National Academies Press: OpenBook

Taking Action to Reduce Tobacco Use (1998)

Chapter: Raise Prices to Reduce Use

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Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.

tobacco control legislation will touch upon the jurisdictions of diverse committees in both houses of Congress. Judiciary committees may address the liability and antitrust provisions, health committees (the Senate Labor and Human Resources Committee and the House Commerce Committee) may address the public health and research provisions, agriculture committees may address the implications for tobacco growers, commerce committees may address the marketing and advertising of tobacco products, education committees may address the components dealing with public education, and tax policy committees (the Senate Finance Committee and the House Ways and Means Committee) may address the revenue implications. These committees held many hearings in the last four months of 1997, and congressional attention is expected to continue in the final session of the 105th Congress in 1998. In addition to legislation growing out of debate about a settlement, Congress will be making decisions about appropriations for enforcement of the FDA rule, federal research and tobacco control programs, and oversight and conduct of U.S. contributions to international tobacco control. This report is intended to inform the debate about federal tobacco control policies in Congress, in the executive branch, and among other stakeholders. The remainder of this white paper addresses recommendations to policy makers, organized according to methods for reducing tobacco use.


The price of tobacco products must be increased substantially.

Raising the prices of tobacco products is a proven way of reducing tobacco use in the short and medium terms. Price hikes both encourage cessation and thwart initiation. Higher prices have the added benefit of reducing use among people not yet addicted to nicotine, including young people, whose level of tobacco consumption may be more sensitive to price.10 The impact and simplicity of price hikes were the main reasons that the 1994 IOM report's first recommendation was a $2 per pack cigarette tax increase (and an equivalent increase for other tobacco products). The recommended increment had three goals: to achieve the desired reduction in demand, to attain rough parity with the most effective tobacco control programs in other countries,11 and to avoid creating a black market. A significant price increase was also recommended recently in the report of a committee chaired by former Surgeon General C. Everett Koop and former FDA Commissioner David A. Kessler. The National Cancer Policy Board believes that a $2 price increment remains the single most effective way of reducing overall tobacco consumption. Such a price increase should also have the desired disproportionately greater impact on preventing the initiation of tobacco use among young people.

There are many ways to raise prices. A federal excise tax is simple and direct and would create a revenue stream that could be used for research and tobacco control measures. An excise tax increment has the virtue of being collected through existing structures appropriated with other federal funds. The main argument against a federal excise tax increment is political pragmatism—any tax increase is suspect, and a tobacco excise tax hike of this

Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.

magnitude has never been passed by Congress. The federal tobacco excise tax was increased by 15 cents (to be phased in) in the Balanced Budget Act of 1997, but this is far less than recommended and encountered stiff opposition. There are also concerns about any new taxes and about the regressive nature of taxes that fall on current tobacco users.

The settlement proposes that the tobacco industry make payments into a fund and stipulates certain broad principles for spending those funds, subject to allocation by a board. The industry payments are an alternative mechanism to a tax and would similarly raise prices. This process leaves many unanswered questions and relies on institutions that must be created de novo. Negotiation of the allocation process could well prove to be complicated, with many interested parties staking contending claims, because tobacco firms, tobacco farmers, health researchers, tobacco control activists, state governments, state and federal health programs, international tobacco control efforts, and others all have a stake.

The proposed settlement has the virtue of ensuring that some funds are used to promote public health, to advertise the health dangers of tobacco use, to carry out research, and to support other tobacco control measures. This link between tobacco revenues and tobacco control measures has been implemented in state efforts, such as those in Arizona, California, Massachusetts, and Oregon. This linkage mitigates the unpopularity of tax increases. The mixed uses of funds derived from tobacco revenues for health programs or education as well as tobacco control, however, has proven to be troublesome, particularly in the first years of the California program.12 Use of tobacco excise tax funds has also been contentious elsewhere, but a fraction of the funds from state excise taxes has successfully been devoted to tobacco control efforts in Arizona and Massachusetts. Tobacco tax collection has never been linked to tobacco control efforts at the federal level, and partially for this reason, federal tobacco control initiatives have been anemic. The State of California, for example, spends more on tobacco control than the entire federal government.13 Ensuring that some tobacco revenues go to tobacco control could be achieved by legislative set-asides in combination with tax increases, without the need to create a new mechanism for obtaining payments from industry or for the allocation of a new pool of funds. Regardless of whether existing processes are used to allocate funds or new ones are created, the process should be insulated to the degree possible from raw politics. Funds allocated for research, for example, would most fruitfully be directed through peer-reviewed channels at the National Institutes of Health (NIH). In program areas in which such peer-review mechanisms do not exist, they should be created.

Failure to achieve targeted reductions in youth consumption should result in further manufacturer-specific penalties.

Goals for reducing tobacco use among youths and adults are specified in Healthy People 2000,14 and the settlement proposes that the rate of smoking among youths be reduced by 60 percent over a decade. The proposed settlement incorporates some penalty payments if the rate of smoking among youths is not reduced, but the penalties are capped and there are provisions for rebates to be given to firms on the basis of good faith efforts. Price increases and other measures incorporated into the settlement would surely result in improvements to public health compared to the status quo, but they may fall short of achieving the specified goals.

Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.

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

Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.
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Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.
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Suggested Citation:"Raise Prices to Reduce Use." Institute of Medicine and National Research Council. 1998. Taking Action to Reduce Tobacco Use. Washington, DC: The National Academies Press. doi: 10.17226/6060.
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