Not only do menthol bans come at a cost to states, but they come with little public-health advancement to show for it.
Governments want people to stop smoking menthols. Their approach could be costly.
G overnments have long identified smoking cessation as one of the rationales for cigarette taxes. Youth smoking, prolonged adult use of cigarettes, and even recreational use of cigars have lasting impacts on the body. If governments have a role in public health, focusing on smoking cessation makes sense.
How they are going about doing so, however, leaves much to be desired.
The latest target of policy-makers has been menthol cigarettes and other flavored combustible tobacco products. Massachusetts and Washington, D.C., have already enacted legislation prohibiting such products, and the U.S. Food and Drug Administration is set to announce a federal ban on them soon.
About 36 percent of smokers use menthol cigarettes, so a ban is no small thing.
If a menthol ban substantially reduces smoking, that would be bad news for government revenues but good news for public health. But if smokers simply substitute non-mentholated cigarettes, consumers will have fewer choices and the impact on both government finances and public health would be negligible. And if, as experience strongly suggests, many menthol smokers turned to smuggled products, everyone loses — except the smugglers.
State lawmakers understand that a reduction in the sale of legal, taxed cigarettes will reduce their cigarette-tax revenues. That is straightforward enough. But the revenue hit is much larger than that.
Cigarettes currently face a federal tax of $1.01 per pack, and, on average, an additional $1.91 in state taxes. Moreover, most states collect general sales taxes on cigarettes as well, and all states receive payments from the Master Settlement Agreement (MSA), a legal settlement between the tobacco industry and state governments that translates to about $0.75 per pack paid by the tobacco companies. States rely on this revenue when planning state budgets.
What would a federal ban on these mentholated products do to revenues? According to Tax Foundation research, the federal government could lose $1.9 billion in the first full year following prohibition. That’s a drop in the bucket of federal coffers. But state governments may lose a combined $4.7 billion.
While this may not seem that dire to some — states collect over a trillion dollars a year in aggregate — revenue from cigarette sales is often earmarked for dedicated spending, to pay for health-care expenses, schools, and infrastructure. Some states even securitized their MSA payments and sold bonds, using MSA proceeds to make their bond payments.
A state such as Wisconsin would lose upwards of $134 million from a menthol ban. Smaller states such as North Dakota would lose $8.5 million. And larger states such as Texas would lose nearly $328 million.
Not only does prohibition come at a cost to states, but it comes with little public-health advancement to show for it. States might be happy to take the loss of revenue, but only if public health improved.
Data from Massachusetts, the only state to ban the sale of menthol cigarettes and other flavored products, have shown that the ban hasn’t stopped people from smoking these products. Instead, it has led to greater smuggling across state lines. Sales of tobacco products stayed the same across New England after the Massachusetts ban. So instead of the Bay State receiving these revenues, New Hampshire and Rhode Island got bigger slices of the pie.
Federal prohibition would be more effective than a state-level ban, as casual cross-border sales are much easier between Massachusetts and New Hampshire than between, say, the United States and Mexico. But data from Europe and Canada, on which the Tax Foundation based its estimates, show that even a federal ban wouldn’t stop people from smoking menthol cigarettes. It would instead lead consumers to smoke other products or to acquire menthol cigarettes illegally. Neither would improve health outcomes; both would reduce economic ones.
Prohibition is hardly a novel idea. But what policy-makers must ask before trying to push a product to extinction is whether prohibition will be effective or the current customer base will simply substitute other products — some of them illicit.
A menthol ban wouldn’t stamp out cigarette smoking. It would simply lead to more illicit trade even as states have less revenue to deal with the negative health effects of smoking. States have yet to fully grapple with that reality.