Confronting the Industry’s Retail Tobacco Pricing Schemes: Key Policy Considerations

1. Confronting the Industry’s Retail Tobacco Pricing Schemes:Key Policy Considerations Mary Strode, MS California Department of Public Health, California Tobacco Control Program Kurt M. Ribisl, PhD University of North Carolina, School of Public Health Ian McLaughlin, JD Technical Assistance Legal Center, Public Health Law and Policy National Conference on Tobacco or Health June 12, 2009 Phoenix, AZ

2. Presentation Outline Introduction (Mary Strode) Rationale for California’s Tobacco Retail Price Manipulation Policy Strategies Summit Summit goals and process Summit proceedings Comparing and contrasting highest priority policy options from the Summit (Kurt Ribisl) Summary of key options Pros and cons of key options Unintended consequences III. Legal constraints and considerations (Ian McLaughlin) FCLAA FDA regulation of tobacco products First Amendment Other considerations IV. Conclusion V. Questions

3. Rationale for Summit Tobacco price manipulation is a problem • Tobacco industry marketing and promotional expenditures have increased dramatically since the MSA (FTC, 2005; Frank Chaloupka) • Nearly 90% of industry spending is devoted to price reduction strategies (FTC, 2005; Frank Chaloupka) • Studies indicate growth in the number of POS ads (Wakefield, et al., 2002; Feighery et al, 2008) • Price manipulation reduces the impact of tax increases on consumption (Chaloupka et al, 2000 and 2002; Chaloupka et al., 1998)

4. Source: Federal Trade Commission, 2005, Frank Chaloupka

5. 2005 Cigarette Marketing Expenditures by Category Source: Federal Trade Commission, 2005, Frank Chaloupka

6. Source: Tax Burden on Tobacco, 2007; FTC 2007;and F.Chaloupka’s calculations

7. Rationale for Summit Tobacco price manipulation is a problem (cont.) • Higher cigarette prices: • Encourage smokers to quit • Prevent former smokers and youth from starting • Reduce consumption among continuing smokers (Chaloupka, et al, 2000) • We need to develop and implement effective and creative strategies to regulate the industry’s price-lowering and price-manipulation schemes to meet public health goals.

8. Summit Goals • To advance our understanding of: • How the industry manipulates prices to influence consumption • What policy interventions are feasible • To inform similar policy efforts around the world

9. Summit Process • Leadership and collaborative agenda development • Invited national experts in various fields to come together for intensive, creative brainstorming: Health policy, research, business, tobacco control, economics, marketing • Presentations on key topics followed by breakouts to identify policy options in two broad categories: 1) Minimum price laws 2) Price discounting strategies • Large group prioritizing of the most feasible policy options

10. Summit Proceedings • Released in May 2009 • Available on the California Tobacco Control Program website http://www.cdph.ca.gov/programs/Tobacco/Pages/default.aspx

11. RetailTalk List-Serve • Eric Lindblom elindblom@TobaccoFreeKids.org

12. Promising Policy Options for Addressing Retail Tobacco Price Manipulationin Session Confronting the Industry's Retail Tobacco Pricing Schemes: Key Policy Considerations Kurt M. Ribisl, PhD National Conference on Tobacco or Health June 12, 2009 Phoenix, AZ

13. Purpose Rationale for policy options Promising policy options-description & impact Minimum price law Restrict or ban price-related promotional activities Price discounts (e.g., buydowns) Bonus cigarettes (e.g., buy 2 packs get 1 free) aka “Retail Value-Added” (FTC)

14. Simplified model of cigarette prices and consumption Increase cigarette excise tax Increase cigarette price Reduce cigarette consumption Consider the case of the recent 61¢ increase in the federal excise tax (FET)

15. Simplified model of cigarette prices and consumption Increase cigarette excise tax by 61¢ Cigarette price unchanged or reduced Cigarette consumption unchanged Cigarette company buys down* cigarette price *A buydown is a price discount triggered when the company reimburses the retailer for lowering the price (e.g., 75 cents off per pack) for a set time.

16. Goal: Increase cigarette prices by means other than raising excise taxes How do we restrain cigarette companies from manipulating retail prices and undermining the public health benefits of higher prices?

17. Option #1 – Minimum Price Law Half of US states have these laws (aka Fair Trade Law) setting minimum cigarette price Retailers can sell at or above that price State sets a formula of minimummarkups for wholesalers and retailers Do minimum price laws increase prices? Study of 15 states comparing prices in those with (n=8) and without (n=7) minimum price laws Separate comparisons made with NY, strongest law

18. Cigarette Prices by presence of minimum price law -No diff between 7 “None” & 8 “Minimum” states; NY sig diff. from all others None Min Min-NY None Min Min-NY Note: NY included in Yes Law Feighery, Ribisl, et al. 2005, Tob Control, 14, 80-85

19. New York – Minimum Price List

20. New York Minimum Prices (5/08) $27.64 + $15.00/carton S.E.T. = $42.64 $44.50 × 7% = $47.61 Includes $3.90 per carton F.E.T. ($42.64 × 3.875%) + 20¢/carton = $44.50 Note: F.E.T. = Federal Excise Tax; S.E.T. = State Excise Tax

21. NY Excludes Buydowns

22. 2 Types of Minimum Price Laws “Weak” – nearly every state has this type; allows buydowns to ‘lower’ base price “Strong” (NY) – discounting not considered in ‘base’ price Caveat – manufacturer could drop list prices, but lose targeting geographic regions, store types, and/or time periods Higher margins enrich tobacco industry

23. Option #2 – Restrict or ban price-related promotional activities Price discounts (e.g., Buydowns) Manufacturer’s promotional programs (e.g., volume discounts to retailers, Retail Leaders) Bonus cigarettes (e.g., buy 2 packs get 1 free) aka “Retail Value-Added” (FTC)

24. Prices in Stores With Contracts Feighery, Ribisl, et al. 2004, Prev Med, 38, 876-884 • Sampled 468 stores in 15 States • Observed marketing materials & prices • Telephone interview re: tobacco company incentive programs • Number of marketing materials • Stores participating in program: 14.0 • Stores not participating in program: 7.4 • Comparison of prices - next page

25. Cigarette prices in stores by contract status NS **P <.01

26. Buydown Values – PM document • Buydown values vary • Some manufacturer reps offer “competitive buydowns

27. Recap: Cigarette Supply Chain Wholesaler Manufacturer Retailer Consumer Distributor

28. Supply Chain and Policy Options Wholesaler Minimum Price-Markup Manufacturer Retailer Consumer Distributor Ban price discounting

29. Other Options Not Reviewed • Strategy needs to directly affect price discounting or prices in large number of retail outlets • Excluded (reason) • Zoning to reduce outlet density with the goal that lower density = higher prices (efficacy?, indirect) • Increaselicense fees to raise prices (indirect) • Ban storefront advertising to lessen visibility of price discounting ads (efficacy?, indirect) • Ban store’s ability to offer price discounts if penalized for selling to minors (few retailers)

30. Legal Issues Related to Retail Tobacco Price Manipulation Ian McLaughlin, JD imclaughlin@phlpnet.org www.phlpnet.org National Conference on Tobacco or Health June 12, 2009 • Phoenix, AZ

31. Primary legal issues Federal preemption (FCLAA) First amendment

32. Preemption must be evaluated under two different legal schemes Current law Post-FDA legislation

33. Federal Preemption – current law • Federal Cigarette Labeling and Advertising Act (“FCLAA”) • Requires warning labels on cigarettes • Also prohibits a state or local: • “requirement or prohibition . . .” • “based on smoking and health . . .” • “with respect to the advertising or promotion of any cigarettes . . .” 15 U.S.C. § 1334(b)

34. 1. “Requirement or prohibition”? A government law is always going to be a “requirement” or “prohibition”

35. 2. “Based on smoking and health”? • Hard to avoid, even if trying to decrease illegal tobacco use by minors • Lorillard v. Reilly, US Supreme Court, 2001 • Need another purpose that is not health-related • Cannot mention health in consideration of law, cannot have tobacco control community in advocacy role

36. 3. “Advertising” or “promotion” of “cigarettes”? • FCLAA only applies to cigarettes not other tobacco products • Advertising?

37. “Promotion” has no clear definition • Courts have relied on numerous sources: • Dictionary definition • FTC reports describing “distribution of cigarette samples and specialty gift items” as “sales promotion activities”, point-of-sale promotions • Surgeon General’s 1994 report gives examples of promotion: • Giving retailers point-of-purchase displays, coupons, including a cigarette lighter with purchase, free samples

38. Conflicting decisions on free samples Are free cigarettes a “promotion”? No: California Supreme Court: (People v. RJR, 2006) Yes: Washington District Court (RJR v. McKenna, 2006)

39. Example- buy-downs, discounts Local law prohibiting buy-downs/discounts

40. Local law prohibiting buy-downs/discounts: FCLAA Preempted? Example- buy-downs, discounts

41. Local law prohibiting buy-downs/discounts: Requirement or prohibition? FCLAA Preempted? Example- buy-downs, discounts

42. Local law prohibiting buy-downs/discounts: Requirement or prohibition? FCLAA Preempted? YES Example- buy-downs, discounts

43. Local law prohibiting buy-downs/discounts: Requirement or prohibition? Based on smoking and health? FCLAA Preempted? YES Example- buy-downs, discounts

44. Local law prohibiting buy-downs/discounts: Requirement or prohibition? Based on smoking and health? FCLAA Preempted? YES DEPENDS Example- buy-downs, discounts

45. Local law prohibiting buy-downs/discounts: Requirement or prohibition? Based on smoking and health? Relating to advertising or promotion? FCLAA Preempted? YES DEPENDS Example- buy-downs, discounts

46. Local law prohibiting buy-downs/discounts: Requirement or prohibition? Based on smoking and health? Relating to advertising or promotion? FCLAA Preempted? YES DEPENDS PROBABLY Example- buy-downs, discounts

47. Example- State Minimum Price Law

48. State Minimum Price law: Requirement or prohibition? Based on smoking and health? Relating to advertising or promotion? FCLAA Preempted? YES DEPENDS MAYBE Example- State Minimum Price Law

49. Iowa tried to ban retailer practices • Iowa (2000): • No retailer give-aways of tobacco products • No free stuff in exchange for purchase of tobacco (e.g., lighter, another pack of cigarettes) • Retailers complained that law prohibited redeeming cents-off coupons, proofs of purchase, and two-for-one sales • Preempted by FCLAA because considered “promotion” • Jones v. Vilsack (8th Circuit, 2001)

50. Certain laws do not involve advertising or promotion Banning self-service displays Requiring a license to sell tobacco Limiting the location of tobacco retailers