Cigarette Ban Would Slash State Revenues

By MERRILL GOOZNER, The Fiscal Times
March 20, 2011

A Food and Drug Administration advisory committee on Friday said banning menthol cigarettes will be a boon to public health, especially among young people and African-Americans, for whom mentholated brands are often a gateway to lifetime smoking.

But strategies that are good for public health are starting to adversely  affect federal and state revenues. Raising taxes on the declining number of people who smoke has finally reached a tipping point with revenues generated by cigarette taxes starting to fall, according to government documents and data provided by the Campaign for Tobacco Free Kids.  A menthol ban would accelerate the trend.

Should the FDA ban menthol cigarettes, which account for nearly 30 percent of the $85 billion a year market, most smokers would likely  switch to other brands. But fewer adolescents and minorities would get hooked on smoking, which would accelerate the decline in smoking, anti-smoking advocates say.

The Obama administration’s recent budget proposal projected that  tobacco cigarette tax revenue will decline sharply over the next decade, from the record $17.5 billion collected this year to $15.5 billion in 2021. In 2009, the government raised the cigarette excise tax from 39 cents to $1.01 per pack.

State cigarette tax rates have also been ratcheted sharply upward in the past two years as states grappled with recession-induced budget deficits. Yet their revenues are also starting to decline.

State tobacco tax collections, which include revenues from the 1998 settlement with major tobacco companies, will fall 2.3 percent to an estimated $25.3 billion this year, according to the Campaign for Tobacco Free Kids data.

Between 2000 and 2010, state tobacco revenues soared from $16.5 billion to $25.9 billion. State taxes now range from a low of 17 cents a pack in Missouri to a high of $2.75 a pack in New York. Even outlier South Carolina, whose cigarette tax was just 7 cents a pack in 2009, raised its levy to 50 cents last year.

The falloff in tobacco tax collections will accelerate if the FDA moves against menthol. The agency, which was empowered by the 2009 Tobacco Control Act to regulate tobacco, has 90 days to review the scientific evidence submitted by its 11-member Tobacco Products Safety Advisory Committee (TPSAC), three of whom are non-voting industry representatives. It will then issue its own report.   

Agency officials said there was no timeline for making a final decision as to “what if any regulatory actions are warranted” in the wake of the report. “We do recognize the strong interest in this issue,” said Lawrence Deyton, director of the Center for Tobacco Products. “Now it’s up to us to do our job.”

The year-long TPSAC study found that while the prevalence of smoking among adolescents was declining, the proportion of youths and young adults smoking menthol cigarettes was higher than in the general population of smokers, now down to 19 million Americans. About four out of every five black smokers smoke menthols, compared to just one in five whites. Nearly half of white teenagers smoke menthols, with most switching to other brands after they get hooked.

“Less experienced adolescent smokers may in fact be experimenting with menthol cigarettes,” which can lead to the initiation of a lifelong cigarette habit, said committee member Dorothy Hatsukami, a professor of psychiatry at the University of Minnesota. The study found that “tobacco companies were aware of the appeal of menthol cigarettes to younger smokers because these [more flavorable] cigarettes are easier to smoke,” she said.

The committee found no evidence to suggest that smoking menthol cigarettes was any more addictive or caused any greater harm than smoking non-mentholated cigarettes. But allowing them to remain on the market would slow the decline in smoking, leading to 327,000 excess deaths over the next 40 years, including 66,000 excess deaths in the African-American community. 

The tobacco industry representatives on the committee, who will be issuing their own report next week, questioned the assumptions used in the report.  Jonathan Heck, a senior scientist at Lorillard Tobacco Co., which manufactures Newport, the leading menthol brand,    said the government committee’s report was  based on a single small study. “There is a shortage of useful data in this area,” he said.  “This is a frail basis to employ in making such projections and calculations.”

The industry also lined up a number of supporters to testify at the meeting, who hammered away at the economic consequences of banning mentholated brands. They claimed a ban would lead to the emergence of a huge underground  market in the U.S. and lower tax collections.

“A ban on menthol cigarettes would be ineffective and create a significant contraband market” of organized crime figures selling made-in-China knock-offs of banned brands, said Scott Ramminger, chief executive officer of the American Wholesale Marketers Association, which represents tobacco distributers. “Cheaper cigarettes that are avoiding taxes . . . could increase tobacco use among youths.”

“Contraband increases dramatically the access of youth to tobacco products,” said Jim Tozzi, executive director of the Center for Regulatory Effectiveness, whose industry funders include tobacco firms. “If you want to reduce youth smoking, you’re jumping on the wrong end of the teeter-totter. You should be jumping on controlling counterfeit cigarette sales.”

Members of the committee largely rejected that possibility. “Most contraband is between states of legitimate product” to avoid taxes, said Jack Henningfield, vice president for research at Pinney Associates. “To come anywhere close to providing menthol cigarettes that are 30 percent of the market, you’re talking about truckloads a day delivered to thousands of outlets.”

“Just as the industry is insisting that the FDA consider the impact of the emergency of a contraband market, I would urge the FDA also take into account the public health side effect of this would have, particularly among African-Americans and youths,” said Timothy McAfee, director of the office of smoking and health at the Centers for Disease Control and Prevention and a non-voting member of the committee. Still, he said, “contraband clearly should be addressed in the FDA’s recommendation.”

Stock market watchers are predicting the FDA won’t ban popular brands like Newport. Hinting Lorillard would sue to protect its franchise, UBS AG and Goldman Sachs Group Inc. urged clients to buy Lorillard shares after the report came out, according to Bloomberg News. Citing the industry’s willingness to challenge the science behind the report, the agency “may not want to face any serious legal challenges,” Goldman Sachs analyst Judy Hong told clients in a research note.

1 comment. Leave a Reply

  1. BJ

    Please just leave People choices alone. This is an LEGAL product & it need not make changes of peoples choice to use Methol. I have been smoking 4 41 yrs. & I haave only smoked Methol cigerettes. Peoples choice 2 smoke is like our right 2 vote. R U going to take that away when it don’t suite ur standards of living.

Leave a Reply

Please Answer: *