Menthol Bans Will Spell Financial Hit to State Coffers

Back in March, the Food and Drug Administration (FDA) announced it was planning “to prohibit menthol as a characterizing flavor in cigarettes and prohibit all characterizing flavors (other than tobacco) in cigars.” The proposal is rooted in the agency’s desire to “significantly reduce disease and death from the use of combusted tobacco products, the leading cause of preventable death in the U.S., by reducing youth experimentation and addiction and increasing the number of smokers that quit.”

While the desire to have fewer Americans smoke is a good public policy, a prohibition on menthol cigarettes and flavored cigars could have significant health and financial ramifications beyond Washington, denying all 50 states access to an essential source of revenue.

While public finances should never trump public health, policymakers must consider the full ramifications of their decisions before proceeding with any new rules. Failing to do so could create more intractable problems further down the line, requiring Washington to engage in a more holistic policymaking process.

Every state in America levies a tax on tobacco. These taxes can range from just $0.37/20 pack in Georgia to $4.35/20-pack in New York. On top of state taxes, the federal government also imposes a $1.01 tax per pack. In 2019, it was estimated that state and local governments collected about $19 billion from cigarette revenue while the federal government collected around $12.5 billion in revenue.

As noted by the Tax Foundation, prohibiting menthol cigarettes and flavored cigars could significantly impact state revenues while doing little to incentivize people to quit. According to their estimates, “both state governments and the federal government would experience significant decreases to their tobacco tax revenue without experiencing a corresponding decrease in consumption.” The federal government stands to see a “federal revenue decline of $1.9 billion in the first full year after prohibition” while states face a “revenue loss of $4.7 billion.”

For states and the federal government, this loss of revenue will force them to make difficult financial choices, notably whether to cut spending or increase taxes. If governments decided to cut spending, citizens would undoubtedly be left facing poor public services. Alternatively, any effort to raise taxes on citizens would see the cost of living increase and Americans being less able to achieve economic security or able to spend income on consumer goods and services.

While a menthol ban could decimate state coffers, it’s also not clear that a ban would incentivize smokers to quit. A 2020 study, for example, found that prohibiting consumer access to one type of combustible product only incentivized them to smoke unaffected products. In the case of San Francisco, which banned flavored vaping products in 2018, smokers only shifted consumption. The long-term result was a limited improvement in health outcomes.

If the San Francisco study results were to be replicated after a federal menthol and flavored cigar ban, it would simply mean thousands more Americans smoking equally harmful combustible products rather than quitting. This would ultimately render the prohibition meaningless as the justification for such proposals is “increasing the number of smokers that quit.”

The FDA’s plan to ban menthol cigarettes and flavored cigars could have ramifications far beyond the agency’s consideration, principally reducing the number of Americans who smoke combustible cigarettes. For states and the federal government, such a ban could also see them lose access to a revenue stream that depresses wages and enables them to deliver public services. Without this revenue stream, budgets will need to be cut, or taxes increased.

Rather than distant bureaucrats deciding what consumers should or should not have access to, the FDA should follow the science and develop a comprehensive plan that helps smokers quit, not simply pushing them onto traditional combustible products that are equally as harmful.

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