Now that the U.S. Food & Drug Administration has finally proposed rules targeted at eliminating menthol in cigarettes and all flavors in cigars, you may have seen tobacco industry front groups and other anti-government regulation organizations providing a one-sided view of the economic impact of those proposals. While anyone working in tobacco control understands that essentially any policy that reduces smoking rates creates significantly more economic benefits than costs, these arguments continue to pop up, in hopes of being parroted by anyone who takes this misleading information at face value.
You may have also seen several estimates of the economic impact of the FDA’s actions. For instance, a blog post from the Tax Foundation recently argued that banning menthol cigarettes at the federal level would result in a loss of $6.6 billion in taxes and fees at the state and federal level. This figure cannot be taken at face value. Although this estimate is being passed off as a well-researched empirical truth, on the level with peer-reviewed science, in reality this is a blog post purveying opinions and assumptions as fact. The author doesn’t provide the raw data behind the calculations, making them impossible to replicate. Further, even if we assume that the calculations are accurate, it ignores what happens to that $6.6 billion and fails to even mention the economic benefits of the same policy. The truth is that a ban on menthol cigarettes would be an incredible boon to the U.S. economy that would pay off immediately and continue to pay significant dividends well into the future. Arguing to the contrary requires twisting logic in a way that can only make sense if you’ve already decided on the outcome, which is not surprising given that the author of the Tax Foundation’s blog post now works for Altria, the largest manufacturer of cigarettes in the U.S.
- A menthol ban does not harm the economy
If one assumes that $6.6 billion is an accurate number of the loss of tax revenue and settlement fees for the states and the federal government, it is more accurately categorized as a reallocation rather than a mere loss. For the tax revenue to be lost entirely, all people who otherwise would have purchased a pack of cigarettes would need to use the money that would have paid for those cigarettes in a way that is also not taxable. Correcting this assumption on its own significantly weakens the overarching argument.
The truth is that a significant portion of the money that would have been spent on cigarettes would instead be spent on other taxable goods and services – perhaps at a lower rate in some places than the rate for cigarettes, but state governments would certainly still capture some of the otherwise lost revenue. This correction alone may reduce the author’s calculations of the impact of this policy down to the magnitude of the ordinary rise and fall of tax revenue on an annual basis. It is important to consider that the recaptured tax revenue represents only a small portion of the money that would be infused into the economy that would have otherwise been spent on cigarettes. Because most menthol cigarettes sold in the U.S. are manufactured by two large, multi-national corporations, the lost sales revenue will mostly impact institutional investors of those corporations, with little other impact because the institutional investors will be able to absorb those losses in much the same way they absorb losses from other sectors as the market ebbs and flows. Instead, the money that would have been spent on cigarettes will be diffused throughout the economy because menthol cigarettes exist everywhere, with some trickling back up to large corporations and investors, but certainly some portion moving to small businesses, charities, and other organizations as well, in a much more geographically diverse manner. Some revenue that stays local will also be used on other taxable goods and services locally. This additional tax revenue would also replace some “lost” tax revenue. So many complicated dynamics are at play here that predicting a specific number for the potential lost tax revenue is a fruitless task clearly intended to make the policy seem controversial when in fact it is not. This is especially true if one looks at the larger picture and considers the policy’s economic gains.
- Any meager loss in tax revenue is offset by health gains many times over
Any unbiased source of information on the economic effects of a particular policy needs to evaluate both the costs and the benefits, which is why we call it a cost/benefit analysis and not just a cost analysis. The Tax Foundation blog post focuses purely on costs, while entirely ignoring the economic benefits. This is telling because the economic benefits of commercial tobacco control policies are tremendous. The author ignores these benefits because they completely undermine the blog post’s conclusion.
According to the Centers for Disease Control and Prevention, each year smoking-related illness costs the U.S. more than $240 billion in direct medical care and more than $372 billion in lost productivity. These costs are based on 2018 estimates, which represent over $720 billion in 2022, when adjusted for inflation. The CDC also estimates 30.8 million people currently smoke, which means that every person who quits smoking represents a gain of over $23,000 for the economy each year that they are no longer smoking – in avoided medical costs and increased productivity. According to the FDA, there are currently 18.6 million menthol smokers in the U.S. If 20 percent of menthol smokers quit as a result of a menthol ban (recent research indicates a rate of 21.5 percent in Canada following a similar policy), the U.S. could see 3.72 million smokers quit. This represents a gain of over $87 billion every year for the life of those smokers. The former smokers will work more hours, earn more money, and purchase more goods and services, inevitably some that are taxable, recapturing all the “lost tax revenue” many times over. The states and the federal government will also spend far less money treating avoidable diseases. The quantified economic benefits of this policy are magnitudes larger than the meager costs.
It is also worth noting that the above back-of-the-napkin analysis only quantifies some of the benefits for current menthol smokers. Another significant source of economic benefit is avoided initiation. Menthol cigarettes are now the primary vehicle for youth to begin smoking. The elimination of menthol products will have a tremendous impact on initiation rates in the U.S. Every year that we progress without menthol cigarettes will steadily drive down smoking rates further than other existing policies. Each year we avoid additional healthcare spending and lost productivity from the youth who would have experimented with menthol cigarettes and progressed to regular smoking. It is also true that every person who quits or doesn’t start smoking as a result of this policy represents dozens of people who are no longer exposed to secondhand smoke – another significant source of economic costs due to smoking.
So, what will the economic impact of a menthol ban look like? Like all federal agencies whose actions have significant impacts on the economy, the FDA is required to conduct a cost/benefit analysis of its proposed rules. The agency’s estimates for the economic benefits for a rule prohibiting menthol in cigarettes ranges from about $2 trillion to $8 trillion in the first 40 years of the rule’s implementation. That’s trillion, with a T. And these are just the easily quantifiable benefits like life-years gained and additional economic output. It doesn’t quantify much more complicated benefits like the reinvigoration of communities whose members are leading healthier and better lives.
Are there economic costs for this rule? Yes. But those costs primarily fall on cigarette manufacturers and to a lesser degree, distributors and retailers. Business losses are the greatest economic cost and those are concentrated among two large corporations that create significant costs to the greater economy due to the impact of their products, that create no benefits for consumers. Most of the “lost” revenue for the government is recaptured. And we all benefit from the tremendous injection of trillions of dollars into the economy, primarily in the form of decreases in healthcare spending and additional productivity by health workers. Don’t let the naysayers fool you. A ban on menthol cigarettes saves lives but it also saves money, trillions of dollars worth.
By Desmond Jenson, Lead Senior Staff Attorney for Federal Regulation, Commercial Tobacco Control Programs
August 29, 2022