Price hikes pay off in sharp smoking decline

After decades of trying to curb smoking by warning about health effects, the US has found a new tool that seems far more effective: price.

In a little-noticed trend that could have important implications for the politics of tobacco, smoking is dropping at double its usual rate. The dramatic decrease in the number of cigarettes sold came after prices were hiked by 25 percent per pack nationally.

Securities analysts who follow tobacco companies believe consumption is down 6 to 7 percent across the US, compared with a less than 3 percent annual decline in past years. And the drop may be much greater in some "high tax" states: There could be as much as a 15 percent decline in Massachusetts and California, and a 17 percent drop in Alaska, which has a $1-per-pack cigarette tax, the highest in the nation.

The decline in tobacco use - if it holds up - could improve the nation's health overall, meaning lower costs for everything from Medicare to health-insurance premiums. "It would be hard to overstate the importance of this.... any significant drop in tobacco use is sure to have a dramatic effect on the nation's life expectancy,"says Cliff Douglas, president of Ann Arbor-based Tobacco Control Law & Policy Consulting.

Public-health officials, however, warn it may be too soon to tell if smokers are throwing out their lighters for good. "Studies have shown us that once ... addicted to the nicotine, most people will pay anything," says Linda Ford, president of the American Lung Association and a doctor in Omaha, Neb.

But, she adds, even people cutting back on the number of cigarettes they smoke would help. "Tapering down is the first part of reducing [an] addiction," she says.

There is no doubt that it has become considerably more expensive to smoke. According to the government, the wholesale price of cigarettes has climbed more than 40 percent in the past year.

For the consumer, tobacco prices soared 18.3 percent in December and another 6.6 percent in January.

After the January price hike, cigarette sales nosedived 15 percent over last January in Massachusetts, says Greg Connolly, head of the state's Tobacco Control Program. "These types of [price] increases will affect consumption among adults and kids," says Mr. Connolly.

Price hikes

The main reason for the price increases is the decision by the industry late last year to raise cigarette prices by 45 cents per pack to pay for the 20-year $206 billion settlement with the state attorneys general.

"This is the most significant outcome by far of the settlement reached by the attorneys general," says Mr. Douglas.

However, prices are also rising because of new state taxes. That's the case in both California, which added a 50-cent-per-pack fee in January, and Alaska, which tripled its tax last October. In a report released on Feb. 22, the Alaska Division of Public Health reported consumption had dropped 17 percent since last fall.

Ford and other public-health advocates believe the price increases are discouraging underage smokers, who usually have limited incomes. However, Gary Black, a tobacco analyst at Sanford C. Bernstein, says older people with fixed incomes are quitting the habit.

"Kids are the least sensitive to price increases, and old people are the most sensitive, contrary to what a lot of people say," says Mr. Black.

The tobacco industry is more than aware of what's happening. Philip Morris, in its annual report, says its US sales fell 3.2 percent, while the industry's sales dropped 4.6 percent. However, in the fourth quarter, when the higher prices started to hit, the tobacco giant's shipments dropped 6.2 percent, while the industry's volume was 7.2 percent lower than the previous year.

The tobacco industry is trying to stem the tide with coupons and discounts. On March 1, over a period of five weeks, Philip Morris will offer a 55-cent-per-pack discount.

Black believes the higher cigarette price is spurring a black market in cheaper cigarettes made offshore. He claims the smokes are coming in on speedboats that pick up the contraband from freighters offshore.

Black-market smokes

Federal authorities confirm that smuggling is taking place. B.J. Zapor, a spokesman at the Bureau of Alcohol, Tobacco and Firearms (ATF), says individuals and groups are buying cigarettes from duty-free shops in the US, taking them to Mexico, and smuggling them back to sell them on the streets.

He says other cigarettes, which are manufactured for export only, are getting back to the US market.

"ATF is aware of illegal activity involving contraband in the state of California that seems to have increased with the recent adjustment of the state's tax," says Mr. Zapor.

California may also figure in yet more price hikes. Recently, a federal jury awarded a smoker $50 million in punitive damages and $1 million in actual damages. If the industry has to start to pay for more lawsuits, this will be included in the pricing.

Black figures if it has to pay $1 million to 60,000 people who file suits, the industry will have to raise prices another $3 per pack.