[Congressional Record Volume 140, Number 101 (Thursday, July 28, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 28, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
BRUCE BARTLETT'S COMMON-SENSE ARGUMENT AGAINST TAXING CIGARETTES TO PAY 
                            FOR HEALTH CARE

  Mr. FAIRCLOTH. Mr. President, as a life long farmer and businessman, 
I feel it is important to be honest with the American people about the 
hoax being played on them by supporters of funding socialized medical 
reform with the revenue from increased cigarette taxes. The reformers 
claim that their plan can be funded by jacking up the tax on 
cigarettes, while at the same time promoting good health by 
discouraging people from smoking. That doesn't make common sense. The 
two goals are mutually exclusive.
  In North Carolina alone, 88,000 people work directly in the tobacco 
business; growing it, auctioning it, or manufacturing cigarettes. North 
Carolina farmers sold over $1 billion worth of tobacco at auction last 
year. And over 150,000 North Carolinians work in jobs indirectly 
dependent on tobacco. According to Price Waterhouse, the proposed $.75 
tobacco tax increase will put 12,676 North Carolinians out of work, in 
addition to thousands of others around the country.
  Those people will be put out of work because consumers will smoke 
fewer cigarettes. Common sense tells us that any revenue derived from a 
product with declining consumption will itself naturally decrease over 
time. Unfortunately, the administration and the socialized medicine 
establishment deliberately avoid acknowledging that fact.
  The issue, however, is honestly discussed in an article by Mr. Bruce 
Bartlett, ``Cigarette Taxes, Smuggling, and Revenues'', which appeared 
in the June 3, 1994 edition of Tax Notes. Mr. Bartlett, a senior fellow 
of the Alexis de Tocqueville Institution, makes an excellent and 
succinct case against relying on a tax to both reduce consumption and 
raise revenue. Furthermore, Bartlett relates the experience of Canada, 
and how that nation's cigarette taxes reached the point that organized 
crime stepped in and created smuggling operations rivaling those of the 
Prohibition era in the United States.
  Mr. President, I ask unanimous consent that Mr. Bartlett's article be 
entered into the Record.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

                Cigarette Taxes, Smuggling, and Revenues

                          (By Bruce Bartlett)


                            i. introduction

       In 1993, President Clinton asked Congress to raise the 
     tobacco excise tax by 75 cents per pack of cigarettes to help 
     fund his national health insurance program. More recently, a 
     congressional subcommittee has proposed an even larger 
     increase of $1.25 per pack, also to fund health insurance. 
     Meanwhile, a number of states, such as Maryland, are 
     proposing increases in state tobacco taxes as well.
       Although these proposed cigarette tax increases largely are 
     being fueled by antismoking concerns about the impact of 
     smoking on health, they are also driven by fiscal necessity. 
     Increased cigarette tax revenues would fund 17 percent of the 
     Clinton health plan, for example. And throughout the United 
     States, tobacco taxes are an important element of state 
     budgets. However, because higher cigarette taxes are 
     motivated by contradictory motives, there is some question as 
     to what the appropriate tax burden on tobacco should be.
       On one hand, those who favor the ultimate abolition of 
     smoking clearly would favor the highest tax rate possible, 
     regardless of the revenue effect, to encourage as many 
     people as possible to quite smoking. On the other hand, 
     fiscal requirements would suggest a moderate tax rate to 
     minimize any reduction in cigarette sales and raise 
     maximum revenue. Thus, the fiscal and nonfiscal goals of 
     tobacco taxation are in conflict with each other.
       The purpose of this paper is to review some of the economic 
     issues related to tobacco taxation in the interest of 
     furthering public debate on this important question.


                             ii. background

       Contradictory actions regarding the regulation of tobacco 
     are nothing new. As early as 1621, the British Crown had 
     forbidden the American colonies from exporting their tobacco 
     anywhere except to England. The purpose was to keep down 
     prices for colonial tobacco and allow the mother country to 
     capture high profits by reselling it on the world market. 
     However, the low prices discouraged colonial production and 
     caused great hardship among tobacco growers. So, to mitigate 
     the effects of the English monopoly on the purchase of 
     colonial tobacco, in 1625 the Crown further ordered that only 
     American tobacco could be sold in England, thus excluding 
     Spanish and Portuguese tobacco from the British market, and 
     forbid the growing of tobacco in England.
       We thus see an early example of how the Crown's 
     merchantilist desire to enrich England at the expense of the 
     colonies was frustrated by the actions of the colonists, 
     requiring the Crown to introduce a subsidy, in the form of a 
     monopoly on sale in the British market, to offset the burden 
     that had been imposed on the colonists.

                         A. First Tobacco Taxes

       In 1685, England imposed an import tax on tobacco for the 
     first time. Subsequently, the rate was increased to such an 
     extent that smuggling became a serious problem. In fact, by 
     the early 1800s, revenue from tobacco taxes was falling even 
     though population and consumption were rising. In 1826, 
     however, a legislative drafting error caused the tobacco tax 
     to be cut by 25 percent. The effect was to so reduce 
     smuggling that revenue from the tobacco tax actually 
     increased.
       The possibility that tax or tariff rates might be so high 
     as to reduce their revenue yield had been noted by Jonathan 
     Swift as early as 1728:
       I will tell you a secret, which I learned many years ago 
     from the commissioners of the customs in London: They said, 
     when any commodity appeared to be taxed above a moderate 
     rate, the consequence was to lessen that branch of the 
     revenue by one half; and one of those gentlemen pleasantly 
     told me, that the mistake of Parliaments, on such occasions, 
     was owing to an error in computing two and two to make four; 
     whereas in the business of laying heavy impositions, two and 
     two never make more than one; which happens by lessening the 
     import, and the strong temptation of running such goods as 
     paid high duties.
       By 1776, Swift's observation had been endorsed by Adam 
     Smith, who wrote in ``The Wealth of Nations'':
       ``The high duties which have been imposed upon the 
     importation of many different sorts of foreign goods, in 
     order to discourage their consumption in Great Britain, have 
     in many cases served only to encourage smuggling; and in all 
     cases have reduced the revenue of the customs below what more 
     moderate duties would have afforded. The saying of Dr. Swift, 
     that in the arithmetic of the customs two and two, instead of 
     making four, make sometimes only one, holds perfectly true 
     with regard to such heavy duties.''
       The founding fathers also were concerned about this 
     problem. In the ``Federalist Papers,'' Alexander Hamilton 
     wrote extensively about how high taxes and import duties 
     encourage smuggling, to the detriment of the Treasury's 
     revenue. In Federalist No. 22, for example, Hamilton said, 
     ``If duties are too high, they lessen the consumption; the 
     collection is eluded; and the product to the treasury is not 
     so great as when they are confined within proper and moderate 
     bounds.'' In Federalist No. 35, he wrote, ``Exorbitant duties 
     on imported articles would serve to beget a general spirit of 
     smuggling; which is always prejudicial to the fair trader, 
     and eventually to the revenue itself.''

                            B. Sumptuary Laws

       Despite the negative impact that high tax rates have often 
     had on revenues, such taxes have continued to be imposed 
     throughout time because they also serve a nonrevenue purpose: 
     to control behavior. In this respect, the tax laws are often 
     akin to sumptuary laws, which have existed since immemorial 
     to regulate the consumption of various commodities. In 
     medieval times, these laws could be extremely detailed, 
     strictly regulating such things as clothing according to 
     one's precise rank in society. Then, as now, such laws were 
     often justified by the need to protect the lower classes from 
     wasteful extravagance or other evils. Today, taxes on alcohol 
     and tobacco are often called sumptuary taxes for this same 
     reason.
       In the 20th century, the desire to control individual 
     behavior and prevent the consumption of commodities deemed 
     harmful has often taken the form of outright prohibitions. 
     The best example of this is the federal prohibition between 
     1920 and 1933 on the sale or distribution of alcohol. Today 
     such outright prohibitions are largely confined to narcotics, 
     such as heroin and cocaine. However, taxes can also be used 
     to prohibit consumption. Hugh Dalton explains how:
       ``If, as the rate of a particular duty is increased, the 
     revenue yielded increases, the duty is predominantly a tax. 
     But when the rate is increased above the point at which the 
     yield in revenue is a maximum, it is clear that some element 
     of penalty is present, and we finally reach a duty of 
     prohibitive amount, whose yield is very small or non-
     existent. This is closely akin to a simple prohibition of 
     production or importation, with a penalty for infraction.''

                             C. Prohibition

       Prohibition, however, was a total failure. Although 
     motivated by the same genuine concerns about health and 
     public safety that today motivate concerns about smoking, the 
     effort to prohibit alcohol consumption altogether proved to 
     be too costly for society to bear. In particular, Prohibition 
     gave rise to a massive increase in crime. Among the reasons 
     for this increase are the following:
       Despite Prohibition, millions of Americans still desired to 
     obtain alcoholic beverages.
       Because such beverages could no longer be produced legally 
     by legitimate producers and because of higher costs 
     associated with illegal production, prices for alcohol 
     increased sharply.
       Higher profit margins led new producers to enter the 
     industry, leading established firms to use violence to 
     protect their market share.
       Such profits also drew many ordinary citizens into criminal 
     activity simply because of their desire to consume alcohol.
       Wide public acceptance of alcohol consumption, high 
     profits, and criminal organization eventually led to 
     corruption of public institutions, including the police and 
     the courts.
       In short, Prohibition led directly to an increase in crime. 
     This fact is shown graphically in Figure 1, which shows the 
     homicide rate before and after Prohibition.\1\ As one can 
     see, the onset of Prohibition before World War I caused a 
     sharp increase in murders. Within a few years of the repeal 
     of Prohibition, however, the homicide rate had dropped as 
     sharply as it had risen. This strongly suggests that 
     Prohibition itself, for the reasons outlined above, was the 
     direct cause of increased crime.
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     \1\Figure 1 not reproducible in the Record.
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                       III. Cigarette Bootlegging

       As noted earlier, taxes can act like prohibitions when they 
     raise prices to such an extent that they discourage 
     consumption and reduce tax revenues to below what more 
     moderate rates would bring in. Cigarette taxes have long been 
     known to have such an effect. In particular, the fact that 
     state taxation of cigarettes varies greatly from state to 
     state has given rise to organized cigarette bootlegging--
     buying cigarettes in low-tax states for resale in high-tax 
     states. As Table 1 illustrates, the range of tax rates 
     between high- and low-tax states can be as much as 63.5 cents 
     per pack (between Virginia and the District of Columbia). 
     Moreover, as in the case of Virginia and D.C., there are 
     often wide variations in tax rates between contiguous 
     jurisdictions, thus making bootlegging an easy crime to 
     commit.

          Table 1.--State Cigarette Tax Rates (cents per pack)


        State                                                       Tax
District of Columbia...............................................65.0
Hawaii.............................................................60.0
New York...........................................................56.0
Washington.........................................................54.0
Massachusetts......................................................51.0
Minnesota..........................................................48.0
Connecticut........................................................47.0
Illinois...........................................................44.0
North Dakota.......................................................44.0
Rhode Island.......................................................44.0
Texas..............................................................41.0
New Jersey.........................................................40.0
Wisconsin..........................................................38.0
Oregon.............................................................38.0
Maine..............................................................37.0
California.........................................................37.0
Maryland...........................................................36.0
Iowa...............................................................36.0
Nevada.............................................................35.0
Nebraska...........................................................34.0
Florida............................................................33.9
Arkansas...........................................................31.5
Pennsylvania.......................................................31.0
Alaska.............................................................29.0
Utah...............................................................26.5
Michigan...........................................................25.0
New Hampshire......................................................25.0
Ohio...............................................................24.0
Delaware...........................................................24.0
Kansas.............................................................24.0
Oklahoma...........................................................23.0
South Dakota.......................................................23.0
New Mexico.........................................................21.0
Colorado...........................................................20.0
Louisiana..........................................................20.0
Vermont............................................................20.0
Montana............................................................18.0
Mississippi........................................................18.0
Arizona............................................................18.0
Idaho..............................................................18.0
West Virginia......................................................17.0
Missouri...........................................................17.0
Alabama............................................................16.5
Indiana............................................................15.5
Tennessee..........................................................13.0
Georgia............................................................12.0
Wyoming............................................................12.0
South Carolina......................................................7.0
North Carolina......................................................5.0
Kentucky............................................................3.0
Virginia............................................................2.5

Source: Tobacco Institute.
       A 1977 report from the Advisory Commission on 
     Intergovernmental Relations indicated that cigarette 
     bootlegging was one of the fastest rising crimes in the U.S. 
     Among the reasons:
       Cigarettes are relatively easy to handle and transport, and 
     smuggling them across open borders is difficult to detect.
       Penalties for cigarette bootlegging are generally light and 
     are not an effective deterrent to bootleggers.
       Cigarette bootlegging is not a federal offense and the 
     interstate nature of the problem hampers state and local law 
     enforcement efforts.
       Potential profits in cigarette bootlegging are so great 
     that a wide variety of people are attracted to this illegal 
     activity.
       Because of the high profit potential, organized crime has 
     become heavily involved in bootlegging.
       The ACIR concluded that high-tax states were losing $391 
     million per year in revenue due to cigarette smuggling 
     (equivalent to $540 million today).
       Other research confirmed the growth of cigarette smuggling. 
     A study of tax evasion by economists Carl Simon and Ann Witte 
     found that in 1975 cigarette smuggling netted between $100 
     million and $200 million. New York was a major market for 
     bootlegging, with smugglers netting $30 million to $50 
     million in that state alone. The magnitude of such losses 
     even led to a major effort in New York to cut the cigarette 
     tax specifically to reduce crime. Supporters of the effort 
     estimated that state and local governments combined were 
     losing $100 million per year due to smuggling and that 
     organized crime was earning $1.5 million per week in the 
     process. In an editorial, The New York Times backed the 
     proposal, arguing that it might even lead to an increase in 
     tax revenue:
       Moved by pure greed, the state has raised the tax on 
     cigarettes so high * * * that half the smokers in New York 
     City buy bootlegged cigarettes, usually without knowing it. 
     The money that should flow as tax payment to government goes 
     instead into the pockets of well-organized criminals and 
     their truck-driving colleagues. * * * Since the state's 
     present taxes took effect in 1972, revenue from cigarette 
     taxes has dropped far below estimates even though smoking has 
     not. The difference is so great that a reduction in the tax 
     rate to put the smugglers out of business would probably 
     produce greater income for the state. It is estimated that a 
     9-cent reduction in the tax would take the profit out of 
     smuggling and stimulate the growth of normal, tax-paying 
     patterns of distribution. It would also, in time, end the 
     threat of gangster control of large parts of the cigarette 
     business.
       Although passage of a federal law against interstate 
     cigarette smuggling in 1978 (Public Law 95-575) has reduced 
     bootlegging, it remains a serious problem.


                      IV. International Experience

       The recent experiences of Europe and Canada illustrate the 
     potential for tax differentials to stimulate smuggling on a 
     massive scale when tax rates get too far out of line. In 
     Europe, this resulted from the elimination of all tariffs 
     among members of the European Community starting on January 
     1, 1993. With the elimination of all tariffs, different rates 
     of domestic sales taxes--especially value added taxes (VAT)-- 
     took on new economic significance. It was now easier than it 
     had ever been before to drive across national borders to buy 
     goods at a lower tax rate than that in one's own country. 
     Indeed, entrepreneurs quickly set up retail operations just 
     across borders, catering to those seeking such tax bargains.

                               A. Canada

       The experience of Canada is even more dramatic. Owing to 
     imposition of a VAT in 1991, as well as higher rates on 
     tobacco, the price differential between Canadian cigarettes 
     and those sold in the United States rose to over $35 
     (Canadian) per carton. Organized, as well as casual, 
     smuggling skyrocketed. According to an industry-sponsored 
     study, one in nine cigarettes smoked in Canada in 1991 had 
     evaded Canadian taxes. As a result, Canadian governments lost 
     approximately $1 billion (Canadian) in revenue that year 
     alone. The study also noted that consumption of contraband 
     cigarettes was increasing rapidly and that such smuggling was 
     giving rise to a vast criminal network, to which ordinary 
     people were turning a blind eye. The study concluded:
       Many ordinary Canadians feel no compunction about breaking 
     tax-related law. Canadians now wink at cigarette smugglers 
     the same way Americans did at bootleggers in the 1920s. 
     Smokers and non-smokers alike not only feel the high taxation 
     rates on tobacco products are unfair, but have now engaged in 
     the smuggling of tobacco solely for profit with little regard 
     for the law and law enforcement officers. As long as the 
     disparity in prices between Canada and the U.S. exists, 
     smuggling organizations will become increasingly more 
     sophisticated to avoid detection from the authorities. Once 
     these organizations become established and, from our 
     intelligence they have indeed become so, it becomes virtually 
     impossible to dismantle them. As we have reported, commercial 
     smugglers have merely adapted their operations to maintain 
     the flow of supply to their distributors. Unless prices are 
     substantially reduced, it appears Canada's tobacco smuggling 
     problem will not disappear.
       Among the major smuggling networks are the Mohawk Indians, 
     whose reservation straddles the New York/Canada border, and 
     who may be responsible for half of all contraband cigarette 
     sales in Canada. (The Mohawks also do a healthy business 
     selling contraband cigarettes in New York.) Fishermen are 
     another major source of bootleg cigarettes. And, of course, 
     organized crime is heavily involved. Canadian police have 
     identified Asian gangs known as Triads as being especially 
     active in cigarette smuggling. The use of violence in their 
     activities is commonplace. The mayor of the border town of 
     Cornwall, Ontario, was even forced into hiding recently due 
     to threats on his life from organized crime, after launching 
     a campaign against cigarette smuggling.
       Interestingly, the original source of most contraband 
     cigarettes is Canada itself. Legitimate cigarette 
     manufacturers, who produce cigarettes specially for the 
     Canadian market, have lately been exporting cigarettes to the 
     United States in large numbers. in just the first seven 
     months of 1993, Canada exported 9.7 billion cigarettes to the 
     U.S.--an 88-percent increase. Since there is no apparent 
     demand for Canadian cigarettes in the United States, the 
     presumption is that virtually all of these cigarettes were 
     ultimately smuggled back into Canada.

                  B. Smuggling Encourages Tax Evasion

       By the end of 1993, the Canadian government was becoming 
     alarmed by the extent of cigarette tax evasion, which was 
     contributing significantly to its fiscal problems. Said 
     Canadian Finance Minister Paul Martin, ``More and more people 
     consider it acceptable not to pay taxes.'' In December, 
     Canada's Minister of National Revenue, David Anderson, 
     suggested that perhaps the tobacco tax rate ought to be cut 
     so as to reduce smuggling. ``Tobacco taxes have gone up so 
     sharply in the last three or four years that people feel 
     it is very much an overtaxed commodity,'' he said.
       In January, opposition to high cigarette taxes went beyond 
     passive tax evasion and developed into a political revolt. On 
     January 24, 75 store owners in the border town of St. 
     Eustache, Quebec, who had seen their sales and profits suffer 
     as a result of smuggling, began selling contraband cigarettes 
     at cut-rate prices, in open defiance of the police. A large 
     crowd turned out to buy the cheap cigarettes and to protest 
     Canadian taxes.
       Such blatant defiance of the law is unusual in Canada and 
     government leaders were becoming alarmed. In particular, 
     there was concern that cigarette tax evasion was having a 
     spill-over effect, leading to evasion of other taxes as well. 
     It was noted that since imposition of the VAT in 1991 use of 
     cash in the economy had surged, which is often a sign of a 
     growing underground economy, where cash, rather than checks 
     or credit cards, is the preferred medium of exchange. Tax 
     evasion was said to be rampant in certain businesses, such as 
     home renovation, where such evasion could cut costs by up to 
     50 percent. A poll found that one in four Canadians 
     considered tax evasion to be acceptable, and 30 percent saw 
     nothing wrong with smuggling.
       Finally, in February, the government decided to cut the 
     cigarette tax by $5 per carton and also enacted measures to 
     encourage the provinces to cut their cigarette taxes as well. 
     At the same time, an $8-per-carton tax was levied on 
     cigarette exports to discourage round-tripping, and the 
     corporate tax rate was increased for tobacco companies. The 
     tax on cigarettes in Quebec was expected to fall from $44 per 
     carton to $23. Combined with the proposed increase in U.S. 
     tobacco taxes, this action is expected to sharply reduce the 
     profit incentive in smuggling cigarettes across the Canadian 
     border.


                             V. Conclusion

       The lessons of history and foreign experience make it clear 
     that there is a limit to excise taxation. When rates get too 
     high they simply lead to smuggling and tax evasion. They may 
     even reduce government revenue to below what more moderate 
     rates might raise. The prime beneficiary is organized crime.
       It is difficult to say whether President Clinton's proposed 
     75-cent-per-pack increase in the federal cigarette tax would 
     have the kind of impact that higher cigarette taxes had in 
     Canada. Obviously, purchasing cheaper cigarettes in Canada is 
     not a viable alternative. However, one should not 
     underestimate the ingenuity of the American people in evading 
     taxes--there is already an underground economy in the United 
     States of probably 10 percent of GDP, some $600 billion per 
     year. And the failures of our nation's wars on alcohol in the 
     1920s and on drugs more recently do not inspire confidence 
     that governments effectively can prevent people from evading 
     cigarette taxes if rates are set too high.
       While it is true that most other countries tax cigarettes 
     more heavily than does the United States, even with President 
     Clinton's proposed increase, it should be remembered that 
     rates charged do not necessarily correspond to rates paid. 
     Especially in developing countries, virtually all economic 
     activity takes place in the underground economy. High 
     statutory tax rates on incomes and commodities simply are 
     not paid. Thus, comparisons between the United States and 
     other countries in this regard are not necessarily 
     meaningful.
       The effectiveness of a given tax to accomplish its 
     objective may also be related to the question of fairness. If 
     it were believed that the government was unfairly picking on 
     smokers just because smokers are politically vulnerable, many 
     nonsmokers would sympathize with their plight and look the 
     other way at efforts to evade cigarette taxes. Sympathy for 
     smokers by nonsmokers may also result from the fact that 
     tobacco taxes are extremely regressive, taking far more out 
     of the pockets of those with lower incomes than those with 
     high incomes, as indicated in Table 2.

        TABLE 2.--TOBACCO EXPENDITURES AS A SHARE OF INCOME, 1991       
------------------------------------------------------------------------
                                       Average      Tobacco             
              Quintile                  income   expenditures   Percent 
------------------------------------------------------------------------
Lowest..............................     $5,981         $181         3.0
Second..............................     14,821          274         1.8
Third...............................     26,073          310         1.2
Fourth..............................     40,868          339         0.8
Highest.............................     81,594          285         0.3
------------------------------------------------------------------------
Source: Bureau of Labor Statistics, Consumer Expenditure Survey.        

       Given that many people will not quit or reduce smoking in 
     response to higher taxes, the effect of such taxes will be to 
     reduce their real incomes, leaving them less money to spend 
     on food, shelter, and other necessities, for themselves and 
     their dependents. It thus is quite possible that higher 
     cigarette taxes could lead to suffering and depravation among 
     many innocent nonsmokers, such as dependent children. For 
     these reasons, one can be opposed to higher taxes on tobacco 
     products without necessarily endorsing smoking.
       There is also the question of revenue. As noted at the 
     beginning of this article, the sumptuary effect of tobacco 
     taxes is clearly in conflict with their revenue purpose. 
     Insofar as such taxes reduce smoking, they reduce tax revenue 
     as well. The most recent evidence indicates that a permanent 
     10 percent increase in the price of cigarettes reduces 
     consumption by 4 percent in the short run and 7.5 percent in 
     the long run. (The difference is mainly due to the impact on 
     young people who are discouraged from taking up smoking in 
     the first place.) Thus, both the Clinton administration and 
     the Congressional Budget Office have forecast that cigarette 
     tax revenues will rise by about half of the percentage 
     increase in the cigarette tax rate.
       Meanwhile, a number of states have found that recent 
     increases in cigarette taxes have failed to raise as much 
     revenue as anticipated. Although this may partly be due to 
     more aggressive antismoking campaigns, bootlegging has also 
     been cited by state tax officials as a major factor. 
     California officials are especially concerned about an 
     increase in smuggling across the Mexican border, where 
     seizures of cigarettes have increased by 887 percent since 
     1991; smuggling accelerated after a tripling of the state 
     cigarette tax in 1989. And this was before passage of the 
     North American Free Trade Agreement (NAFTA), which presumably 
     will make cross-border cigarette smuggling easier. 
     Interestingly, many of the cigarettes seized are not Mexican 
     brands, as had been the case earlier, but American brands 
     that previously had been exported to Mexico.
       In conclusion, there are strong reasons for being cautious 
     about raising cigarette excise taxes. Bootlegging is already 
     a serious problem at the state level and a 75-cents or $1.25-
     per-pack increase in the federal tax on top of already high 
     state rates may only stimulate more of this activity. 
     Moreover, the potential for cross-border smuggling between 
     the Mexico and the United States cannot be dismissed 
     casually, given the recent experience of Canada and the 
     passage of NAFTA. In the end, not only will revenues suffer, 
     but we could see spillover effects in the form of increased 
     crime and its attendant violence and an increase in overall 
     tax evasion. Higher cigarette tax revenues thus may be offset 
     by lower revenues from other taxes.

                          ____________________