Fired and Sun-Cured tobacco areas of the Central Piedmont.
Mr. Chairman, we agree that health care is an important
issue. But we think that the survival of thousands of family
farms and the economic well being of local communities are
serious issues, too.
I would emphasize to many of you the importance of tobacco
to the general economy of the state, and especially to the farm
economy. Virginia is one of the five largest tobacco states in
terms of crop value. In 1992, tobacco was the largest cash crop
in Virginia. Approximately 200 million dollars in total cash
receipts at the farm were derived from tobacco, representing over
a quarter of total cash crop sales in Virginia. Tobacco farms
are located in over half of Virginia's 95 counties with almost
10,000 farm families producing tobacco. Millions of pounds of
leaf tobacco are sold, processed, stored and manufactured into
product in our state.
I will not mince words: I believe that the proposed tobacco
tax increase threatens the very existence of a viable tobacco
economy in Virginia; will not obtain the necessary funds to
finance a national health program; and is punitive in nature.
Since Webster defines punitive as a means "to inflict
punishment," I would conclude that the motives and measures of
the tax are by nature designed to punish and discriminate against
a certain segment of the U.S. population.
Anti-smoking advocates are using the power to tax to punish
and destroy the tobacco industry. Middle and lower income
families who already pay more than their fair share in excise
taxes will be punished by having to absorb an even higher share
of these taxes. Tobacco farmers and their families will be
punished by decreasing and or destroying the source of their
economic livelihood.
Former Supreme Court Justice Oliver Wendell Holmes once said
"The Power to Tax Does Not Include The Power to Destroy While
This Court Sits."
Do we now condone this type of power?
I note that smokers already pay $11.3 billion dollars in
excise taxes or over four times what the farmer receives for the
sale of tobacco. This would indicate that any time government
permits an excise tax to escalate far beyond that of the income
the farmer receives for the crop, such a tax is not only
excessive but discriminatory.
Whether discussing deficit reduction or economic reform it
is the historical consensus in our society that taxes should be
equitable. Americans have often opted for ability to pay in
judging the fairness of the overall tax structure. However, any
increased reliance on excise taxes counters this long held
philosophy of fairness and can only lead to diminishing returns.
While it may be politically easy for the administration and
some federal lawmakers to advocate increasing excise taxes on
cigarettes as a revenue source, the results are often quite
different. In fact, state and local governments have learned the
reality of diminishing revenues from this "popular punitive tax."
355
A 1993 Study by the Council of State Governments calls excise
taxes on tobacco a "worn out tax source." The Council urges
policy makers to look elsewhere for revenues to fund new
programs .
Any increase in the excise tax will without question damage
our rural economy with the loss of farm income, sector jobs and
tax revenue at the local and state level.
William Jennings Bryant, in the late 1800s, said it best:
"Bum down your cities but leave my farms alone, and your
cities will spring up again as if by magic. But allow the farms
to be destroyed and there will be grass growing in every street
across America."
In closing, I urge that you not turn your back on the
tobacco farmers of Virginia by enhancing the excise tax on
cigarettes. We should be committed to maintaining or increasing
our economy, not forcing a large number of productive Virginia
families into job dislocation or welfare.
Thank you.
356
Mr. Payne. Thank you very much, Mr. Ash worth.
Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman.
Dr. Lee, let me be sure I understand exactly why you are here
today. You are a professor of economics, but you have been asked
to come here by the Tobacco Institute; is that correct?
Mr. Lee. That is correct.
Mr. Andrews. And now they pay you a retainer to come here or
do you work for them part-time? What is your relationship with the
Tobacco Institute?
Mr. Lee. On occasion they have asked me to testify on tobacco
issues based on work that I have done, writing in economics, actu-
ally long before I ever even heard of the Tobacco Institute.
Mr. Andrews. How long have you worked with the Tobacco Insti-
tute, Dr. Lee?
Mr. Lee. About 4 years, off and on. I have done a little testimony
here and there for them.
Mr. Andrews. Do you believe that smoking causes cancer?
Mr. Lee. You know, I would — I would say that as an economist,
I am simply not prepared to answer that question. I would hope
you would have
Mr. Andrews. Do you have an opinion, Dr. Lee? Do you have an
opinion about it? Do you have an opinion?
Mr. Lee. Not that is relevant. I would hope you wouldn't get eco-
nomic advice from doctors, M.D.s, and you would probably be well
advised not to ask an economist for medical advice
Mr. Andrews. Well, you are here to testify about the costs of
smoking, and the costs of health care. That is what the purpose of
this forum is, is to discuss
Mr. Lee. Right, the purpose, as I understand
Mr. Andrews. Just a moment, Dr. Lee, let me ask you a ques-
tion, then you please feel free to take your time to answer it.
The whole purpose of your testimony, as I understand it, was to
talk about what raising tobacco taxes could do to the economy and
what the real health impact would be or how de minimis it would
be. Amazingly from your testimony, from raising tobacco costs, did
you know that one out of three long-term cigarette users die? Did
you know that. Dr. Lee? Do you believe that is an accurate statis-
tic?
Mr. Lee. I am sorry, I am having a difficult time hearing. I am
losing my hearing a little bit. That is my fault, I apologize.
Mr. Andrews. Well, let me try a different one, maybe you can
hear this one easier.
The American Cancer Society estimates that 1,000 people die
every day from using tobacco products. Does that sound accurate
to you. Dr. Lee?
Mr. Lee. I have no idea. My testimony is based on economics.
And the economics of this is as follows. If people believe, and cer-
tainly people argue this, that nonsmokers or those who quit are
going to live longer, OK I have heard that. That is a widely accept-
ed belief.
Mr. Andrews. Well, do you believe that, Dr. Lee?
Mr. Lee. I don't have any reason to believe it or not to believe
it. I am not — ^you know, there are statistics that indicate there is
357
an association there, but the cause, I have no idea. But if it follows
that these people are going to use more health care, they are going
to use it after 65 — they are going to live longer, they are going to
use more health care after 65, that is when the big subsidies kick
in. So all I am arguing is, you know, everybody
Mr. Andrews. In other words, people will be healthier if the tax
goes up, they'll live longer so they have Social Security benefits,
and we won't lose 1,000 Americans every day that die from using
tobacco products?
Mr. Lee. I am simply arguing that you can't have it both ways.
You can't argue that smoking shortens your life, and at the same
time argue that smokers are subsidized by nonsmokers. If you
want to argue that smoking shortens your life, then you have to
also accept the logical implications of that.
The logical implication is that smokers will be less likely to live
and take the dominant share of their health care using the last
year of their life after the age of 65, when the big subsidies kick
in with Medicare. I am simply arguing
Mr. Andrews. Let me ask you about the other end for a second.
Dr. Lee. Let me ask you about the other end. You are familiar with
demographic studies and economic studies of who uses tobacco
products, are you not?
Mr. Lee. I am not an expert on that, but I know that smoking
is primarily — ^is concentrated in lower-income groups.
Mr. Andrews. Well, you know who smokes in the country. I as-
sume you do read studies, economic studies to formulate your opin-
ions. You understand where they are out there. Like you suggest,
they tend to be the poorer people, I think is what your testimony
was earlier, and therefore the tax is regressive.
Did you know that about 90 percent of all the new smokers every
day are under 19 and half of them are under 13 years of age?
Mr. Lee. No, I am not familiar with that.
Mr. Andrews. You don't have any idea. With all the studies you
have done and the 4 years that you have worked with the Tobacco
Institute, you do not have any conceivable idea of who the new cus-
tomers are that take up smoking?
Mr. Lee. I am quite willing to accept your information on that.
I as an economist
Mr. Andrews. You don't have an independent view yourself, Dr.
Lee?
Mr. Lee. I am interested in the economic implications of excise
taxes.
Mr. Andrews. Well, in terms of the economic implications of
smoking, are you aware that all of the new customers that take up
using tobacco products, that pay for the products, that use the
products, all of the new smokers, 90 percent of them are under 19
and half of them are under 13 years of age? Do you have an opin-
ion? Does that sound right based on the studies and the work that
you have done with the Tobacco Institute?
Mr. Lee. If you are informing me that is the case, I am certainly
quite willing to believe you.
Mr. Andrews. Is today the first day you have heard that statis-
tic?
358
Mr. Lee. I have heard a lots of statistics from both people de-
fending and attacking the tobacco industry, and not always consist-
ent wiui each other. This is not
Mr. Andrews. You don't have — ^you don't have an opinion about
what the age group of new smokers are? You just don't have any
independent knowledge of what the age category of new smokers
are?
Mr. Lee. I rely on your information on this. I am quite willing
to do that. I am assuming you have looked it up.
Mr. Andrews. Do you have any opinion based on the studies and
your 4-year relationship with the Tobacco Institute about the
health consequences of tobacco use?
Mr, Lee. Well, let me say that I certainly am not as an individ-
ual advocating young people smoking. We have laws against
Mr. Andrews. No, that is not my question. My question is, do
you have any independent knowledge, formed any opinion after 4
years of working for the Tobacco Institute, as to the health con-
sequences of using tobacco products?
Mr. Lee. No, absolutely not.
Mr. Andrews. You just have no idea?
Mr. Lee. No.
Mr. Andrews. You don't know whether it kills 1,000 people
today or whether tobacco use is the number one
Mr. Lee. My concern is whether or not smokers over their life-
time consume more health care than nonsmokers. If they do, then
maybe there is a subsidy, maybe they are not paying their own
way. But the evidence on that simply does not exist. There is no
evidence that smokers — I don't care when they start smoking. We
are here talking about — at least I was told, we were here talking
about fairly funding and financing health care reform.
My question, the question I wanted to ask, was whether or not
)kers should pj
smokers, with the idea being that if they consume more health
smokers should pay more to finance health care reform than non-
care, there is a case to be madfe for that. My understanding is there
is no case to be made for that based on available data.
Mr. Andrews. Just a moment. I guess then, I guess if I under-
stand what you are saying, if we raise the taxes on tobacco prod-
ucts, people are going to smoke less, teenage kids are not going to
smoke as much, people are going to be healthier and they are going
to live longer and therefore the overall taxes are going to go up.
In other words, you are saying maybe 1,000 people wont die every
day if we raise tnose taxes so they will live a little bit longer?
Mr. Lee. If your data is correct, then that is certainly true.
Mr. Andrews. You don't have any opinion about that?
Mr. Lee. Oh, I am in favor of long life, I am definitely in favor
of long life. I am also in favor of charging people for what they
consume and not discriminating against one group on the basis
that they consume more health care than anotner group when in
fact they don't.
And if you want to go with what you just said, I will be glad to
go along with it, but let's follow out the logical implications of that.
And that is that health care is not something that smokers
consume more of than nonsmokers.
Mr. Andrews. Thank you, Mr. Chairman.
359
Mr. Payne. Thank you, Mr. Andrews.
I would like to go back to something, Mr. Bond, you said, which
has not been brought up in this heanng before. It has to do with
the quota of tobacco, 1994, 1995. There have been some estimates
about how areas might be affected. From what you are saying, as
I understand it, is that the 1994 quota might be reduced by 10 per-
cent. And given your discussions with the Department of Agri-
culture, the 1995 quota could be reduced by as much as 50 percent?
Mr. Bond. Yes.
Mr. Payne. Could you explain why that would happen with this
particular tax increase?
Mr. Bond. I think most of the reduction in quota has come from
the uncertainty of the tax. That uncertainty has created a weak
market demand by at least 125 million pounds of tobacco, which
the cooperatives are having to take under loan, which the growers
will have to underwrite along with the buyers. So I am simply say-
ing the implications of the 75 cents per pack tax is the major cause
of the quota reductions in 1994, and hopefully we don't reach 50
percent in 1995. That would be a disaster. But these are some pro-
jections. And the contributing factor to these projections has been
the tax increase.
Mr. Payne. Are these projections ones that are available from
the Department of Agriculture at this time?
Mr. Bond. I am sure that the department would make those fig-
ures available. As a matter of fact, those figures were not released
but commented on at a meeting in Raleigh, N.C., about 1 week ago,
at a tobacco meeting in Raleigh.
Mr. Payne. Is it possible that you could make those available to
me so I could insert those in the record?
Mr. Bond. Yes, sir.
Mr. Payne. And I would unanimous consent to insert those in
this record. Without objection, we will do that.
[The following was subsequently received:]
CHANGES IMPACTING FLUE-CURED AND BURLEY TOBACCO
MARKETING QUOTAS AND ALTERNATIVE SCENARIOS, 1994-98
by Verner N. Grise '
and
Robert H. Miller^
This paper identifies a number of forces of change with the
potential to impact the tobacco industry and their potential
sector impacts upon the players (government, producers,
processors, manufacturers, and consumers) . At the sector level,
a force of change impacts one or more ot the determinants of
income; that is, price, average cost of production or quantity
produced and sold. These impacts generate structural change as
measured by numbers of players, average size of player (s) and
locales of activity.
Forces of Change Affecting the Tobacco Industry
Each force of change will exert unique impacts upon the structure
of the industry. In some cases, the influence upon an income
determinant is predictable, while with others, the effect
(incidence, direction and magnitude) is not readily discernible.
Two major items are (1) the minimum domestic tobacco content law
(cigarettes), and (2) Federal excise tax changes.
Other forces are: (1) Rising budget deficit; (2) Adoption of
"no-smoking" areas, and declining social acceptance of cigarette
smoking; and (3) continued erosion of U.S. market shares to low-
cost foreign producers.
Minimum Domestic Content - The 1993 Budget Reconciliation law
requires that US-grown tobacco make up at least 75 percent of the
tobacco used in all cigarettes produced in this country. The
leaf import provision restricts the percentage of imported
tobacco used, including Oriental leaf, to no more than 2 5 percent
' Head, Tobacco Analysis Section, Commodity Economics
Division, Economic Research Service, USDA, Washington, DC
20005-4789.
^ Director, Tobacco and Peanuts Analysis Division,
Agricultural Stabilization and Conservation Service, USDA,
Washington, DC 20013. Remarks prepared for the Tobacco
Marketing Cost Committee Meeting, Fletcher, NC, October 18-19,
1993. This paper contains the views of the authors and does not
represent an official position of the Economic Research Service,
Agricultural Stabilization and Conservation Service, or the U.S.
Department of Agriculture.
361
of the total quantity of all tobacco used during a calendar year.
Currently, about 40 percent of cigarette tobacco represents
imports. Thus, to comply with the new law, manufacturers will
have to sharply reduce the import share in their blends, or shift
major portions of their output to overseas factories.
Completion of the international trade negotiations (GATT) could
result in the loss of this provision. Last month a GATT
consultation group considered this new provision as a result of
complaints from some 15 countries. It is unknown how long this
issue will be under negotiation.
Excise Tax Increase - Since January 1, the Federal Government has
levied an excise tax of 24 cents per pack of 20. Increases in
excise taxes on tobacco products to help finance the
Administration's health care have been cited by virtually all
proponents of health program changes. Earlier this year, an
increase in the Federal tax of $2.00 per pack was proposed;
recently an increase of 75 cents has been mentioned. (Washington
Post . 9/16/93).
Cigarette Smoking, and Excise Taxes, and EPA
Even if the Administration's health care reform package stalls,
it is highly likely that the Federal cigarette excise tax will
increase during the next year or so, perhaps a doubling of the
current 24 cents per pack rate. Although opposed by a still
relatively powerful tobacco-state congressional contingent,
increases in tobacco taxes are supported by a large segment of
the U.S. population.
With the reduced quality of this year's flue-cured crop, buyers
are purchasing less at lower prices and allowing more to go to
Stabilization. We believe these shifts have occurred because
cigarette manufacturers anticipate some tax increases. With
ample supplies and uncertain demand, the 1993 burley crop could
face a continution of the weak market.
The proportion of Americans who smoke is declining, social
acceptance of cigarette smoking is waning, and publicity about
relationships between smoking and health are increasing.
Publicity about the alleged adverse effects of smoking on
nonsmokers are especially detrimental to the image of cigarette
smoking.
The January 1993 risk assessment report of the Evironmental
Protection Agency (EPA) , "Respiratory Health Effects of Passive
Smoking: Lung Cancer and Other Disorders" has received much
publicity. According to the report, "smoking is not just a
health hazard for smokers but a significant risk for nonsmokers,
particularly children." The report has spawned an increasing
number of restrictions on smoking in public places and has
reduced public opposition to higher cigarette taxes.
In June, organizations and companies representing several
segments of the tobacco industry sued the EPA, challenging the
scientific evidence that EPA used in concluding that secondhand
smoke puts nonsmokers at high risk of cancer. EPA proclaims
faith in their scientific process. (Flue-Cured Tobacco
Stabilization Co-operative Corp. etal v. U.S. Environmental
Protection Agency, U.S. District Court, Middle Dist., NC, June
22, 1993).
Marketing Quotas and Production, 1994-98
In evaluating tobacco production and quota levels for flue-cured
and burley tobacco over the next 5 years, baseline estimates for
1994-98 assume the following:
• The 2 5 percent maximum foreign-content requirement is
implemented and remains in place,
• Federal cigarette excise taxes rise from 24 to 48 cents
per pack,
• Domestic cigarette consumption will fall 5 percent
after a 24 cent cigarette tax increase and about 2
percent annually after that because of state tax
increases and other factors, and
• Cigarette exports will decline as production of
cigarettes for export moves off-shore.
• Leaf exports will weaken as foreign producers expand
output and manufacturers in export markets counteract
the U.S. domestic content law.
Flue-cured — Even if the Federal cigarette excise tax only
doubles, its effect combined with several factors already noted
will cause domestic cigarette consumption to fall and also will
result in a decline in cigarette exports. The result will likely
mean a 30-percent drop in marketing quotas by 1998. Total
U.S. -grown leaf use is expected to fall from 950 million pounds
in 1994/95 to around 700 million pounds in 1998/99. Domestic
leaf use could fall from 575 million pounds to 375 million pounds
and leaf exports are expected to fall to 325 million pounds.
A tax increase of 51 cents to reach 75 cents per pack would cause
cigarette consumption to fall an additional 6 percent (assuming a
price elasticity of -.4) .
A bigger tax increase of 76 cents to total $1.00 per pack would
likely cause consumption to fall 12 percent from the baseline
estimate. Consequently, the flue-cured quota could decline to
about 560 million pounds by 1998 — 37 percent below 1993 's quota.
Burley — The marketing quota will likely fall 30 percent from 1993
to 1998 to about 420 million pounds, about 45 million below
1987 's record low. Total domestic leaf use would likely decline
by about one-fourth. Most of the decline would occur in domestic
use but leaf exports would also decline. A tax increase to $1.00
per pack would result in a quota reduction to about 3 55 million
pounds by 1998, about 41 percent below 1993 's quota.
Excise Tax Revenue — Raising the Federal excise tax to $1.00 per
pack of 20 would increase Federal tax revenues about $14 billion
annually. Consumption would decline about 18 percent (from 492
billion cigarettes in 1992 to about 400 billion cigarettes after
the tax is implemented) . A Federal tax increase of 50 cents per
pack would boost Federal tax revenues about $10 billion annually.
Consumption would decline about 12 percent but revenues would
grow to $16 billion from the current $6 billion.
Tobacco Quota Buyout — To soften the impact of the decline in U.S.
production resulting from increased Federal cigarette excise
taxes, proposals have been made to pay quota owners to retire
unneeded quotas. Few specifics are available about how and what
amounts of quota would be purchased and retired. Part of the tax
revenues would be earmarked for the buyout. A bill (H.R. 1246)
that would increase excise taxes on cigarettes and other tobacco
products authorizes 3 percent of the increase taxes to assist
tobacco producers experiencing financial hardship caused by
increased tobacco excise taxes.
One approach would be to pay quota owners the capitalized value
of the decline in quotas directly attributable to any increase in
cigarette taxes. Since quotas cannot be sold between counties,
the capitalized value of quota varies widely from as little as
25 cents per pound in marginal producing counties to as much as
$3.50 per pound in the most intensive producing counties. A
wider variation probably exists for burley quota values than for
flue-cured but both vary considerably.
The average capitalized value of flue-cured and burley quotas
probably averages $2.00 to $2.50 per pound. For illustrative
purposes, we will use $2.25 per pound. In 1993, the flue-cured
effective quota totals 890 million pounds and the burley quota
totals 720 million pounds. If an additional 76 cents per pack
excise tax was imposed, the flue-cured and burley quotas would
fall about 135 million pounds. The flue-cured quota would fall
about 75 million pounds and the burley quota about 60 million
pounds because of the decline in cigarette consumption directly
attributable to the cigarette tax increase. At an average rate
of $2.25 per pound, quota owners would receive around $300
million for quota losses directly attributable to the decline in
Federal cigarette taxes — about 1^ cents per pack of cigarettes
sold in a year.
364
Economic Impacts