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These are not good times for the U.S. cigarette industry. For decades, policy makers and consumer activists have unsuccessfuly attempted to rein in the tobacco industry. Now, new legal strategies are bearing fruit, more stringent regulations regarding the marketing and sales of cigarettes are being implemented, and a bill to significantly increase cigarette taxes has been put before the Senate. A large cigarette tax complements the gains made on other fronts by making cigarettes less desirable to teenagers, the next generation of addicts.

Thirty-two states to date have filed lawsuits accusing the tobacco industry of hiding knowledge of the adverse effects of smoking and seeking compensation for billions of dollars in Medicaid costs incurred for treatment of people with smoking-related illnesses. In March of this year, the Liggett Group, Inc., the smallest of the five leading cigarette makers, agreed to a settlement in which it acknowledged that the nicotine in tobacco is addictive, that tobacco causes cancer, and that cigarette companies had deliberately marketed their products to teenagers for many decades. The company also agreed to pay a quarter of its pretax profits annually to the 24 states for the next 25 years.

In mid-April, it was disclosed that the two biggest cigarette makers, Philip Morris Companies and RJR Nabisco Holdings Corporation, had initiated negotiations with 24 state attorneys general to settle the Medicaid lawsuits. These corporations, like Liggett, have offered to disclose their research on smoking and health and specifically to make known the hundreds of chemical additives in cigarettes. Under their proposed settlement, the companies would make payments of more than $250 billion over the next 25 years to compensate states and individuals for the costs of cigarette-related illnesses and would create a fund of as much as $500 million to educate young people about the risks of smoking. They would also submit to sweeping new Food and Drug Administration (FDA) regulations authorized by the Clinton administration in August 1996, regulations that the companies had previously vowed to challenge in court. Under these regulations, the FDA would be renamed the Food, Drug, and Tobacco Administration.

In late April 1997, Judge William L. Osteen Sr. of the Federal District Court in Greensboro, North Carolina, upheld the FDA's power to regulate nicotine on the basis that it is a drug and to regulate cigarettes on the basis that they are drug delivery systems. However, he also ruled that the agency lacked the authority to control advertising intended for young people because Congress had not given it this power. This does not mean that the advertising restrictions will not eventually take effect, as the judge did not rule that these restrictions violate the Constitution's protection of free speech. The Federal Trade Commission, which Congress has empowered to control advertising, could impose them. The Clinton administration win appeal the part of the ruling prohibiting the FDA from regulating cigarette advertising. However, if the final settlement of the Medicaid lawsuits includes restrictions on advertising and if these are included in consent decrees and ratified by Congress, the legal barrier to FDA control over advertising might be eliminated.

Under one of the new FDA regulations that took effect on February 28, 1997, cigarette customers who appear younger than age 27 must supply proof to retailers that they are at least 18. Effective August 28, 1997, other measures to discourage teenage smoking -- including restrictions on advertising -- will go into effect. If the Clinton administration wins its appeal of Judge Osteen's ruling, cigarette vending machines will not be permitted except in certain nightclubs and other places where people under 18 cannot go. Sales of cigarettes in packs of fewer than 20 and distribution of free samples will not be allowed. Billboards within 1000 feet of schools and playgrounds will be banned. All advertisements in magazines favored by teenagers as well as all outdoor cigarette advertising will be restricted to black-and-white, text-only presentations. Logos of cigarette brands will no longer be permitted on T-shirts, gym bags, or baseball caps. Beginning August 28, 1998, cigarette makers will be allowed to display only their corporate logos -- without brand names -- at sporting events.

It is not surprising that the new FDA regulations focus on curtailing youth smoking. Numerous studies have shown that roughly 90% of smokers begin the habit as teenagers.[1] Each day, approximately 6000 youths try a cigarette for the first time, and about half of them become daily smokers.[2] Among people who have ever smoked daily, 82% began smoking before age 18.[1] Thus, cigarette control policies that discourage smoking by teenagers may be the most effective way of achieving long-run reductions in smoking in all segments of the population.

The upward trend in teenage smoking in the 1990s is alarming to public health advocates. Between 1993 and 1996 the number of high school seniors who smoke grew by 14%.[3] At the same time the number of tenth grade smokers rose by 23%, and the number of eighth grade smokers rose by 26%.[3]

The FDA regulations approach the problem of youth smoking by curtailing access to cigarettes and attempting to reduce the appeal of cigarettes by putting Emits on cigarette advertising. Increased taxation, which results in higher prices, is another means to accomplish the goal of discouraging young people from smoking. Unfortunately, increases in the Federal excise tax rate on cigarettes have not been motivated by a desire to curtail smoking. The purpose of each of the three tax increases since 1951 was to raise tax revenue or reduce the Federal deficit rather than to discourage smoking. The tax was fixed at 8 cents per pack between November 1, 195l, and the end of 1982. It rose to 16 cents per pack effective January 1, 1983, as part of the Tax Equity and Fiscal Responsibility Act of 1982. The tax was increased further to 20 cents per pack effective January 1, 1991, and to 24 cents per pack effective January 1, 1992, as part of the Omnibus Budget Reconciliation Act of 1990. But if the tax had simply been adjusted for inflation each year since 1951, it would be 47 cents per pack today; therefore, in effect today's tax is much lower than the 1951 tax.

A 43-cent tax hike is proposed in a bill introduced by Senators Orrin G. Hatch and Edward M. Kennedy in this Congress. As with past tax increases, the primary focus is not to discourage teenage smoking. The goal of the tax increase in the Hatch-Kennedy Bill is to finance health insurance for low-income children who are currently uninsured. Two-thirds of the estimated annual $6 billion increase in tax revenue would be allocated for grants to the states to provide health insurance for children below the age of 18 whose low-income working parents do not qualify for Medicaid. The remaining one-third would be applied to reducing the Federal deficit.

The industry has known and public health advocates have come to realize, however, that an increase in the cigarette tax can influence the behavior of smokers. The American Cancer Society, the Robert Wood Johnson Foundation, and other members of the antismoking lobby are supporting a proposal to raise state cigarette tax rates to a uniform $2 per pack nationwide in the next few years, from the current range of 2.5 cents in Virginia to 82.5 cents in Washington State. According to John D. Giglio, manager of tobacco control advocacy for the American Cancer Society: "Raising tobacco taxes is our number one strategy to damage the tobacco industry. The ... industry has found ways around everything else we have done, but they can't repeal the laws of economics."[4]

The cigarette industry's recognition of the potency of excise tax hikes as a tool to discourage teenage smoking is reflected in a September 1981 Philip Morris internal memorandum written by Myron Johnson, a company economist, to his boss, Harry G. Daniel, manager of research on smoking by teenagers. The memo was written in reaction to a National Bureau of Economic Research (NBER) report authored by Michael Grossman, Eugene M. Lewit, and Douglas Coate, which was later published in the Journal of Law and Economics.[5] In the memo johnson wrote: "Because of the quality of the work, the prestige (and objectivity) of the NBER, and the fact that the excise tax on cigarettes has not changed in nearly 30 years we need to take seriously their statement that '...if future reductions in youth smoking are desired, an increase in the Federal excise tax is a potent policy to accomplish this goal.' [Grossman et al.] calculate that... a 10% increase in the price of cigarettes would lead to a decline of 12% in the number of teenagers who would otherwise smoke."[6]

Why Taxes Work