Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
"Cigar smoking knows no politics. It's about the pursuit of pleasure, taste, and aroma," someone once said. Premium cigars are enjoyed by adults as much as a fine wine, a single malt scotch or a luxury car — they symbolize the finer things in life. More specifically, one of the finer adult things in life.
Yet cigars are now caught up in the politics of protecting children. The Family Smoking Prevention and Tobacco Control Act, passed three years ago, authorizes the U.S. Food and Drug Administration to regulate "all tobacco products." Cigars fall into that category.
The "Family Smoking Prevention Act" has a very appealing name, but its reach extends far beyond its title. Kids are not the smokers of premium cigars. These types of cigars are expensive hand-made products that are sold at boutique stores — not in convenience stores. Kids don't have the money or desire to buy them. But despite this, the cigar retailers who don't sell to them are about to see a blitzkrieg of harmful regulations and higher taxes, all in the name of protecting children.
Anti-smokers figure this to be a good thing since higher prices mean fewer smokers and a better life for all. Paternalistic laws, like this one, infringe on the cigar pleasures of adults who know the risks of smoking.
This paternalism is economically destructive as well. Higher taxes lead to fewer smokers, that's for sure, but they've also resulted in a major spike in black-market activity surrounding tobacco products.
History clearly shows that any ban on an activity raises prices and drives some people to engage in black-market behavior. America's attempt at alcohol prohibition is a case in point. Restrictive regulations on tobacco products, coupled with higher taxes, provide an incentive for criminal gangs to make large sums of money as prices for the products increase.
A 2010 Fraser Institute report describes the connection between increased cigarette and tobacco taxes and a burgeoning black market in tobacco. As Canada experienced an increase in illicit tobacco sales it began to reduce excise taxes on tobacco to deter black-market sales, and it worked. Yet, in the early 2000s the federal government began to increase the excise taxes; again the black market activity followed with estimates that it now comprises 27 percent of the tobacco market in Canada.
Canada is confronting the fallout from these higher taxes and restrictive regulations in the form of criminal syndicates and black-market crime. Quebec authorities arrested members of the Hells Angels Motorcycle Club for smuggling tobacco products into the country and buying guns and narcotics from the sales of cigarettes; and in a more ominous tone, Canadian law enforcement discovered that profits from lower-priced tobacco imports were used to buy firearms and explosives for a group connected with the terrorist organization Hezbollah.
The U.S. cigar industry is not immune from black-market behavior. In fact, cigar counterfeiting (cheap cigars are labeled with fake bands and boxes to pass them off as more expensive premium cigars) is a huge problem and would only become worse as higher taxes and restrictions on cigars stimulate the profit motive for black-market gangs.
Authorities in 2006 busted a cigar counterfeiting ring in Miami that generated more than $20 million in sales and untold losses in missing tax revenues. But counterfeiting is not limited to South Florida. Birmingham, Ala., law enforcement shut down a counterfeiting operation after a four-month investigation, and officials there were surprised how far the investigation went and the untold millions of dollars in lost tobacco tax from counterfeiting.
In order to save part of the tobacco industry from higher taxes, and overregulation, retailers, with the assistance of cigar-supportive lawmakers, have introduced legislation sponsored by 220-plus members of the House of Representatives and 14 members in the Senate to preserve their way of life and protect jobs.
One thing is for sure, FDA rulemaking only substitutes less smoking for more smuggling, and no one wants to see that.