The Price of a Puff
'Cheap' Cigs May Hamper Efforts to Curb Smoking

In France, a pack of cigarettes costs about $3.50most 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 smokingparticularly by priceconscious
teens.
As Congress and the White House consider whether to bulk up
the $368.5billion 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 tobaccorelated health care costs and fund a variety
of stopsmoking programs. Critics such as Sen. Edward M.
Kennedy (DMass.) 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 otherssensing a onceinalifetime chance to
depress smoking rates by jacking up pricesalso 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 smokingparticularly by the nation's youthis 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 packincluding a 24cent 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 15cent 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 industrysupported 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 62cent 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 $2perpack 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 antismoking measuresincluding 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 smokingcessation programs, finance a $500millionperyear
antismoking ad campaign and fund stepped up enforcement of
laws barring sales of tobacco to youths under 18.
In return, pending antitobacco 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 positionand 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,
respectivelyin 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:

Country Price Tax
United States $1.90 $0.66*
U.S. postsettlement** 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 62centsperpack
price increase to fund $368.5billion settlement, plus the
15centsperpack excise tax increase recently adopted by
Congress.
Source: Smoking and Health Action Foundation

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