TCS Daily

Excise Wide Shut

By Giedrius Kadziauskas - August 5, 2005 12:00 AM

Recently, Lithuanians were reminded about a scheduled increase in tobacco and fuel prices. This will come as part of Lithuania's commitment to the European Union to raise its excise duties in order to reach the EU's minimum levels by 2009. But this minimal level is not minimal at all for Lithuania and other new E.U. members, where standards of living are not expected to rise to the E.U. average for another 15 to 30 years.

The news apparently was broadcast to help Lithuanians prepare to buy more expensive cigarettes and petrol, to look for cheaper substitutes and, finally, to get used to the idea that news about the leaking Lithuanian border is inevitable.

Meanwhile, smuggling is growing in Lithuania, which is responsible for guarding 902 kilometers of the EU's external border. Every single rise in excise duties signals to smugglers that the ranks of their potential customers are swelling and that they have an opportunity to mark up prices of their goods.

It is impossible to measure the real scale of smuggling. The least recorded crimes are those that leave behind no victim and which do not harm a specific person. Such is the nature of smuggling: except for most border-guards and those who actually pay excise-duty, and of course producers of legal goods, all the rest are satisfied: consumers, smugglers and some border-guards or customs officials.

One indicator of the scale of the problem is the quantity of smuggled cigarettes that have been confiscated. According to the data of the Lithuanian State Border Guard Service, this has been doubling every year since 2001 and last year was about 3.4 million. There is no doubt that since joining the EU the efficiency of the customs service has improved. But despite this, the smuggling is increasing. This is because the products are fetching higher prices.

A survey carried out by the Lithuanian Free Market Institute (LFMI) in 2004 showed that more than a half of cigarette consumers in Lithuania buy smuggled cigarettes at least once in a while. About a third of all cigarette consumers buy illicit cigarette supplies regularly or frequently. This data and the growing number of detained cigarettes demonstrate that the improved border protection is failing to curb this illegal activity.

It's not just a problem in Lithuania. For example, in Sweden, 1.35 million cigarette packages were confiscated in 2002, increasing to 3.7 million in 2003. In Great Britain, empty cigarette packages collected after a football match showed that more than 90% of cigarettes smoked at the stadium that day had been smuggled. Great Britain estimates that as a result of illicit trade of tobacco products its budget does not collect income of about €6 billion from excise taxes and VAT.

Revenues from increased excise duties go into the government's pocket, while multiplied profits from sales of illegal goods serve as investments in the smuggling business. Observing such favorable business conditions, smugglers don't lack ideas.

Starting at the lowest level, working and living conditions are facilitated for the so-called "ichtyomen" (smugglers who carry goods by swimming under the water across the river Nemunas, from the Kaliningrad Region to Lithuania), drivers of enhanced-enlarged cross-country vehicles, the old ladies who sell goods and other lowest-income employees of the Lithuanian smuggling business.

At the highest level, prevention of punishment is tackled by trimming the list of punishable actions of smuggling, by softening sanctions laid down in the Lithuanian Penal Code or by dealing with prevention of penalties for smugglers directly in courts.

It's natural that once a smuggling business is established, and all its chains are functioning, its owner will be willing to exploit the investments made and to carry en route a woman, a bomb or a bar of uranium, along with such "ordinary" goods as footwear and clothing. Another way to employ profits from smuggling is to lend them to those who cannot borrow from official sources. Shortly after the war on terrorism started, some newspapers in the US reported that some terrorist activities had been financed from illegal trade of tobacco products. Similar accounts are cropping up about the origin of terrorist funding in Europe.

There are other problems. Increased accessibility to smuggled cigarettes hinders the goals of improving health care and reducing juvenile smoking. One of the reasons governments give for imposing high excise duties on fuel, tobacco and alcohol products is to reduce overall consumption of these products and to boost environmental protection and heath care. But cheap illicit tobacco products counter this aspiration, as much cheaper smuggled goods are frequently of poorer quality and are more easily obtained by consumers than the legal ones.

It may be unpopular or even risky to talk about reducing excise duties on tobacco products, but it is crucial to look into the roots and the consequences of this problem. It's only a matter of time before serious debates will be launched regarding the effectiveness of the excise tax policy and its effects on security in the EU. Only a threat to security and an excess of euros thrown at safeguarding the EU's exterior border, being conducted by the new member states, will force officials to consider changing the course of excise duty policy by starting to remove the required minimum levels.

In the meantime, the expanding market for smuggled tobacco goods will be the major source of smugglers' profit and Lithuanian government's headache. Most importantly, this headache should become an E.U.-wide ailment because the remedy - the decision regarding lower excise duties - rests in the corridors of the European Union.

Giedrius Kadziauskas is a policy analyst at the Lithuanian Free Market Institute.


TCS Daily Archives