The Tribune

THERE has been much talk of late about boosting revenue collection and generation, no doubt spurred on by pressure from international credit rating institutions to address our considerable national deficit.

The two most obvious examples are revenue projections from the possible legalisation of gambling – an issue on which the country’s opinion is being sought at the polls today – and a Bill currently before the Senate which seeks to improve the collection of tariffs on tobacco product imports.

In both cases, the projections are tremendous – $20 million a year, $60 million, $80 million.

But if it sounds too good to be true, it probably is. As a leading webshop man pointed out last week, the big numbers don’t amount to “a hill of beans” until gambling is tested in a regulated market.

Tobacco insiders say the same goes for projections about their industry: few if any current offenders will go clean and start paying duty if the government makes it harder to smuggle or counterfeit cigarettes or cigars. Most will just go deeper underground or find a new illegal occupation.

Either way, government revenue will remain largely unaffected.

There are, of course, concrete ways of boosting revenue, but hardly anyone is talking about these. That is, with the exception of FNM deputy leader Loretta Butler-Turner, who hinted during the Tobacco Bill debate in Parliament that lower taxes might actually encourage an expansion of the legitimate industry and therefore generate more cash for the Treasury.

It is a point that was made by INSIGHT years ago, but largely ignored. The following article was first printed in 2008.

By PACO NUNEZ

Tribune News Editor

LOCAL retailers say the 220 per cent import duty on premium cigars is strangling the market and encouraging corruption and smuggling.

Several government officials have promised to look at the issue and in 1996 former FNM finance minister William Allen admitted the rate is not of economic benefit to the Bahamas, and at least partly the result of “irrational considerations.”

So, why has this unusually high rate of tax never been adjusted?

In many countries, political correctness has encouraged substantial “sin taxes” on products seen as vices or health risks. Indeed, according to a statement from the Ministry of Finance, health concerns are behind the rejection of repeated requests for an adjustment to the cigar tax.

But this can hardly be a satisfactory explanation – as alcohol, another target of sin taxes, and which far more widely used, is either duty free or taxed at only $10 per proof gallon in the Bahamas.

TOURISM PRODUCT

It could be argued that competitive pricing for items such as brandy and whiskey is an important component of the tourism product the Bahamas seeks to offer; essential to the country maintaining its lead in the region.

But local cigar retailers say this is precisely the point: were it not for the monumental rate of duty, the Bahamas could be poised to become a haven for the cigar trade, which has done wonders for the economies of Honduras, Nicaragua and the Dominican Republic. “If the rate were to change, I would have to build a warehouse to hold my stock,” one retailer said.

The low tax rate on liquor has allowed several Bahamian operations to flourish, and the entrepreneurs who took advantage of the situation are counted among the country’s new elite. This success has in turn created many employment opportunities for Bahamians.

The contrast with the premium cigar market could not be more extreme. A former Bay Street cigar shop owner said the “stifling” 220 per cent tax was one of the main factors which led to his going out of business: “It’s extremely frustrating to know that we have a product that tourists are very interested in, and yet the cost that we’re forced to sell at is prohibitive. Everyone will look, but few can afford to buy at those sorts of prices.”

In a letter to the Ministry of Finance a local operation stated the case in a nutshell: “The net effect of this draconian impost is to rob the Bahamian retail sector of a unique opportunity for the high end luxury market in this commodity, particularly in the American tourism sector for which premium cigars, particularly Cuban cigars, are a much sought after item.”

HEALTH

In any case, retailers add, the level of cigar consumption in the Bahamas pales in comparison to that of alcohol. The minister of health himself admitted last month that only seven per cent of Bahamians at the average age of first time cigarette smoking, 18, admitted to being smokers. He might have added that only a tiny fraction of these, if any, smoke premium cigars

Compare this to the 36.3 per cent of Bahamians the same age who drink alcohol on a regular basis. Indeed, more students admitted in a survey to smoking marijuana than to smoking any type of tobacco product.

While evidence is lacking, one local health expert estimated that, considering the “vast difference” between the levels of alcohol and tobacco use, the public health impact of alcohol is probably “far greater.”

This takes into account all tobacco products, but globally speaking, there is a vast difference in sales between cigarettes and cigars. Sales of individual premium cigars equalled less than two per cent of the 17.4 billion packs cigarettes sold in the US last year. If the numbers are anything like this in the Bahamas, it would mean that only about 1.4 per cent of young adults use cigars.

But there is reason to believe that the number is even smaller: the high end cigar market is aimed almost exclusively at tourists. Indeed, most real premium cigars – not counterfeit or smuggled ones – are found in resorts or other tourist areas.

Cigar retailers say they are merely asking that the taxes applied to tobacco reflect these facts and mirror the situation in the US, where cigars are taxed at a much lower rate than cigarettes.

‘TAX FREE’ TOBACCO

In response, the Ministry of Finance quoted a number of studies, as well as a 2007 policy paper by the World Medical Association, which said smoking “and all other forms of tobacco use” are major causes of serious health concerns.

However all tobacco products are not equal. According to a National Cancer Institute study from 1998, cigar smokers have only a two per cent higher chance than non-smokers of dying of smoking related diseases, whereas cigarette smokers are almost 70 per cent more likely to die. The report said: “When cigar smokers don’t inhale or smoke few cigars a day, the risks are only slightly above those of never smokers.”

Furthermore, if all tobacco products are to be feared, why are unprocessed tobacco, chewing tobacco and snuff allowed into the Bahamas duty free?

In fact, all forms of “smokeless tobacco” lead to a number of cancers as well as heart disease and other health problems. Chewing tobacco can deliver three to four times the amount of nicotine as cigarettes.

And, to add a touch of irony to the situation, it should be noted that while the government refuses to adjust the tax on imported cigars, the majority of unprocessed tobacco brought in to the Bahamas duty free is reserved for a single purpose: rolling cigars for sale both domestically and abroad.

DEMAND REDUCTION

Yet the ministry somehow sees its tax as an effective strategy to reduce the demand for all tobacco products, citing several studies in its defence. It seems to have escaped everyone’s attention, however, that different products carry different levels of demand, some more resilient than others.

“Just as birders travel the world in search of rare birds to add to their life-list, true cigar aficionados think nothing of setting off to Havana, Santo Domingo, Kingston or Danli on a cigar buying jaunt,” a Honduras This Week article by Howard Rosenzweig noted.

Local retailers say they want to add Nassau to the list, and point out that the wider tourism industry would benefit in many ways from an increase in well-heeled visitors.

The article noted that cigar aficionados “tend to be wealthy and will go to great lengths for that perfect cigar” – which may explain why despite economic difficulties, cigar sales in the US are climbing at a rate not seen since the “cigar boom” of a decade ago, when the number of new cigar smokers actually outnumbered new cigarette users.

But the ministry maintains that for some mysterious reason, while increasing tax will suppress demand, decreasing it will not do the reverse. It said that given “the new estimates of the relatively low responsiveness of tobacco consumption to price changes,” reducing the tax on premium cigars “would not likely lead to a market that would flourish . . . or create significantly higher government revenues.”

THE NEW BOOM

Meanwhile, experts seeking an explanation for the new cigar boom see lower taxes – and specifically a differentiation between taxes on cigarettes and cigars – as a main factor in the rapid increase in sales. Cigarcyclopedia.com reported that the peak year of the “cigar boom”, 1998, has now been surpassed. Import figures for 2007 from the Cigar Association of America showed that, despite new smoking bans, “imports of premium cigars increased 7.8 per cent to the second-highest total on record: 335,167,000 cigars.”

The tiny country of Honduras, with a decade’s experience exploiting this niche market, is now second only to the Dominican Republic, the industry giant, in cigar exports to the US: a total of 105.9 million last year.

While there are ample brands available in the US to meet this demand, the argument goes that there is one area where the Bahamas could corner the market. “Cuban cigars remain, for the time being at least, the forbidden fruit of this growing market in the US,” one study notes.

The US is the largest premium cigar market in the world, and Cuba is the most renowned producer – but as Americans are still prohibited from visiting that country, it should be obvious that the Bahamas is poised to take advantage of the situation.

HIGH HOPES

Local retailers say they have big ideas - from the establishment of large cigar factories that double as shops, smoking lounges and tourist attractions, to the hosting of huge cigar conventions – and would be in a position to explore them if the tax were lowered.

It could be a case of “right time, right place” – as American smokers are feeling less and less welcome in many of their old haunts. Cigar conventions in the US, which attract hundreds of wealthy patrons, have been hit hard by new anti-smoking laws.

But the demand is still there. A recent issue of the publication Cigar Aficionado, lamenting the cancellation of an event in Chicago due to the new laws, noted that in the last 15 years, more than 250,000 people have attended its conferences.

As smoking laws tighten across America, these are exactly the kinds of events cigar retailers say they can attract to the Bahamas. Indeed, the industry is becoming desperate for new venues. “Don’t worry.” Cigar Aficionado tells its readers. “We will find places that will welcome us.” But local retailers warn that the window of opportunity is not unlimited. “Cuba will kill us if this tax is not reduced. We might as well forget it, we will be wiped out,” said one cigar shop owner.

One of the most important things to keep in mind, according to local stakeholders, is that a decrease in the tax would help raise the profile of the Bahamas’ overall tourism product.

With the downturn in the US economy causing middle income American families to tighten their purse strings, it is unwise to resist any opportunity to attract high end visitors – who are more willing to travel and will spend more while on holiday.

SMUGGLER’S HAVEN

As it stands now, the Bahamas’ reputation among wealthy cigar connoisseurs can be anything but favourable – considering the fact that substandard fakes are on display everywhere.

The Ministry of Finance puts a great deal of faith in the Customs Department, which it feels “is up to the challenge as part of its ongoing strategy to detect and deter all illegal activities at the border.”

Granted, it would be unusual for any government office to bad mouth a sister agency, but the sheer volume of goods smuggled into the country through or around Customs tells another story to all those who live in the real world.

According to one local shopkeeper, downtown Nassau is “flooded” with counterfeit cigars, which in some cases are being hawked by foreigners whose immigration status they question.

“The whole trade as it stands makes Nassau seem like a pirate town. It’s bad for everyone – tourists become irritated because they are sold a substandard product, and Bahamians see an example of blatant illegal behaviour which encourages them to follow that example” said one shopkeeper.

Indeed, the official statistics on the number of cigars imported into the Bahamas – particularly from Cuba – represent what can only be called a laughable fraction of the actual volume. “What this means in real terms is that demand is satisfied by a conspiracy of evasion – ie, smuggling, which is not actively interdicted by Customs. The black market created, it should be noted, aids the circulation of counterfeit product which does the reputation of the Bahamas no good,” the shopkeeper said.

MOTIVES

In light of all this, one wonders what the government’s stance is really all about.

According to the Ministry of Finance, the Bahamas must act in accordance with the World Health Organisation (WHO) Framework Convention on Tobacco Control, of which it is a signatory. Presumably, the Bahamas, a good global citizen, would like to live up to its international agreements. But this seems somewhat more negotiable when it comes, for example, to treaties on the protection of the environment, endangered species, or UN stipulations on public participation in key development decisions.

The US is also a signatory to the WHO’s tobacco convention but sees no problem in separating cigars from cigarettes for tax purposes. This is perhaps because while the US has signed the deal, it has not ratified it – but then, neither has the Bahamas.

Several persons interviewed for this article suggested other, more nefarious reasons for government’s stubbornness. Some, including a source inside Customs, said cigar smuggling is mostly concentrated in the hands of a few well connected people, who the authorities are reluctant to obstruct. Others say the government is fearful that a decrease in the tax on Cuban cigars would not be welcomed by the United States.

In addition, it is obvious that the current tax regime privileges local operations which import raw tobacco for cigar construction over those who import the finished product.

Anyone who wants to smoke a cigar in the Bahamas will do so – either the genuine article from a genuine retailer or a substandard fake from a street-side hawker. The question is, what impression of the Bahamas will that person take away from the experience?

Cigar retailers say the solution to the smuggling problem lies in lowering the duty to a more competitive rate. Some ask that premium cigars be treated like other luxury items – high-end alcohol, perfume, jewellery and watches – and classified as duty free.

As one retailer put it, lowering the tax would not only “create a disincentive for smuggling and dishonesty enabling the collection of more revenue by Customs, it will facilitate expansion of this retail sector. It will also discourage the circulation and sale of counterfeit product. In short, it is a win/win scenario for the Bahamas.”

What do you think?

Email comments or questions to pnunez@tribunemedia.net, or join the conversation at http://www.tribune242.com/news/opinion/insight/

• HISTORY’S LESSON

EVIDENCE from other jurisdictions suggests the responsibility for cigar smuggling in the Bahamas should be placed squarely on the original framers of the steep tobacco tax – and those who refuse to change it.

In 2006, Professor of Economics at George Mason University Walter E Williams wrote that “Politicians seem to ignore the idea of substitutability, namely, when the price of something changes people respond by seeking cheaper substitutes. New York City raised cigarette taxes, thereby making a pack of cigarettes $7. What happened? A flourishing cigarette black market emerged.”

Speaking of the huge spike in cigarette smuggling in the state of Michigan a few years ago following a tax hike, a US Customs officer told the Associated Press “Because the profits are so fantastic, we’re now seeing drug traffickers, other criminal organisations, and even terrorists involved in tobacco smuggling.”

John Attarian of the Foundation for Economic Education added: “As long as the smuggler’s price is lower than the legal ‘tax-augmented’ retail price, he’ll have buyers. When the excise tax is small so is the smuggler’s profit, and it isn’t worth the effort. But the bigger the excise tax, the bigger the price differential between locations. It follows that the way to stop smuggling is to undo the tax that encouraged it in the first place.”

He also notes that in an effort to curb smoking in the early 1990s, the Canadian government tripled its “sin tax” on cigarettes, while continuing to export cigarettes tax-free. “Smugglers quickly took advantage of the price differential. They bought up Canadian cigarettes in American from wholesalers, ran them back into Canada, and pedalled them on the black market.”

Perhaps the most enlightening example Mr Attarian gives has nothing to do with tobacco: “Once drunk by only a handful of Britons, tea became the national drink in the eighteenth century. But it had to be imported, and the tax rate on tea was an incredible 119 per cent. The combination of a huge market and a very high tax made the incentive to smuggle extremely powerful.

 “The consequences were disastrous for the British treasury, which lost huge sums, and for the East India Company, which held a government-granted monopoly on legal tea imports but was undersold by smugglers and almost ruined. In 1784, the company’s accountant estimated that roughly two-thirds of the tea drunk in Britain was contraband.”

How was the situation remedied? - “Prime Minister Pitt realised that the only way to end Britain’s rampant tea smuggling was to get rid of its tempting profits, and in 1784 he slashed the tea tax to 12.5 per cent. Legal tea prices plunged accordingly, so did smuggling. A year later, tea imports had more than tripled. Soon, tea smuggling was just a memory.”