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Last year, representatives of five major tobacco companies and a group of state attorneys general reached an agreement that, if enacted, could dramatically change the ways in which tobacco is marketed, sold, and consumed in the United States. That settlement would impose large payments on the tobacco industry, strengthen regulatory controls, and expand public health initiatives to reduce cigarette smoking. This Congressional Budget Office (CBO) paper--prepared at the request of the Assistant Majority Leader of the Senate--examines the settlement's potential impacts on consumers and the industry. The reduction in cigarette consumption and the amount of payments by the industry are estimated under various assumptions regarding increases in the price of cigarettes and the response by smokers to those price hikes.

The paper was written by Joseph Antos, Kathryn Rarick, Bruce Vavrichek, and Judith Wagner of CBO's Health and Human Resources Division. Julia Matson and Nabeel Alsalam carefully reviewed the underlying technical analysis for accuracy and consistency. A number of other people at CBO provided helpful comments and suggestions as part of the agency's internal review process. In addition, Robert Cook-Deegan of the National Academy of Sciences commented on portions of the paper.

Leah Mazade edited the manuscript, assisted by Melissa Burman. Ronald Moore and Sharon Corbin-Jallow prepared the paper for publication. Laurie Brown prepared the electronic version for CBO's World Wide Web site.

June E. O'Neill
Director
April 1998
 
 

I - SUMMARY AND INTRODUCTION

• Initiatives to Reduce Smoking
• The Likely Outcome
• Reducing Teen Smoking and Other Considerations

II - THE CONTEXT OF THE PROPOSED SETTLEMENT

• Trends in Cigarette Consumption by Adults and Teenagers
• The Cost of Smoking-Related Illnesses
• The Regulatory Context of the Settlement
• State and Private Lawsuits
• The Proposed Settlement

III - THE IMPACT OF REGULATORY AND PUBLIC HEALTH PROVISIONS

• Effects of Advertising Restrictions
• Effects of Public and Workplace Restrictions
• Effects of Restrictions on Youth Access to Cigarettes
• Effects of Smoking Prevention and Cessation Programs
• The Net Effect

IV - THE IMPACT OF REQUIRED INDUSTRY PAYMENTS

• The Effect of Price Increases on Consumption
• Price Increases Under the Settlement

V - CIGARETTE CONSUMPTION AND INDUSTRY PAYMENTS UNDER THE SETTLEMENT

• Industry Payments Under Alternative Assumptions
• The Base Case
• A More Realistic Benchmark

VI - REDUCING TEEN SMOKING AND OTHER CONSIDERATIONS

• Can the Targets for Teenage Smoking Be Met?
• Other Consequences of the Settlement

APPENDIX - Life-Cycle Estimates of the Cost of Smoking
 

TABLES
1.	Percentage of Adults Who Were Current Smokers, by Sex and Age, 1965-1995
2.	Scheduled Tobacco Industry Payments for the First 25 Years Under the Proposed Settlement
3.	Restrictions on the Advertising, Promotion, and Sale of Cigarettes in the Proposed Settlement and in State and Federal Laws, 1995
4.	Estimates of Price Elasticities of Demand for Cigarettes from Selected Studies
5.	Settlement Payments and Reduced Cigarette Consumption Over 25 Years Compared with the Base Case
6.	Settlement Payments and Reduced Cigarette Consumption Over 25 Years Compared with an Alternative Benchmark
FIGURES
1.	Trends in Per Capita Adult Cigarette Consumption and Cigarette Prices, 1945-1997
2.	Long-Term Trends in Smoking for High School Seniors, 1975-1996
BOXES
1.	The Tobacco Industry
2.	Tax Treatment of the Industry's Payments

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