The Price of a Puff

In France, a pack of cigarettes costs about $3.50--most of that tobacco taxes. In Britain, cigarettes cost about $5.25, with the tax exceeding $4.

Comparisons with the U.S., where cigarettes cost, on average, about $1.90, have surfaced in the tobacco settlement debate amid growing concern that the deal won’t lift cigarette prices enough to seriously discourage smoking--particularly by price-conscious teens.

As Congress and the White House consider whether to bulk up the $368.5-billion accord, tobacco representatives say the industry is near its limit and may be forced to back away if the price of peace goes higher.

“The economic terms of the deal, I think, are extremely stringent, and I would not predict the companies have any ability to do any more in that area,” industry lawyer D. Scott Wise recently told a Senate panel.

Yet the settlement would not be funded directly by the companies but through higher cigarette prices that amount to a de facto tax on smokers. And a comparison with other countries where tobacco companies also operate profitably shows that U.S. cigarettes would remain among the cheapest even after the settlement kicks in.

When it comes to taxing cigarettes, “the United States is way out of step with everyone else,” said Eric LeGresley, legal counsel for the Smoking and Health Action Foundation of Canada.

“You look at other countries . . . you see the price of cigarettes at $5 a pack,” said Gary Black, tobacco analyst with Sanford Bernstein & Co.

The industry thinks the deal is fair, but “the message that ‘we can’t afford [to pay more]’ falls on deaf ears,” Black said.

The $368.5 billion, to be paid over 25 years, would reimburse the states for tobacco-related health- care costs and fund a variety of stop-smoking programs. Critics such as Sen. Edward M. Kennedy (D-Mass.) argue that cigarette makers would get off cheaply because the payments won’t cover billions of dollars a year in federal costs of treating sick smokers under Medicare and veterans programs.

Kennedy and others--sensing a once-in-a-lifetime chance to depress smoking rates by jacking up prices--also worry that the deal isn’t expensive enough to achieve that.

They are advocating a large increase in the settlement amount or an excise tax increase of as much as $1.50 to $2, which would have the same effect.

“Study after study has shown that the most powerful weapon in reducing smoking--particularly by the nation’s youth--is to raise the price of cigarettes,” Kennedy said Friday in a speech to the Senate.

Currently, American smokers, on average, are taxed just over 60 cents per pack--including a 24-cent federal excise tax and state excise and sales taxes that vary by location but average about 40 cents more.

The tobacco settlement, by raising prices by about 62 cents per pack over the next five years, would essentially double the effective tax on cigarettes. Add in the 15-cent tobacco tax hike recently passed by Congress, and the tax bite rises just above $1.40 in the next few years.

Even that would leave the U.S. near the bottom in tobacco taxation and prices, according to separate surveys by the Smoking and Health Action Foundation and the industry-supported Tobacco Merchants Assn. of Princeton, N.J.

“When you compare the ultimate retail price resulting from the settlement with that in other countries, the United States would still rank low,” said Jeffrey Harris, an MIT economist who analyzed the settlement for the American Cancer Society and has testified before Congress on the deal.

Harris and other economists say a 10% increase in cigarette prices should trigger a 4% drop in cigarette consumption.

By this rule of thumb, the 62-cent price hike, representing a 30% increase, could cut smoking about 12% and probably more among underage youths who have little spending cash.

Even so, the reduction would fall well short of the goal outlined in the agreement of reducing smoking among underage teens by 30% in five years and by 60% in 10.

The cancer society has called on Congress and President Clinton to achieve a $2-per-pack increase by boosting the amount of the deal.

In remarks this week to the Senate Agriculture Committee, Dr. C. Everett Koop, the former U.S. Surgeon General, and Dr. David Kessler, former commissioner of the Food and Drug Administration, called for an increase of $1.50 to $2 to dramatically reduce youth smoking.

But tobacco industry lawyer J. Philip Carlton said the industry is not prepared to go higher.

Under terms of the deal, the industry would also accept and even fund a variety of anti-smoking measures--including a ban on tobacco billboards, larger and more dire warning labels and a ban on smoking in most workplaces.

In addition, the industry would pay up to $1.5 billion per year for smoking-cessation programs, finance a $500-million-per-year anti-smoking ad campaign and fund stepped up enforcement of laws barring sales of tobacco to youths under 18.

In return, pending anti-tobacco class actions and lawsuits by the states would be dismissed and future such claims would be banned.

“It’s a silly argument to say they [tobacco companies] can’t afford” to up the ante, said Black, the Sanford Bernstein analyst.

On the other hand, Black maintained, the deal is reasonable given the strength of the industry’s legal position--and the unlikelihood of its foes winning as much as $368.5 billion in court. One indication, he said, is that in recent months eight of the lawsuits by state attorneys general have been substantially weakened by pretrial rulings favorable to the industry.

Tobacco companies recently settled Medicaid recovery suits by Mississippi and Florida for $3.4 billion and $11.3 billion, respectively--in both cases, virtually on the eve of trial. Those settlements would be superseded by the nationwide accord if it is ratified by Congress.

But cigarette firms are taking a stand in Texas, saying they will fight rather than settle that state’s Medicaid case, which is scheduled for trial late this month.

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The Price of a Puff

U.S. cigarette taxes and prices would remain among the lowest globally, even with the increases resulting from the proposed tobacco settlement. Average retail prices (including tax) for 20 cigarettes and total taxes per pack in December 1996, in U.S. dollars:

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Country Price Tax United States $1.90 $0.66* U.S. post-settlement** 2.67 1.43 Australia 4.50 2.92 Austria 2.84 2.11 Belgium 3.23 2.39 Brazil 1.43 1.06 Canada 3.00 1.97 Denmark 4.75 4.02 Finland 4.54 3.48 France 3.47 2.61 Germany 3.18 2.28 Greece 1.82 1.33 Hong Kong 3.62 1.76 Iceland 4.07 2.63 Ireland 4.94 4.16 Italy 2.17 1.59 Netherlands 2.66 1.94 New Zealand 4.17 2.76 Norway 7.05 5.23 Portugal 1.77 1.43 Singapore 3.72 1.87 South Africa 1.04 0.47 Spain 1.08 0.81 Sweden 4.47 3.13 Taiwan 1.45 0.62 Thailand 1.58 0.89 United Kingdom 5.27 4.30

*--*

* Federal cigarette excise tax combined with average state excise and sales taxes.

** Approximate prices. Tax figure includes 62-cents-per-pack price increase to fund $368.5-billion settlement, plus the 15-cents-per-pack excise tax increase recently adopted by Congress.

Source: Smoking and Health Action Foundation