Jacob Grier -- Liquidity Preference
Coffee, Cocktails and Commentary
While in DC this week I recorded a couple podcasts. Here’s the first, with the Cato Institute’s Caleb Brown. In it we cover FDA regulation of cigarettes, e-cigarettes, and cigars.
One minor correction: We were only discussing these inhalable products, so I misspoke when saying that current FDA regulations only cover cigarettes. The agency regulates smokeless tobacco too.
Update 5/30/13: Or if you prefer video…
New FDA Center for Tobacco Products director Mitch Zeller tells Bloomberg to expect action from the agency soon and that he seeks to craft a “comprehensive nicotine policy.” What could that mean? Unmentioned in the article are Zeller’s ties to producers of pharmaceutical nicotine replacement products or his interest in reducing nicotine levels in cigarettes to near zero, a proposal he brings up in the most recent issue of Tobacco Control.
My friends the Stogie Guys have a couple recent posts that are worth reading. In the first, they explain how Big Tobacco has become the enemy of small, premium tobacco through its lobbying efforts. In the second, they examine what a new bill requiring online merchants to collect sales taxes may mean for the cigar industry.
Hestia Tobacco, the brand whose struggle to navigate the FDA’s approval process I documented for The Atlantic, is finally in business. Not selling cigarettes, of course, but rather filtered little cigars. Sale of their cigarettes must await greater competence at the agency. If the product interests you, go check them out.
Christine Quinn, a leader in polls to replace Bloomberg as New York City’s next mayor, appears to have embraced Bloomberg’s nannying legacy. She has proposed raising the legal age to purchase cigarettes within the city to 21. As J. D. Tuccille notes at Reason, this would be good news for black market sellers, who already claim more than 60% of the state’s cigarette market.
My latest article for The Atlantic provides four reasons to oppose the new tobacco taxes proposed in the White House budget.
People in DC bars are “vaping,” or using electronic cigarettes, indoors. A couple members of the DC city council — Yvette M. Alexander and David Grosso — have introduced a bill to include e-cigarettes in the city’s smoking ban:
In an interview, Alexander said e-cigarettes are being “used to usurp the smoking ban.”
“It is smoking, is an inhalant and it’s similar to smoking,” said Alexander, chairwoman of the Health Committee. “We don’t know what the ill effects of this are, and it’s still a bother to some people.”
“Similar to smoking” and “a bother.” Time was city officials at least made a show of finding evidence of harm before imposing bans. E-cigarettes may be annoying to other patrons, but there’s no evidence or reason to believe that secondhand vapor (is that a thing now?) is something to fear. And to point out the obvious, bar and restaurant owners are perfectly free to set their own policies if guests prefer to avoid it.
According to Bloomberg, President Obama will be proposing new tobacco taxes to fund pre-kindergarten programs:
Obama’s 2014 budget proposal, to be released April 10, would finance a pre-kindergarten program for 4-year-olds with higher taxes on cigarettes and other tobacco products. The president outlined the program in his annual State of the Union speech to Congress. He’s seeking to increase spending in areas such as education while Republican lawmakers are pushing for additional budget cuts as a way to reduce the federal deficit.
White House spokesman Jay Carney declined to elaborate on the proposed tobacco-tax increase. “Wait for specifics,” he told reporters at a briefing yesterday.
Never mind for now that cigarette smokers already suffered a more than doubling of the federal tax in Obama’s first year in office. The “other tobacco products” part of this proposal is reason to worry for those who enjoy pipes and cigars.
The 2009 tobacco tax increases to fund the Children’s Health Insurance Program created some significant disparities among similar products. Pipe tobacco was taxed at a far lower rate than roll-your-own (RYO). Large cigars sometimes get much more favorable treatment than small cigars. As a result, producers and consumers shifted to pipe tobacco instead of RYO and added just enough weight to small cigars to qualify as large. The distorting effects of these taxes were immediate and striking:
These changes are almost entirely a matter of legal classification. Actual consumption patterns haven’t changed in the way the chart suggests. Neither pipes nor premium cigars have enjoyed an explosion of new consumers as a result of these taxes.
Nonetheless, the government wants to fix this disparity. A report from the General Accounting Office, the source of the chart above (PDF), estimates that in the first two years of new taxes these substitution effects may have cost the treasury up to $1.1 billion.
One way to fix the disparity would be to lower taxes on RYO and small cigars, but that’s not going to happen. So don’t be at all surprised if the proposal from the Obama Administration includes tax hikes on pipe tobacco and large cigars, imposing substantial new costs on consumers and retailers.
For more, read Michael Siegel’s take on the tax proposal. And for a longer explanation of how smoking bans, higher taxes, and FDA regulation threaten the premium cigar industry, see my December article in The Atlantic.
Update 4/10/13: Via International Premium Cigar and Pipe Retailers on Facebook, this is apparently the language in the budget proposal:
Increase tobacco taxes and index for inflation
Under current law, cigarettes are taxed at a rate of $50.33 per 1,000 cigarettes. This is equivalent to just under $1.01 per pack, or approximately $22.88 per pound of tobacco. Taxes on other tobacco products range from $0.5033 per pound for chewing tobacco to $24.78 per pound of roll your-own tobacco.
The Administration proposes to increase the tax on cigarettes to $97.65 per 1,000 cigarettes, or about $1.95 per pack, increase all other tobacco taxes by about the same proportion, and index the taxes for inflation after 2014. The Administration also proposes to clarify that roll-your-own tobacco includes any processed tobacco that is removed for delivery to anyone other than a manufacturer of tobacco products or exporter. The rate increases would be effective for articles held for sale or removed after December 31, 2013.
As predicted, all loose tobacco would be treated equally, resulting in a huge tax increase for pipe smokers. Details on cigars are lacking, but it looks they would be hit too.
Good news: The FDA is once again taking action on the application of Hestia Tobacco, the aspiring start-up whose case I profiled in The Atlantic this week. Bad news: The agency returns with a new round of demands for information.
To recap, in order to bring their cigarettes to market, Hestia Tobacco and brand owner David Sley must prove that their product is substantially equivalent to a product that was already on the market before February 2007. Sley identified the original blend of Natural American Spirit as his chosen predicate and submitted a report demonstrating the very tight similarities between it and his product.
Natural American Spirit is an established brand, successful enough that its parent company was acquired by Reynolds American in 2001. Even if you don’t smoke, there’s a good chance you’re familiar with it. Yet Hestia Tobacco’s newest task is proving that this product really was for sale, as explained in an email Sley received this morning and in a phone call yesterday:
Dear Mr. Sley,
Thank you for taking the time to speak with CTP’s Office of Compliance and Enforcement today regarding your 905(j) submission. In follow-up to our conversation, please find below a summary of the information we requested.
1. Evidence demonstrating that the predicate tobacco product was commercially marketed in the United States as of 2/15/2007
Please provide evidence to demonstrate that the predicate tobacco product was commercially marketed in the United States on 2/15/2007. If you cannot provide evidence demonstrating the tobacco product was commercially marketed on 2/15/2007, per our discussion, we suggest that you provide evidence that your product was commercially marketed before and after 2/15/2007.
Examples of such evidence may include, but are not limited to, the following:
• dated copies of advertisements;
• dated catalog pages;
• dated promotional material;
• dated trade publications;
• dated bills of lading;
• dated freight bills;
• dated waybills;
• dated customer receipts; or
• dated distributor or retailer inventory lists.2. Evidence Description
Please provide a brief statement or chart explaining and identifying any abbreviations (e.g. item number and/or product description) in the evidence and how it references the predicate tobacco product.
3. Package Description
Please provide a statement as to whether the cigarettes are sold as a soft pack or hard pack.
4. Statement that the predicate tobacco product was not in a test market as of 2/15/2007
As you stated in the teleconference, your predicate tobacco product is Original Blend Natural American Spirit and you do not own the product. Thus, in addition to providing a statement that to the best of your knowledge the predicate tobacco product was not in a test market only on 2/15/2007, please provide additional evidence to show that product was not in a test market only. Examples of this additional evidence can include but are not limited to: dated copies of U.S. advertisements, dated U.S. promotional materials, dated online U.S. product reviews, dated U.S. articles, etc.
We request that you provide the above information for the following 905(j) Report (SE0004644) as soon as possible.
You may receive additional requests if further information is needed. Please do not hesitate to contact me if you have any questions.
Thank you!
[Redacted]
Hestia Tobacco’s application was submitted in June of last year. As explained in my article, the law implies that these reviews should be complete within 90 days, or at most 180. Regardless of whether one considers this latest request for information legitimate, it’s rather late for the agency to be getting around to it. And the timing — arriving the first business day after my article ran — is something to ponder.
My article today at The Atlantic looks at the anti-competitive effects of the FDA’s regulation of tobacco:
David Sley wants to sell cigarettes. This, by his own admission, does not make him the most sympathetic person to feature in an article about excessive government regulation. Yet Sley, an aspiring entrepreneur who has spent more than two years trying to navigate the Food and Drug Administration’s new tobacco regulations, has legitimate cause to complain. The entire cigarette industry has been brought to a standstill by the FDA, forbidden from introducing any new products since March 2011. Tobacco companies contend that the agency’s actions rest on uncertain scientific and legal grounds — and, for once, they may be right.
In the article I document Sley’s attempt to launch a new cigarette brand, a process which has dragged on for more than two years without resolution. As you may remember, the Tobacco Control Act was backed and negotiated by Philip Morris, who just might have anticipated such a result.
The extremely slow approval process also bodes poorly for the premium cigar market, which is even more dynamic than that for cigarettes. Cigar lovers should pay close attention when the FDA issues its proposed rules for cigars later this year.
Millions of Californians would not be able to smoke tobacco inside their own homes under new legislation that would raise the bar nationwide for fighting secondhand smoke.
No state ever has ventured into personal bedrooms and living rooms with its smoking restrictions, but California is going even further than that by targeting owner-occupied residences as well as rental units.
Specifically, the measure would prohibit lighting up a cigarette, cigar or pipe in condominiums, duplexes and apartment units. [...]
Levine’s bill would permit outdoor smoking near apartments or condos, but only in a clearly marked area that is at least 20 feet from any housing unit and 100 feet from a playground, school or pool.
Who could have predicted that ignoring property rights and letting bad science go unchallenged would lead to this?
An Oregonian editorial last week was refreshingly libertarian, calling for same-sex marriage, tuition equity for some undocumented immigrants, restraint on gun control, and even opposition to the state’s smoking ban. I sent in a letter about the last item, which they published today:
The Jan. 12 libertarian-leaning editorial “Protect and expand personal freedom: Agenda 2013″ was a breath of fresh air, especially in regard to our state’s excessively stringent smoking ban.
Current law makes few exceptions for businesses that cater to smokers, making it essentially illegal for entrepreneurs to open new cigar bars or smoking lounges even in stand-alone tobacco shops. Regardless of whether one supports a broad smoking ban, it’s difficult to justify forbidding these businesses to open.
Sensible reform would replace the current exemptions, which apply only to venues that have been grandfathered in, with objective guidelines that would allow both existing and aspiring business owners to offer smokers an indoor refuge.
As I reported in the Oregonian in 2011, the promised decline in heart attacks that the smoking ban was supposed to usher in never developed.
A city inspector in St. Paul spent his time last week seizing contraband candy cigarettes from an old-time soda shop and threatening the owners with a fine if they sell the sweet treats again:
Lynden’s, on Hamline Avenue near Cretin-Derham Hall High School, said a city inspections official came in last week and gave the shop a warning and added that a misdemeanor citation — with a $500 fine — would be next if the non-carcinogenic confections continue to be sold.
There are legitimate reasons why one may not want to sell candy cigarettes, but a law banning the products seems excessive. Thank local anti-smoking groups for putting the law into place:
The ordinance was championed by a group of St. Paul teenagers working with the Association for Nonsmokers-Minnesota, which educates youth groups and individuals who want to lobby for anti-tobacco policies.
You’ve gotta get them hooked on banning things when they’re kids if you want them to continue banning things as adults.
[Via BoingBoing.]
My forthcoming article that I’ve alluded to a couple times this week is now up at The Atlantic:
If a time traveler from the early 1990s were to arrive in the U.S. bars and restaurants of today, what would notice first? Perhaps that the food has become more interesting and varied, or that a perplexing number of diners are photographing it with their remarkable phones. The most obvious change, however, might register on the nose: the nearly complete absence of indoor smoking.
California implemented the United States’ first modern statewide smoking ban in 1998. Today twenty-nine states and 703 municipalities require bars and restaurants to be smoke-free, according to data maintained by the Americans for Nonsmokers’ Rights Foundation (North Dakota brought the tally to thirty states this month). Tobacco use has been banished from our culinary radar along with the question “smoking or non?” Most of us don’t miss it. Yet as a slew of new bans, taxes, and regulations drive smoking to the peripheries of society, it’s worth giving tobacco another look.
Read the whole thing. And for more context on some of the arguments, see my recent posts about the effects of new tobacco taxes and the failure of the FDA to establish an effective regulatory regime.
One of the topics I’ve been researching for a forthcoming article is the effect of the higher tobacco taxes imposed by the Childrens Health Insurance Program Reauthorization Act (CHIPRA). CHIPRA raised tobacco taxes across the board but it didn’t raise them equally; some products were hit harder than others. The most relevant disparities are between roll-your-own (RYO) tobacco and pipe tobacco, and between small cigars and large cigars.
Before CHIPRA, pipe tobacco and RYO were both taxed federally at $1.10 per pound. After CHIPRA, the former increased to $2.83 while the latter increased to $24.78. Since the two products can be treated as substitutes for each other, this naturally led to manufacturers and consumers shifting to products labeled as pipe tobacco for use in rolling cigarettes. A similar shift affected the cigar market, where it became advantageous for some producers of small cigars to slightly increase the weight of their products to qualify as large cigars. (Direct comparison of taxes on small and large cigars is complicated by the fact that small cigars are taxed by weight and large cigars by value.)
I knew that these market distortions were occurring, but I didn’t realize just how substantial they were until reading a report from the General Accounting Office (PDF) from earlier this year on the effects of CHIPRA taxes. Here in two charts is a dramatic illustration of unintended consequences at work:
At first glance this may look like booming business for producers of pipe tobacco and cigars, but of course that’s not what’s happening. The changes are almost entirely nominal. Yet since they reduce tax receipts for the government, the pressure is on now to fix the disparity by raising taxes yet again. This would be another blow to producers of traditional pipe tobacco and large cigars, as well as the retailers who sell their products.
When the Food and Drug Administration was granted authority over tobacco products, many people (myself included) objected that this was an inappropriate field for the agency to be involved in. Among other reasons, it makes little sense for the FDA to approve products that are to some degree inherently dangerous. An excellent article from Michael Felberbaum of the Associated Press shows that the agency has failed to establish reasonable standards of review and has halted innovation in the parts of the industry it regulates:
Tobacco companies have introduced almost no new cigarettes or smokeless tobacco products in the U.S. in more than 18 months because the federal government has prevented them from doing so, an Associated Press review has found. [...]
Since June 2009, when the law allowing the agency to regulate tobacco went into effect, the tobacco industry has submitted nearly 3,500 product applications, according to data obtained by the AP under a Freedom of Information Act request. While none have been ruled upon, the vast majority of these products are already being sold.
A grandfather clause in the law allows products introduced between February 2007 and March 2011 that are similar to those previously on the market to be sold while under review. They can be removed from store shelves if they don’t pass muster with the agency. But 400 products submitted for review since March 2011 are being kept off the market.
The reviews, which are supposed to take 90 days, have dragged on for years in some cases. About 90 percent of applications have lingered for more than a year.
Nearly 3,500 applications over three years and zero rulings. Perhaps the agency is understaffed? Not exactly:
The [FDA's Center for Tobacco Products] has an annual budget of more than $450 million, funded by the industry, and more than 365 employees, about 115 of whom work on the application reviews.
One hundred fifteen employees and zero rulings. One wonders what they do all day.
Part of the problem is that the agency evaluates products not merely on their physical characteristics, but also on whether they may entice new smokers or discourage current smokers from quitting. Since any new product is intended to appeal to someone, it’s not clear to me how applicants can decisively prove to hostile regulators that their products meet this requirement.
Perhaps one does not feel much sympathy for the tobacco companies. But note that the FDA has signaled that it will likely soon be regulating cigars too, and imagine giving the lumbering agency veto power over all new cigar blends. If Philip Morris and Lorillard can’t push new products through the approval process, how will boutique cigar makers fare? As demonstrated by the FDA’s handling of tobacco thus far, regulation could be devastating to the premium cigar industry.This is a topic I’ll be covering in greater depth next week.
Update 12/14/12: Michael Siegel weighs in too:
The rest of the story is that the Tobacco Act is working exactly as I predicted it would: as a way to protect the existing cigarettes on the market and block any real possibility of competition from what could be truly safer products.
Julien Guttman on the forthcoming outdoor smoking ban at George Washington University:
“We’re trying not to use the word ban,” says Julien Guttman, of the GW campus advocacy group Colonials for Clean Air. “We encourage people to talk about a smoke-free campus rather than a ban on smoking.”
This is the same Julien Guttman who lamented a couple weeks ago, “No matter how much science we have to back up what we are saying, there will always be individuals who see this as a restriction on their freedom.” Perhaps it’s a sign of progress that she feels the need to resort to such euphemism when defending the policy.
A bit more on the shaky science behind outdoor smoking bans here.
Politicians in the UK are pushing for a minimum price for alcohol that would increase the cost of cheaper products while leaving high-end alcohol unaffected. According to the website Scottish Grocer, they’ve found an unlikely ally: the craft brewers at BrewDog.
This is the same brewery that made a 1.1% abv beer called “Nanny State” in mocking response to critics of their high-alcohol brews, so it’s a bit of a disappointment to see this coming from them. It’s another story to file under brewers behaving badly.
For a contrary view on minimum pricing, see Chris Snowdon.
Today is Repeal Day, which as most of you know is the holiday celebrating the ratification of the 21st Amendment and the end of Prohibition. To mark the occasion, Reason has put together an interesting video on the “The Man in the Green Hat,” Congress’s very own bootlegger:
Also of interest: This trailer for Breaking the Taboo, a new documentary narrated by Morgan Freeman about the failure of the War on Drugs:
On a similar note, outgoing Mexican president Felipe Calderón spoke to The Economist about the Drug War and its devastating effects in his country:
“[E]ither the United States and its society, its government and its congress decide to drastically reduce their consumption of drugs, or if they are not going to reduce it they at least have the moral responsibility to reduce the flow of money towards Mexico, which goes into the hands of criminals. They have to explore even market mechanisms to see if that can allow the flow of money to reduce.
“If they want to take all the drugs they want, as far as I’m concerned let them take them. I don’t agree with it but it’s their decision, as consumers and as a society. What I do not accept is that they continue passing their money to the hands of killers.”
Finally, here’s an essay I wrote for The American Spectator on the 75th Anniversary of Repeal Day.
Today at Drink Portland, I’ve posted a guide to the city’s few remaining cigar bars. There are only eight of them, so click through if you’re looking for a place to escape the rain with a cigar and a drink. Since Oregon’s smoking ban only exempts bars that can demonstrate cigar sales from 2006, it’s essentially illegal to open a new cigar bar. These eight are all we have and all there will be. An update to the law a couple years later also capped the number of tobacco shops that can allow smoking.
Ban advocates predicted that Oregon’s law would drastically reduce the rate of heart attacks in the state. As I noted in the Oregonian, that never came to pass.
Pre-ban, my favorite place to have a cigar in Oregon was the Horse Brass Pub. My ode the Horse Brass is here. It’s still a great bar, but you can’t light up there anymore.
Jacob Grier is a freelance writer, bartender, cocktail consultant, and magician in Portland, Oregon. He writes, eats, and drinks a lot. His articles have appeared in the print or online editions of The Washington Post, The Atlantic, The Los Angeles Times, Reason, The Oregonian, and other publications.
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