Scott Gottlieb's Unprecedented Menthol Ban Will Lead to New Illicit Trade Markets

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Posted by ATR on Monday, February 11th, 2019, 8:00 AM PERMALINK

In an effort to reduce cigarette use, Food and Drug Administration Commissioner Scott Gottlieb is considering an outright ban of menthol cigarettes. This strong-armed approach to public health policy would put the United States at the forefront of an untested global social experiment with little precedent for success elsewhere.

Decades of history around illicit trade suggests that Commissioner Gottlieb’s potential menthol ban could pave the way for further criminal enterprise in the cigarette market, where a robust black market already exists. The National Academies Press estimates that up to 21 percent of all cigarettes are sold illicitly in the United States. In New York, which has some of the highest taxes on cigarettes in the United States, more than 55 percent of all cigarettes sold in the state are smuggled in from other places. A ban on menthols is only predicted to aggravate the issue, without necessarily altering demand for the products.

The Alabama State Troopers Association, the National Organization of Black Law Enforcement Executives, The National Troopers Coalition and many other law enforcement groups warn that banning menthols would open a gate for criminal enterprise. In a recent survey, 25 percent of menthol smokers implied that they would turn to the black market to purchase their desired cigarette. That is consistent with the real impact of what some call “price prohibition” throughout states with high excise taxes.

Employing an incredibly conservative model, researchers at the Center for Regulatory Effectiveness projected that such a ban would balloon the illicit trade of menthol cigarettes by 45 percent. Not only would a black-market fulfill current demand, but it would make mentholated cigarettes more accessible, CRE warns. Absent regulatory oversight, restrictions on underage smoking would be eliminated, and prices would fall, as the cigarettes would go untaxed, making illicit cigarettes more attractive. Considering the already burgeoning illicit market for cigarettes, this idea is not an unimaginable consequence.

The illicit trade for cigarettes exists outside of government purview, making them neither taxed nor regulated by the intended party. New York, where the issue is most pertinent, is estimated to lose $1.5 billion in excise tax revenue in the illegal cigarette trade.

Collectively, each state and the District of Columbia, collect over $17 billion in cigarette excise tax revenue. Based on 2015 data from the FDA, 33 percent of these sales are from menthol cigarettes, which represent a growing segment of the overall market. While it cannot be assumed that all menthol smokers would turn to the black market, and many would simply turn to traditional tobacco cigarettes, state excise tax revenues are sure to take a hit with this regulation.

According to an analysis conducted by the Americans for Tax Reform, states like Florida and Pennsylvania could take billion-dollar hits with Gottlieb’s suggested regulation, amassing $370 million and $445 million losses annually, based on the direct excise taxes collected on menthol cigarettes alone in 2017. This is no less true for smaller states. Delaware for example collected over $100 million from the excise tax on menthol cigarettes. These figures are based on the FDA’s estimate for the size of the menthol market compared to cigarettes overall. Pushing menthols outside of the legal market only detracts from state revenue streams, while boosting illicit activity. The fiscal exhaustion would only be amplified by the spending required to enforce this ineffective mandate.

Commissioner Gottlieb ought to consider the externalities of a ban, before continuing with his tried-and-failed prohibition style approach. If his objective is to reduce the use of cigarettes, he should look to tackle the issue head through an embrace of less harmful alternatives, rather than pushing it outside of the control of the legal market.

Photo Credit: The U.S. Food and Drug Administration

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