Tobacco

Public Policy

Congress and FDA Regulation of the Tobacco Industry1

On February 15, 2007, bipartisan legislation was introduced in the 110th Congress in an effort to establish a comprehensive and coherent national tobacco policy in the United States. This legislation, known as the Family Smoking Prevention and Tobacco Act, follows similar legislative efforts in the 108th and 109th Congress. It would set in place a wide range of important provisions that are expected to greatly benefit consumers, public health and all rightful participants in the tobacco industry. Some of the essential aspects of the new bill include the following:

• Changing the language of the current cigarette health warnings, substantially enlarging their size and granting the FDA the authority to require new warnings in the future;
• Full disclosure of ingredients added to tobacco products;
• Authority for the FDA to regulate, or ban, terms such as "light" and "low tar";
• Authority for the FDA to mandate changes in the design of tobacco products to protect public health, including authority to remove harmful ingredients and smoke constituents;
• Authority for the FDA to do more to prevent minors from using tobacco products;
• Authority to establish standards for products that could potentially reduce the harm caused by smoking and define the appropriate ways to communicate about these products; and
• A ban on the sale of candy and fruit-flavored cigarettes.

With these new restrictions given by the FDA, the tobacco industry will be affected in a couple of different ways. By making the warnings larger, and including all ingredients, people might be more hesitant to buy tobacco increase sales because people will be more willing to buy them after knowing that they are less harmful than past products.

Several major tobacco companies, including Philip Morris USA, are supporting this legislation. Language from their website states that the company supports such legislation as "the best way to address the serious harm tobacco products cause and to advance real solutions to the many complex issues involving tobacco."2

New State and Local Policies on Smoking3

In recent years, many states and municipalities have begun to restrict smoking both in public areas and in private restaurants and bars, citing public health and the danger of second-hand smoke. These new anti-smoking actions are expected to affect the tobacco industry negatively, as it could dampen demand for tobacco products, especially cigarettes. The Center for Disease Control and Prevention (CDC) has designed a study called the Morbidity and Mortality Weekly Report (MMWR) that shows the changes in smoking policies across the country. The MMWR shows the new restrictions of smoking in different states across the country. These are the highlights of the latest MMWR:

• The number and restrictiveness of state laws regulating smoking in private-sector worksites, restaurants, and bars increased from 1999-2004. This increase has provided U.S. nonsmokers with greater protection from exposure to secondhand smoke, a known human carcinogen.
• From 1999 to 2004, ten states strengthened their smoking restrictions for private-sector worksites, nine strengthened restrictions for restaurants, and five strengthened restrictions for bars.

By the end of 2004:

1. Seven states (Delaware, Florida, Idaho, Maryland, Massachusetts, New York, and South Dakota) banned smoking in private-sector worksites, up from one state (Maryland) at the end of 1998;
2. Eight states (Delaware, Florida, Idaho, Maine, Massachusetts, New York, Utah, and Vermont) banned smoking in restaurants, up from two states (Utah and Vermont) at the end of 1998;
3. Four states (Delaware, Maine, Massachusetts, and New York) banned smoking in bars, up from no states at the end of 1998;
4. Three states (Delaware, Massachusetts, and New York) banned smoking in all three of these settings, up from no states at the end of 1998.

Illegal Trade4,5

Legislators and tobacco manufacturers have also sought to prevent smuggling of cigarettes. As cigarette prices rise, some consumers have sought other means to acquire cigarettes, including counterfeit, illegally imported, untaxed, under-taxed and stolen cigarettes. The Prevent All Cigarette Trafficking Act (the "PACT Act"), which passed the Senate in 2004 during the 108th Congress, is one attempt to address these concerns. The PACT Act includes a series of reforms to the Jenkins Act, the Contraband Cigarette Trafficking Act (CCTA) and the Imported Cigarette Compliance Act (ICCA). This legislation was reintroduced to the Senate on March 29, 2007. Some of the reforms included are:

• Increasing the penalties for violations of the Jenkins Act from a misdemeanor to a felony;
• Making nonpayment of a state excise tax in a delivery sale a federal offense;
• Requiring delivery sellers to pay the state excise tax in the state of delivery before shipping the cigarettes;
• Lowering the threshold for shipping cigarettes without evidence of the payment of state taxes across state lines from 60,000 cigarettes to 10,000 cigarettes;
• Clarifying that international delivery sales of cigarettes to consumers in the United States must comply with the ICCA requirements for cigarette imports, and are not subject to the exception from those requirements around cigarettes for personal use, and also providing the states and private parties with enhanced authority to enforce the ICCA;
• Prohibiting the shipment of cigarettes via the United States Postal Service.

Cracking down on illegal trade will have both positive and negative effects for the tobacco industry. If people can no longer buy cigarettes illegally, they will either pay the higher price for the cigarettes (which will help the industry), or stop buying cigarettes they cannot afford (which will harm the industry in the long-run).

The Fair and Equitable Tobacco Reform Act of 2004

The tobacco industry has been under a system of quotas since 1938, a result of the financial difficulties that tobacco farmers faced during the Great Depression. These quotas, calculated by a complicated formula applied to each farm, limit the amount of tobacco that each producer can grow. Over time, rich landowners have purchased quota shares from smaller farmers, gaining larger rights to production. In addition, these landowners often profit by renting out quotas to small farmers.

Quotas were intended to act as a price support mechanism by restricting the amount of tobacco in the market. However, in the past decade, demand for cigarettes (and therefore tobacco) has declined for various reasons. Additionally, tobacco imports from other countries have also increased, especially from Brazil and Turkey. In order to maintain the effectiveness of quotas as a price support mechanism, the government has had to limit the number and size of quotas.6

These difficulties in the industry led to support for and passage of the Fair and Equitable Tobacco Reform Act of 2004, which Congress passed in 2004. It calls for elimination of both the quota system and supplemental government price supports through a massive buyout. This buyout will pay farm owners proportionately to the quotas they possess. This will affect North Carolina substantially, as four of the ten billion dollars involved in the buyout program is destined for this state. Of the 76,000 people that were scheduled to receive payments from the government, 269 will receive over $1 million, which is a demonstration of the inequalities present in the ownership of quotas.7

Most experts believe big farms will survive in a market environment because they are large enough to contract with tobacco product manufacturers and because economies of scale work to their benefit. In fact, because supply restrictions are lifted, they may even grow. However, smaller farms will likely start to disappear. This not only has the potential to affect farmers, but it also may change the way in which the tobacco industry operates.

Part of the proposed legislation sought to alter the role of the Food and Drug Administration (FDA) in this industry. This item sought FDA regulatory power over cigarettes, a change which would place tobacco under regulation as a drug for the first time. The compromise bill worked out between the two houses of Congress ultimately eliminated this oversight from the final legislation, though the Senate initially allowed this power.8 Interestingly, the biggest tobacco company in the United States, Philip Morris, supported the FDA regulation bill attachment due to its dominant role in the industry. FDA oversight or regulation would not have affected Philip Morris in a different manner from other companies in the industry, and may have prevented competitors from gaining market share. Because many of the costs of compliance with regulation are fixed in nature, Philip Morris would have been able to spread these costs across a wider volume of sales than the other cigarette manufacturers.

The Master Settlement Agreement

In November 1998, the four largest cigarette manufacturers reached an agreement with 46 states to settle state suits to recover costs associated with treating smoking-related illnesses. According to the Master Settlement Agreement (MSA), the cigarette industry is projected to pay the settling states more than $200 billion over the next 25 years, as well as $46 billion to the four states that settled suits before this agreement.9,10 The Master Settlement Agreement also called for manufacturers to address the negative impact that the MSA would have on the farming segment of the tobacco industry. This requirement, Phase II of the settlement, takes the form of a $5.15 billion fund to be divided among the states that produce cigarette tobacco. North Carolina expects to receive about $4.6 billion in MSA payments over the 25 years covered by the settlement. Legislation was passed in 1999 establishing a non-profit corporation for economic assistance to tobacco dependent communities, with half of the funding coming from the settlement.

The Golden LEAF Foundation, formed with one-half of the money received by North Carolina from the MSA, aims to reduce the dependence of the state's economy on the tobacco industry.11 It has announced an $85.4 million economic stimulus package it believes will significantly improve North Carolina's economy and make the state a leader in the biosciences industry. More specifically, the Golden LEAF economic package will allow the people of North Carolina to capitalize on advances in the biotech industry, create a major new market for NC agricultural products, and put this state on the cutting edge of the alternative fuels industry.12 These measures are expected to increase tax revenues at the state and local levels and help to avoid future budget crises. To date, the foundation has donated more than $200 million to organizations throughout North Carolina.

The tobacco settlement was presented as a historic opportunity to attack the enormous public health problem posed by tobacco use in the United States. As described by state attorneys general and governors, the promise of the MSA was two-fold. First, it would significantly increase the amount of money the states would spend on programs for juvenile tobacco prevention and treatment programs for users. Second, it would greatly reduce youth exposure to tobacco marketing through specific mandates aimed at tobacco companies. The agreement, among other things, does the following:

• Forbids participating cigarette manufacturers from directly or indirectly targeting youth
• Imposes significant prohibitions or restrictions on advertising, marketing and promotional programs or activities for cigarettes
• Bans or restricts cartoons, transit advertising, most forms of outdoor advertising including billboards, product placement in media, branded merchandise, free product samples, and most sponsorship.

The two largest tobacco companies, Philip Morris and R J Reynolds, created youth anti-smoking and prevention divisions within their company. R J Reynolds's program, "Right Decisions, Right Now," and Philip Morris's program, YSP (Youth Smoking Prevention), both express their desire and responsibility to help prevent children from smoking. Both companies have provided funding, research materials, and paid advertisements to support their efforts, and they have changed some business policies and practices to support this new campaign.

North Carolina Agriculture, Post-Tobacco: Diversification and the Rise of the Wine Industry13

For many tobacco farmers, especially those who own small farms, the declining tobacco industry in North Carolina puts them in a bind. They have a couple of options: continue to grow tobacco; sell their farms to larger farmers; seek to expand into other crops (diversification). In the case of tobacco farming, the relatively small plots of land are only conducive to a small number of crop changes, one of which is grape growing. The industry does require start-up capital, but some of this capital is available to farmers, both as a result of payouts from the Master Settlement Agreement and other litigation, but also through organizations like the Golden Leaf Foundation.14 Golden Leaf is an organization set up by North Carolina to distribute and utilize a portion of funds from the MSA through grants designed to aid in the economic development of North Carolina post-tobacco. One of their programs includes a trust fund for farmers in North Carolina who want to switch crops.15

Two institutional changes have also encouraged the switch to grape farming. First, community colleges are starting to provide training programs for tobacco farmers interested in grape growing and wine making. Surry County Community College, for example, has offered successful viticulture and enology programs throughout the 1990s. In addition, North Carolina State University has developed experimental vineyards to conduct research on grape growing in Carolina's soil and climate.16

Second, the creation of the North Carolina Grape Council, which is publicly funded, aims to stimulate the growth of grape farms and wineries in the state. The Grape Council has been a major marketing force and offers valuable information on grape growing and production equipment. It eases the transition for farmers in other industries.17 Other organizations, including the North Carolina Winegrowers Association, have sprung up to aid in the effort, and trumpet the fact that grapes are one of the only crops (at least in this state) that can replace tobacco dollar for dollar.18

As of late 2003, 2% of NC farmers have switched to grape growing.19 By September 2004, North Carolina had about 300 vineyards and 38 wineries half of which had been established in the last two years.20 As tobacco farms have declined in number and the number of vineyards has increased, North Carolina has grown to the 10th largest producer in the country of both grapes and wine.21 The economic impact of this industry is estimated at $800 million and 5,600 jobs.22

Transformation, however, is not as easy as it may sound. In a random sample of 1,000 tobacco growers, a strong, negative, trend between age and being interested in or trying alternative enterprises was found. 23 Grape farming is a long-term investment, making it hard for anxious farmers to take the risk knowing they will have to wait a few years for a return. In addition, many older landowners cannot afford to forego income for multiple years. Finally, the wine industry further differs from the tobacco industry in that, with the former, success also depends upon the farmer's marketing skills. Regardless of these reasons, currently there is not an adequate public dialogue to promote diversification. 24

One possible solution is for the government to design public policy to encourage farmers to diversify their crops. Many growers are psychologically ready to take such a step, but lack the knowledge and resources. New measures should take this into account. Another possibility is to encourage banks to adopt more lenient standards in terms loans to farmers in this situation. The government should probably enact policy at both the federal and state levels. Federal aid is indispensable, but leaders at the state level can provide more specific plans for infrastructure development.

For more on this case study, see Diversifications into the Wine industry

References

1. Philip Morris USA, "FDA Regulations and Policies," Corporate website. Last accessed July 2, 2007. [http://www.philipmorrisusa.com/en/legislation_regulation/fda/regulation_tobacco_products.asp]
2. Philip Morris USA, "FDA Regulations..." (fn. 1).
3. Center for Disease Control and Prevention, "State Smoking Restrictions for Private-Sector Worksites, Restaurants, and Bars - United States, 1998 and 2004," Washington, DC: Department of Health and Human Services, July 8, 2005. Last accessed November 23, 2006. [http://www.cdc.gov/tobacco/research_data/legal_policy/mm5426_highlights.htm]
4. Philip Morris USA, "Illegal Trade," Corporate website. Last accessed July 2, 2007. [http://www.philipmorrisusa.com/en/legislation_regulation/illegal_trade.asp].
5. Library of Congress, "S. 1027: Prevent All Cigarette Trafficking Act of 2007," Last accessed July 2, 2007. [http://thomas.loc.gov/cgi-bin/bdquery/D?d110:5:./temp/~bd41yQ::|/bss/d110query.html|]
6. Melinda Penkava, "Big Tobacco Buyout: Interview with David Rice, Billy Yeargin, and Cynthia Hill." Radio Program, National Public Radio, State of Things, October 12, 2004.
7. Mandy Locke and Amy Martinez, "Leaf Buyout Tolls End of Era," The News and Observer (Raleigh), Oct. 12, 2004, p. A1.
8. Penkava (fn. 6)
9. Campaign for Tobacco-Free Kids. Campaign for Tobacco-Free Kids Organization Website, various pages. Last accessed August 7, 2007.
10. Campaign for Tobacco-Free Kids. "A Broken Promise to Our Children: The 1998 State Tobacco Settlement Six Years Later." December 2, 2004. Last accessed August 7, 2007
11. Golden LEAF Foundation. "About Us." Golden LEAF Foundation Website Last accessed July 27, 2007.
12. Ibid.
13. Center on Globalization, Governance & Competitiveness, North Carolina in the Global Economy Project, "Diversification in North Carolina Farming; From the Decline of Tobacco to the Rise of the Wine Industry," Unpublished article. Last accessed July 2, 2007. [http://www.soc.duke.edu/NC_GlobalEconomy/pdfs/tobacco/TobaccoCS_WineIndustry.pdf]
14. R. Saylor Breckenridge and Ian M. Taplin, "Entrepeneurship, Industrial Policy, and Clusters: The Growth of the North Carolina Wine Industry," in Lisa A. Keister (ed.), Entrepreneurship. Research in the Sociology of Work Series, Vol. 15, 2005. pp. 209-230.
15. Golden LEAF (fn. 11).
16. Mark H. Smith, David G. Altman, and Brad Strunk. "Readiness to Change: Newspaper Coverage of Tobacco Farming and Diversification," Health Education and Behavior, Vol. 27, December 2000. pp. 708-724.
17. Breckenridge and Taplin (fn. 14, pp. 10-11)
18. Campaign..., "Broken Promise," (fn. 10).
19. Breckenridge and Taplin (fn. 14, pp. 10-11).
20. Shaun Lockhart, "As Tobacco Declines, Farmers See a Future in Grapes," Durham Herald-Sun, November 23, 2004.
21. Ibid.
22. North Carolina Wine & Grape Council, "The Source for Information about NC Grapes & Wine." Website, Last accessed August 7, 2007. [http://www.ncwine.org]
23. Sherry Wilson Youngquist, "Growers Hesitant to Turn a New Leaf: Many Farmers Dependent on Fast, Reliable Income from Tobacco Find Grapevines and Strawberry Plants Inadequate Substitutes. Switch Requires Investment, Equipment and Re-Education," Winston-Salem Journal, August 31, 2003.
24. Smith et al. (fn. 16. p. 710).