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1 Patrick Fleenor, How the McCain Bill Will Affect Smokers' Wallets and the Underground Cigarette Market 1 (1998)

handle is hein.taxfoundation/srhjxz0001 and id is 1 raw text is: IO TAX FOL ION May 1998 No. 79 How the McCain Bill Will Affect Smokers' Wallets and the Underground Cigarette Market In June 1997 representatives of the tobacco industry reached an agreement with a number of state attorneys general. Under this settlement the industry would pay federal and state govern- ments as well as other entities $ 368.5 billion over the next 25 years and would agree to accept a host of new regulations and restrictions on to- bacco marketing, advertising, and product ac- cess. In exchange, the settlement placed limits on both future litigation against the industry and on the Food and Drug Administration's authority Figure 1 Annual Cost of'the McCain Bill for Average One- and Two-Smoker Households under the Baseline Scenario, 1.999-2003 (1998 Dollars) $1,500 F $1,200 $900 $600 $300 $0 Two Smokers E One Smoker (D co N a co CM- 69- N0 LaL 1999 200 200 LO 0 0 0 La LO 2002 2003 Source: Tax Foundation. to regulate tobacco products and smoking. Any settlement of this type would require federal legislation. As a result the Senate Com- merce Committee set about drafting legislation codifying the settlement. On April 29, 1998, the Committee reported out the National Tobacco Policy and Youth Smoking Reduction Act (here- in referred to as the Act), sponsored by the Committee's Chairman, Sen. John McCain (R- Ariz.). This Act would require that the industry make much larger payments than those called for in the initial settlement. It also sharply curtails or eliminates some provisions viewed as favorable to the industry. The first half of this report examines the financial impact this legislation is likely to have on smokers. The second half looks at a phenom- ena that has arisen in other countries when they have raised tobacco taxes by similar magnitudes - a growth of an illegal tobacco market and an increase in cigarette smuggling. The Legislation The Act would create a National Tobacco Settlement Trust Fund. Upon passage of the Act the industry would be required to pay this fund $10.0 billion. Payments would be apportioned by historical market share. Additional payments would be required in subsequent years. These payments would gradually grow from $14.4 bil- lion in 1999 to approximately $43.9 billion in 2024.1 In order to make these payments each pack of cigarettes sold in this country would be assessed a per pack licensing fee. These excis- es would gradually rise from 65¢t per pack in 1999 to around $2.34 per pack in 2024.2 These levels were set to meet the Clinton Administra- tion's demand that the price of cigarettes rise by $1.10 per pack in real terms by 2003.3 The Act also sets reduction targets for under- By Patrick Fleenor Senior Economist Tax Foundation

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