing” (i.e., flavoring), reconstituting, rolling, and packaging, plus, of course, distribution, display, and sale. The final product also has a relatively long shelf life, which makes it easy to come under the surveillance of taxation authorities. Imagine, by contrast, taxing bread or broccoli: each loaf or head is different and cannot be stored for more than a week or two (without freezing), the packaging is not uniform, and profit margins are low. People also are not addicted to bread or broccoli, which means that if prices go too high they can always turn to substitutes. Tobacco, by contrast, has a fiercely loyal clientele: most smokers say they want to quit but can’t, which translates into a low price elasticity. A 10 percent rise in prices means roughly a 4 percent decline in consumption, though this will fluctuate according to how wealthy a society is and how deeply addicted.
Summarizing, then: tobacco taxation is facilitated by the long time delay between harvest and use, by centralized distribution of the finished product, by the high and inflexible demand, by durable packaging and a long shelf life, and by the homogeneity of the finished article. Addiction adds the final touch: most people find it hard to quit smoking, harder even than to give up heroin or cocaine. Smokers are therefore a “captive market” and may be willing to pay five, ten, or even twenty times what it costs to make cigarettes because they cannot do without.
Tobacco has been taxed at least since the seventeenth century, and perhaps even earlier by Native American elites, whom we know to have used the cured leaf as a form of tribute. The big push to tax didn’t come until the nineteenth century, however, when governments started to rely on pipe and cigar taxes as a source of revenue. Tobacco taxes accounted for nearly a third of the U.S. government’s entire income by the 1880s, by which time many nations had recognized “the golden leaf” as a cash cow. Spain had established a tobacco monopoly in 1636, and France followed suit in 1674.1 Britain’s was actually the first, established by King James I in 1619. Austria’s tobacco monopoly was established in 1784, Poland’s in 1924. Japan Tobacco monopolized the production of cigarettes in that country for most of the twentieth century, and though many of these monopolies have been eroded by privatization and the iron arm of global trade—aided by the cigarette transnationals and their allies—they still rule the roost in many countries.
Even when tobacco has not been monopolized, however, national governments have profited greatly from tobacco taxes. In the United States in the mid-1930s, tobacco taxes brought the federal government nearly as much (73 percent) as the income taxes paid by individual earners. Yugoslavia in the 1930s got more than 22 percent of its governmental income from tobacco taxes. A 1935 estimate figured that European governments on average obtained about 15 percent of their income from tobacco taxes. Those numbers diminished in the postwar era, as affluence expanded the tax base. In 1950, however, tobacco taxes still supplied Britain with 20 percent of its state revenue. And in the mid-1960s tobacco monopolies provided 5 percent of the national budget in France, 10 percent in Italy, and 15 percent in Taiwan. China as recently as the 1990s was getting more than 10 percent of its entire governmental income from tobacco taxes. Zimbabwe is highly dependent on tobacco; it used to produce about 230,000 metric tons per year, though the chaos in that country under Mugabe has shifted some of that business to its neighbors, notably Malawi and South Africa.2
Germany is an interesting case, since the Nazi government received about 10 percent of its income from tobacco taxes, and some Nazi party organizations depended heavily on cigarette revenues. Hitler’s notorious Brownshirts (also known as the Sturmabteilung, or Storm Troopers) received about two-thirds of its income from tobacco taxes, an arresting fact overlooked in most histories of the Third Reich. Several of Germany’s leading political parties had their own brands of cigarettes, which they used to generate income. The Brownshirts produced a “Storm Cigarette,” for example, which provided handsome revenue even though Hitler was always grumpy about smoking.3
China is also remarkable, given that it was a relatively minor consumer until the Revolution of 1949 that brought Chairman Mao to power. From about 80 billion that year cigarette consumption grew to 200 billion in 1960, 300 billion in 1970, and 1200 billion in 1990. By the mid-1990s the Chinese were smoking a whopping 1.7 trillion (1,700,000,000,000) cigarettes per year, nearly a third of the world’s total. The Middle Kingdom by this time had 180 cigarette factories and 500,000 people working to produce nearly a thousand different brands. The Communist Party has promoted the farming and manufacture of tobacco as a source of revenue for the Chinese state, but at what cost? Deng Xiao Peng’s vision of “socialism with a Chinese face” has this ghoulish aspect, that hundreds of millions of Chinese alive today will die from smoking even if this policy is reversed (since many of the health effects won’t be felt until decades hence). Beijing’s leaders are mostly nonsmoking engineers who need to realize that China is going to face a health catastrophe over the next few decades—my colleague Matthew Kohrman calls it “an extermination”—unless steps are taken to curtail smoking.
Today, though, the Chinese government is still doing far more to promote tobacco than to limit it. Coercive means are being used to induce farmers to grow tobacco; farmers get only about 2 percent of the value of the finished manufactured product and often don’t even want to grow tobacco but have no choice. Many foreign companies are trying to get a foothold in China, but so far the government remains the largest single producer. The Chinese army owns a number of cigarette factories, and the government did not issue a formal statement on health hazards until 1979.4 And the China National Tobacco Corporation (CNTC) paints a rosy view of the golden leaf. In 2005 the CNTC website crowed, “Smoking removes your troubles and worries,” quoting a thirty-seven-year-old magazine editor’s words, “Holding a cigarette is like having a walking stick in your hand, giving you support. Quitting smoking would bring you misery, shortening your life.” The government sells the Longlife brand of cigarette with these same reassurances.
Privatization has been a double-edged sword when it comes to health impacts. It generally leads to increased competition, which allows foreign manufacturers to penetrate domestic markets, bringing their aggressive tactics. In most cases this means an increased sale of Japanese, British, and American cigarettes, which tend to be less harsh and therefore easier to inhale; they also tend to be doctored with additives and chemically manipulated to maintain addiction. Keeping a state monopoly has risks of its own, however. Monopolies typically don’t have to submit to independent regulation, they are often harder to tax (because the taxer is the taxee), and their cozy relationship with the government often makes them immune to litigation or other forms of social accountability.
Tobacco taxes are now very high in many European countries. In 2008 a pack of twenty premium cigarettes in the United Kingdom cost nearly £6, or about U.S.$10. France, Germany, Ireland, and all the Scandinavian countries have very high taxes. Norway may well have the highest in Europe, with a pack of twenty costing 70 krone, which is about $12. About 90 percent of this is tax—which is why smokes in other parts of Europe can be bought for less than one-tenth this amount. Cigarettes in most parts of the Balkans (Serbia, Montenegro, Albania, etc.) still cost less than a dollar a pack. Cigarettes are even cheaper in certain parts of Asia.
The United States has some of the world’s lowest national cigarette taxes, measured as a fraction of retail price (currently less than 10 percent). Taxes are also imposed at the state level, however, which means that cigarettes vary widely in price. Kentucky, for example, was taxing cigarettes at a rate of only 3 cents per pack as late as 2005, when the state legislature raised it to 30 cents. South Carolina still taxes at the rate of only 7 cents per pack, and Missouri charges only 17 cents. Rhode Island currently has the highest state tax ($3.46 per pack in 2009). New York State has allowed the city of New York to levy an additional amount, bringing state and local taxes in Manhattan and the other boroughs to nearly six bucks. (A pack of Marlboros can now cost upwards of $11, and singles are being sold—illegally—for a dollar apiece.) Residents of Indian lands are still able to buy cigarettes tax-free, though efforts have been made to close this loophole. In most states, though, taxes do not make up even half the retail price, a legacy of the power of the industry to suppress all challenges to its rule.5
Taxation is potentially one of the most powerful means of tobacco control. It has be done with care, however, since it also creates an incentive for smuggling wherever tax rates are uneven (“buttlegging” is what some like to call it). Criminal and terrorist gangs are sometimes involved, and the industry itself has not exactly remained neutral. In the 1990s more than 70 billion cigarettes were shipped every year from the United States to Antwerp, even though few of these were smoked in Belgium. Most ended up on the black market: Winstons were trucked to Spain and Marlboros to Italy, with the origin disguised to evade taxation.6
The companies say they don’t like smuggling, but they are also known to have aided and abetted it. In 1994, for example, Canada was forced to lower its federal cigarette tax in consequence of cross-border smuggling from the United States; Canadian manufacturers had helped organize the illegal transport of Canadian brands into New York State, from where they were routed via Akwesasne Indian lands back into Canada. By 1995 an estimated one in three cigarettes in Canada’s eastern provinces was being sold illegally. Tobacco manufacturers then used this to demand a rollback in tobacco taxes (to stop smuggling!), and the plan succeeded: taxes were reduced, and smoking rates rose in response. The same thing happened in 1999 in Sweden, where some of the world’s highest tobacco taxes were abandoned in response to smuggling from Estonia and Poland. Smokers were also able to evade local taxes by ordering cigarettes by mail from tobacco-friendly places like Greece. Buttlegging became such a problem in the United Kingdom in the 1990s that the country’s dominant manufacturer, Imperial Tobacco, was sued for having conspired to aid and abet illegal distribution. Philip Morris was likewise sued in November 2000 for helping to organize the U.S.-Antwerp ring. Philip Morris and BAT also benefited from massive smuggling operations organized in Colombia, which caused many local farmers to shift from tobacco to coca (for cocaine) as illegal imports undercut local brands.7
Internal documents from British American Tobacco reveal the company collaborating with its Argentine subsidiary, Nobleza-Piccardo, to exploit smuggling opportunities in northeastern Argentina. The company used the term duty not paid (D.N.P.) to designate this illegal trade, described as a “significant market yet to be satisfied.” One element in this plan was to introduce the Jockey Club brand as a D.N.P. cigarette in Posadas, a town on the border with Paraguay notorious as a crossroads for illegal transit. BAT already had “long-standing strength in the D.N.P. region” and was hoping to leverage this strength with the goal of “maximizing group profit from the D.N.P. trade.” BAT knew that the Argentine government would eventually move to close this opportunity and emphasized being prepared “to vacate the D.N.P. segment completely without leaving a vacuum which our competitors are better placed to fill.” Plans were also made to introduce similar products legally into Brazil “to protect N-P [Nobleza-Piccardo] from accusations of complicity.”8
Smuggling has long been a global phenomenon. An internal industry report from 1980 conceded that roughly 30 percent of all Italian cigarettes were smuggled, and during the peak years of the 1990s as much as a quarter of the world’s entire cigarette trade was illicit. Clamp-downs in the new millennium—including self-policing by companies worried about their image as criminal co-conspirators—seem to have cut this illicit trade by about half. Even so, smuggling still involves hundreds of billions of sticks every year, with $40 billion to $50 billion lost in revenue to governments.9
In some parts of the world, however, smuggling has been and remains more the rule than the exception. In the Ukraine in 1999 President Leonid Kuchma announced that three quarters of the cigarettes sold in his country were either smuggled or produced illegally. For many years cigarette makers did little to combat illegal trade or even encouraged it—and not just in Canada, Sweden, or Britain. In 2001, for example, documents came to light showing that British American Tobacco had organized a smuggling ring involving the illegal shipment of hundreds of millions of cigarettes into Somalia, Afghanistan, India, and Pakistan. One corporate document from 1987 notes that “transit to Sudan will be supplied via Kental [a Cypriot trading company] and Somalia via Easa Gurg,” Dubai’s ambassador to London. Transit was another code word used by the multinationals for smuggling, as revealed by BAT’s internal admission that “opportunities for legal imports need to be fully investigated before we seek transit opportunities.” Cyprus has long been a crossroads for contraband, though the problem exists wherever there are inequalities in tax rates. New York’s Chinatown even today is awash in illegal cigarettes, mainly knockoffs of Marlboro and other popular brands counterfeited in the People’s Republic.10
Prosecutions for smuggling have increased in recent years, partly as a result of increased global port vigilance in the wake of the attacks of September 11, 2001. More diligent searching of containers has cut out part of this illicit trade, but police and customs officials have also become more vigilant. In January 2003, for example, two hundred German customs officials raided the Hamburg offices of Reemtsma, a subsidiary of Imperial and the maker of West and Davidoff cigarettes, arresting several board members, including the company’s sales and marketing director, for smuggling. Imperial became the world’s fourth biggest tobacco company following its acquisition of Reemtsma in 1998 and is thought to have been making half of the cigarettes smuggled into England.11 The World Health Organization’s Framework Convention on Tobacco Control has called for more careful product tracking across international borders, to help put an end to illicit trade.
Taxation inequalities can of course open opportunities for illegal transit, but usually only if the industry cooperates and local law enforcement is weak. Crucial to keep in mind, though, is that smuggling fosters smoking. Smuggled cigarettes are usually cheaper than the legal variety, but smuggling can also help to popularize a new brand, giving it a kind of “street cred.” Smuggling also has the effect of undermining market restrictions (bans on imports, for example), which serves to undermine local monopolies. And since smuggling is illegal, the companies can even argue that taxation leads to illegal activity—that is, smuggling—which can then be used to argue for lowering taxes. Which is precisely what happened in Canada and in Sweden.
The industry claims that taxes cause smuggling, but the fact is that smuggling tends to be low where taxes are high—because those tend to be places (like Norway or Sweden) where the rule of law is respected. Versus, say, Albania, where nearly three quarters of the market is illicit, even though cigarettes cost only about 31 cents per pack.12 And penalties are generally weaker if you are caught smuggling a legal product than some other form of contraband (cocaine or weapons, for example). It is bizarre that ordinary packages shipped by UPS or Federal Express have electronic tracking while crates and cartons of cigarettes do not. Nor do we yet have the kind of high-tech tax stamps that would help prevent counterfeiting. Smuggling could easily be reduced if the problem were taken seriously.
I’ve spoken about taxes as the “second addiction,” but in the United States there is arguably a third addiction insofar as states that successfully sued the industry in the 1990s now rely on the health of the tobacco trade to guarantee an uninterrupted flow of litigation payments. The Master Settlement Agreement (MSA) of 1998, forged to compensate state governments for medical costs from smoking, required the companies to pay $250 billion to the states over a period of twenty-five years, but the tobacco men were clever enough to include riders that allow them to stop making payments if revenues fall below a certain point. And in the new millennium, when judges and juries began considering awards to plaintiffs in other cases, some state attorneys general sent industry-friendly letters to the courts supporting limits on such claims. The fear has been that high-price awards will hurt the companies’ ability to make their payments to the states. That is one reason the MSA has been viewed as a sellout,13 a kind of joint embrace with the cancer mongers. The MSA can be thought of as an excise tax, with lawyers taking part of the proceeds and a side benefit for the companies in the form of informal guarantees of financial stability. Which is also why tobacco stock prices have skyrocketed in the intervening years.
Governments throughout the world are now addicted to the continued sale of cigarettes. Taxing the industry can be a great way to reduce smoking, but since taxes are more often seen as a way to fill state coffers, it is hardly surprising that most successful politicians remain soft on tobacco. It is easy to blame smokers for their foolish habits, but governments must also shoulder part of this blame, both for what they do and for what they fail to do. It is a callous calculus, but governments are likely to do the right thing only when they realize that the cost of paying for smoking- caused diseases cuts perilously deep into the benefits derived from taxation. And this doesn’t even count lost productivity from premature death and disease and costs from environmental damage and fires. Considered as a whole, we are talking about a habit that exacts a far greater toll than what is derived from taxation.