By Lyle Beckwith
The Federal government is currently considering its biggest tobacco decision since President Obama signed the Family Smoking Prevention and Tobacco Control Act into law last year: whether to ban the use of menthol flavoring in cigarette manufacturing. The decision will have far-reaching consequences €" not only for the significant menthol tobacco market €" but for the industry as a whole.
The Tobacco Control Act requires the Food and Drug Administration (FDA) to undergo a close examination of menthol in cigarettes, including whether to ban the use of the flavoring altogether. The FDA€™s Tobacco Products Scientific Advisory Committee (TPSAC), composed primarily of public health officials, has been doing the initial groundwork €" soliciting comment from experts and the public, and holding lengthy public hearings on the matter. TPSAC is expected to make recommendations early next year to the FDA, which will then decide whether to ban menthol €" which could happen anytime in 2011.
On November 18, 2010, I spoke at a TPSAC meeting in an effort to educate the committee about the pitfalls of a menthol ban. Many tobacco manufacturers and industry experts €" including NACS €" believe that such a ban would add more fuel to the already smoldering contraband tobacco fire.
A ban on menthol in cigarettes risks giving rise to an entire industry of unregulated cigarette products. It is simply not reasonable to expect that the menthol market, which accounts for roughly 30 percent of cigarette sales today, will vanish overnight or could be phased out over time. Combined with the relative ease of obtaining menthol flavorings, black market manufacturers will sprout up very quickly.
Let€™s hope that the Obama administration decides that the enormous problems created by a menthol ban will far outweigh any perceived public health benefits.
The production, distribution, sale and end-use of contraband tobacco has existed for years. What has changed recently, authorities say, is that criminal enterprises have expanded their reach and sophistication. As tobacco taxes have been hiked to raise revenue and deter smoking, illegal sales have become increasingly lucrative, leading to more widespread and sophisticated criminal enterprises.
In the United States, the Bureau of Alcohol, Tobacco, Firearms and Explosives describes the diversion of tobacco as "a global problem and believes illegal cigarettes are the number one black market commodity in the world."
In Canada, a special taskforce advising the Minister of Public Safety on the status of contraband tobacco put the problem in stark terms: "Persons involved in contraband tobacco, including the end users, are undermining global and domestic health objectives, contributing to the proliferation of organized crime, inviting criminals into their communities, undermining the local legitimate economy, and evading taxes that support Canada€™s programs."
The Canadian taskforce cited a recent study for cigarette manufacturers that found about 30 percent of tobacco purchased in Canada is bought illegally. The problem is at its worst in Quebec and Ontario, where studies show that contraband rates hover around 40 percent and 50 percent respectively €"and it€™s accelerating.
An estimated 13 billion illegal cigarettes were bought in 2008, up from 10 billion a year earlier. And through regular analyses of cigarette butts collected at various locations €" yes, "butt studies" €" the association found that one-quarter to one-third of the cigarettes smoked at various high schools were contraband tobacco.
The 2009 Inspector General report said the diversion of tobacco today in the United States €" estimated to cost federal and state governments more than $5 billion a year in unpaid excise taxes €" is profitable primarily because of the disparity among state excise taxes. Typically, criminals purchase cigarettes in a low-tax state and resell them in a high-tax state. A seller can make a profit of $23,000 on a carload of cigarettes, or $465,000 for a small truckload.
Individuals and organized crime groups have been selling black market cigarettes for decades, ATF officials told the inspector general. But now, their larger scale enterprises have all the characteristics of a structured business model that mirrors legitimate tobacco manufacturers €" a source, a warehousing system, a shipping network and finally a retail outlet.
ATF€™s diversion program "has not kept pace with the level of diversion activity and increasingly complex diversion schemes," the Inspector General report concluded.
Contraband and black markets frequently sell lower or inferior quality counterfeit cigarettes. "Smokers who are tricked into buying fake cigarettes don€™t get the product they€™re expecting," the ATF warns on its website. "While all cigarettes are dangerous and cause disease, it has been reported that counterfeit cigarettes had 75 percent more tar, 28 percent more nicotine and about 63 percent more carbon monoxide than genuine cigarettes. Furthermore, many are even contaminated with sand and other packaging materials such as bits of plastic."
For those who have studied today€™s increasingly sophisticated contraband market, a logical question emerges: With illicit trade already in place, will banning menthol create a new expansion of the existing contraband market?
Law enforcement groups resoundingly say yes.
"Illegal and unregulated menthol cigarettes will likely create a flourishing criminal enterprise in the process," the Law Enforcement Alliance of America, a coalition of law enforcement professionals, crime victims and concerned citizens, told the FDA advisory committee. "The resulting illegal market could overwhelm our law enforcement and judicial systems, diverting even more resources from more pressing problems."
The National Troopers Coalition and the National Organization of Black Law Enforcement Executives (NOBLE) also warn about the drawbacks: "NOBLE believes a black market of contraband, illicit and unregulated cigarettes will be large if the government bans menthol. Without question, illegal menthol cigarettes would find their way to consumers," the group told TPSAC.
Convenience stories have a huge stake in the battle. Cigarettes are the number one in-store item for the U.S. convenience industry. In Canada, contraband sales have played a role in driving small, family-run convenience stores out of business €" could it do the same in the United States?
In NACS written comments to FDA, we warned that an expanded, menthol-replacement illicit market would create health concerns. Current cigarette manufacturers operate within the full scrutiny of the FDA. Illegal manufacturers, obviously, will not, meaning that cigarette contents, purity, nicotine and tar levels, to name just a few issues, all will be subject to their whims.
We pointed out to the FDA that it would be impossible to assume that a menthol ban will reduce underage smoking, a key objective of the new federal tobacco law. If anything, we wrote "a ban on menthol will aggravate, not mitigate, underage smoking problems" because a ban will undoubtedly lead to a black market in menthol cigarettes due the broad, existing consumer base among adult smokers.
Stay tuned. The fear that banning menthol will make an unregulated, unhealthy and illicit tobacco trade much worse is very real. Let€™s hope that, acting in the name of public health, FDA does not make that fear a reality.
Lyle Beckwith is the NACS senior vice president of government relations. He can be reached at (703) 518-4220 or at lbeckwith@nacsonline.com.
***
During the 110th Congress, the House Energy and Commerce Committee€™s Subcommittee on Health passed the Family Smoking Prevention and Tobacco Control Act (H.R. 1108) by a vote of 18 to 9 on March 11, 2008. Following Subcommittee approval, NACS and its congressional allies began lengthy negotiations with the full Committee.
Although unable to remove from the bill the transfer of authority to the FDA, NACS successfully reached an agreement with the Committee to include all of the other retailer priorities. Accordingly, NACS withdrew its opposition to the bill.
On April 2, 2008, the House Energy and Commerce Committee passed the amended legislation by a vote of 38 to 12. On July 31, 2008, the House voted on final passage 326 to 102. The bill was sent to the Senate, but no further action was taken.
In the 111th Congress, the House Energy and Commerce Committee passed H.R. 1256, the Family Smoking Prevention and Tobacco Control Act, by a vote of 39 to 13 on March 4, 2009. The House of Representatives passed the bill 298 to 112 on April 2. The bill included the language secured by NACS the previous year.
The Senate passed its version of the bill on June 11 on by vote of 79 to 17 after adding a requirement for gruesome warning labels on packages of tobacco products. The House passed the Senate version on June 12, and President Obama signed it into law on June 22.
In December 2010, FDA must implement a program to monitor and enforce compliance with a 1996 ruling. Also regulations to prevent the sale and distribution of tobacco products to minors via non-face-to-face transactions (i.e., over the Internet and by mail order) will be made official.
In June 2011, regulations regarding advertising tobacco products to youth over the Internet and through other non-face-to-face methods will also be official.
Fifteen months after they are issued, regulations regarding label warnings on cigarettes and smokeless tobacco products will become effective.
These requirements will not apply to retailers, so long as the retailer does not create or modify the products€™ label statements. However, after the effective date, retailers will be held liable if they publicly display an advertisement that does not include a warning.