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The payments in the proposed settlement will likely not raise tobacco prices sufficiently to achieve demand reduction goals through price increases alone. Analysts have reached widely differing conclusions about the impact of the proposed settlement on tobacco consumption among youths. Despite wide agreement that higher prices reduce the level of tobacco consumption,15 the magnitude of the effect depends not only on price but also on what other measures are taken and how effective they are. A drop in youth consumption is likely, but its magnitude cannot be predicted with precision. A 10 percent price increase could reduce consumption by as little as 4 percent, according to some estimates, or by as much as 12 or 13 percent, according to others.16 Tobacco use may also be influenced, moreover, by restrictions on access to tobacco by youths, advertising and promotion, and other measures.
The Federal Trade Commission recently released a report on the economic implications of the proposed settlement. It projects an ultimate price increase in the range of 62 cents per pack and estimates that the actual present value of the proposed settlement is in the neighborhood of $100 billion to $120 billion (as opposed to the face value of $368.5 billion, with the lower amount resulting from inflation, demand reduction, and other factors). Jeffrey Harris of the Massachusetts Institute of Technology, in a report for the American Cancer Society, estimates the net current value of the settlement to be $195 billion.17 An analysis by researchers at the University of California at San Francisco finds that the funding would be insufficient to recoup Medicaid costs for the treatment of tobacco-related illnesses, let alone to cover the desired tobacco control expenses. An industry analysis differs with these assessments. It projects an eventual price increase of 83 cents per pack under the settlement, with a greater reduction in the level of tobacco consumption and sharply lower profits.18 A response from the Federal Trade Commission notes the out-year price projections in the industry analysis are not adjusted for inflation. FTC also challenges the assertions about effects on profits.19
The board cannot resolve the uncertainty over how much tobacco prices will increase, the effect of price increases on consumption, or the additive effect of price on other tobacco control measures. The board believes, however, that the desired health goals should dictate tax rates (or settlement payments) rather than the reverse. Fixing the tax rate or payment amount in advance, with no provisions for adjustments later in light of data about levels of consumption and the initiation of tobacco use among youths, invites failure to achieve the public health goals. If tobacco consumption and initiation do not recede, taxes on tobacco products should be increased to further reduce demand. Any tax increases or penalty payments should be indexed to inflation, so the effects on consumption and the revenues to support tobacco control and other goals are not eroded over time. A system of public health monitoring, as suggested below, is needed to guide pricing interventions, such as taxes or penalties under any settlement legislation.
The American Cancer Society urges elimination of the penalty caps and rebates in the settlement. The American Society of Clinical Oncology suggests a ''fail-safe mechanism," with excise tax increases triggered by failure to attain youth tobacco-use targets. The American Medical Association lists several provisions to redesign the penalties if youth consumption goals are not met, including a provision that "payments should be assessed against each individual company based on reductions in underage use achieved by that company. They should not be assessed on the basis of collective industry responsibility."20