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.
I’m excited to head back to Washington, DC this month to be on a a panel discussion hosted by Tim Carney as part of the American Enterprise Institute’s Culture of Competition project. The details:
Free beer: Liberating libations from ‘Bootleggers and Baptists’
For centuries, the manufacture and sale of beer, wine, and spirits has been a highly profitable and highly regulated enterprise. And where profit and regulation meet, cronyism and rent-seeking frequently follow.
From moonshiners buying off politicians during the Prohibition era to liquor stores trying to ban supermarkets from selling beer today, regulation has been used to keep start-up brewers, winemakers, and distillers from manufacturing alcohol; to preserve inefficient distribution systems; and to restrict choices available to consumers. Frequently, this regulation has been used for “noble social goals” — hence the famous public choice example of “Bootleggers and Baptists.”
Can markets and consumers win? Join us for a discussion of the history and future of federal and state alcohol regulation and competition, followed by a reception with beer, wine, and spirits.
The event takes place at 5:00 pm on Tuesday, May 21. Drinks will follow. Check the site for all the necessary information.
And since I know a lot people in the industry read this site, I’d love to get your feedback as well. How do existing regulations help or hinder competition? What laws would you most like to see changed? Feel free to leave a comment or send me an email.
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.
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.
If you’re using nicotine gums, lozenges, or patches to quit smoking, the FDA has good news for you. It’s also good news for the producers of these products, such as pharmaceutical company GlaxoSmithKline. The agency announced yesterday that it’s revising its labeling requirements for nicotine replacement therapy (NRT) as an aid to smoking cessation:
The Food and Drug Administration says smokers who are trying to quit can safely use over-the counter nicotine gum, patches and lozenges for longer than previously recommended in a move to help millions of Americans kick the habit.
Current labels suggest consumers stop smoking or using other products containing nicotine when they begin using the products to help them quit and that they should stop using nicotine replacement products after 12 weeks at most.
The federal agency said Monday that the makers of gum and other nicotine replacement products can change the labels that say not to smoke when using the products. The FDA also said the companies can let consumers know that they can use the products for longer periods as part of a plan to quit smoking, as long as they are talking to their doctor.
This is a sensible move. Nicotine, taken in small doses and divorced from the carcinogens produced by combusting tobacco leaves, is not particularly worrisome. And any small harms that could accrue from using these products certainly pale in comparison to the alternative of continuing to smoke. So this looks like a good decision from the FDA.
What’s interesting, though, is the timing. The FDA has indicated that this month it will announce new proposed rules expanding the reach of its tobacco authority, deeming additional items to be tobacco products covered by the Tobacco Control Act. Among these may be e-cigarettes, an increasingly popular alternative to smoking that delivers nicotine via vapor.
E-cigarettes haven’t been studied nearly as extensively as traditional NRT products, but evidence that consumers use them to reduce or quit consumption of cigarettes continues to grow. A new study to that effect came out last week, in fact. And though there have been some concerns about e-cigarettes, no reasonable person believes they even approach the dangers of the real thing.
The question is whether the FDA’s Center for Tobacco Products will allow e-cigarettes to continue as a viable approach to harm reduction or whether it will subject them to the full slate of regulations applicable to cigarettes. As I documented in my Atlantic article, the thicket of rules enforced by the CTP can be absolutely paralyzing, with the agency failing to rule on a single new product application in its three years of operation.
It’s at this point that one must mention the new director of the Center for Tobacco Products, Mitch Zeller. Zeller took over on March 4, stepping down from his pharmaceutical consulting position at Pinney Associates. His big client at Pinney? GlaxoSmithKline.
Neither Zeller nor the CTP are responsible for yesterday’s announcement about NRT labeling, which came from the FDA’s Center for Drug Evaluation and Research. However the relationship will be one to consider when and if the agency issues new rules regarding e-cigarettes. Hopefully the agency will take same the sensible approach to these potential competitors to traditional NRT as it has to GlaxoSmithKline’s own products.
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Additional note: Buried at the end of Michael Felberbaum’s article linked above was this tidbit:
Meanwhile, the FDA said it is missing a Monday deadline to submit three tobacco-related reports to Congress, which the agency said are nearing completion. It also is missing another deadline to publish a consumer-friendly list of the levels of dangerous chemicals found in cigarettes and other tobacco products, as well as tobacco company testing and reporting requirements for ingredients and additives.
There are no penalties for forgoing the deadlines outlined in the 2009 law that gave the FDA authority to regulate a number of aspects of tobacco marketing and manufacturing.
Keep up the good work, FDA!
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.
Sarah Kliff has two very interesting articles at The Washington Post this week about the Affordable Care Act and tobacco. In the first, she looks at how the law prohibits or limits insurance companies charging higher prices to higher risk clients, with one key exception: They can charge smokers up to 50% more. Interestingly, anti-cancer groups and tobacco companies have teamed up to oppose this provision, though obviously for different reasons.
Her follow-up post examines the under-the-radar question of how the government should define “tobacco user” for health insurance purposes:
[...] the law says nothing more about what counts as “tobacco use.” And that’s a hard factor to regulate: Unlike age, where subscribers have one definite birth date, the idea of who counts and doesn’t count as a tobacco user is really fuzzy. Enter the regulators!
The impact on the cost of insurance for smokers could be huge, especially for those with lower incomes:
For a low-income American faced with the surcharge, their premium could jump from $708 to $3,308. That jump is larger than 50 percent due to the fact that the base premium gets a federal subsidy, while the tobacco surcharge does not.
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Regardless of whether this is good policy, it’s clear that frequent smokers of cigarettes should count as tobacco users. But what about people who only smoke an occasional cigarette socially? Or enjoy an infrequent cigar? Or people who use other forms of tobacco entirely? These users have very different risk profiles, but the law could treat them equally. This would put them in the difficult position of either paying exorbitantly for health insurance or lying about their status, the latter option putting them at risk for losing coverage.
Health and Human Services has invited comment on what questions should be asked of insurance applicants to determine whether they count as tobacco users. Kliff mentions a few suggestions, all of which inquire about use within a given period of time:
The Campaign for Tobacco Free Kids argues that it should be defined as smoking within a set amount of time.
“The Department will need to determine a period that is not so short as to allow allow a person to identify himself or herself as not a tobacco user if he or she ‘quit’ the day they applied for health insurance but not so long as to include people who have actually quit,” the group writes in public comment.
America’s Health Insurance Plans, which represents most health insurance companies, proposes a two-part question: “Have you used tobacco in the last twelve months?” and “Are you currently using tobacco products?”
These suggestions simply reframe the question, grouping people into smokers or non-smokers/quitters. They don’t address casual use. A casual cigar smoker would have to answer yes to both questions posed by America’s Health Insurance Plans. Twelve months is a long time! Should someone who enjoys an occasional cigar have to pay 50% (or more) higher on their insurance premiums, the same penalty faced by pack-a-day smokers?
A sensible definition would address not only recency of tobacco use, but also frequency within that time period (and possibly the form of tobacco used). Unfortunately, this consideration doesn’t appear to be part of the current discussion. That oversight, along with the looming threat of FDA regulation and calls for higher tobacco taxes, is one more item that could make this a tough year for the cigar industry.
Related: Here’s my article from The Atlantic a couple months ago arguing for a different approach to tobacco regulation. And at Quora, I reference some of the research comparing the risks of cigars and cigarettes.
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.]
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.
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.
Do you ever wonder why you can’t buy a spirit you liked overseas in the United States? There are many potential reasons, but a big one is a very simple regulation defining the volume of bottles legally permitted in the American market:
First off – the United States drinks its whiskey from 750ml bottles. The entire rest of the world (except for South Africa, I believe) does not. 700ml or 70cl is the global standard. The United States does not want its citizens to be confused between two different measurements, so they do not allow for 700ml bottles of booze to be sold domestically. That means that any liquor company that wants to sell its booze in the U.S. needs to put it in an entirely different bottle with a new label as well. All of their other booze can be shipped with ease to every other nation (except South Africa, I believe) around the world. Then a separate, special, time-consuming batch has to be made just for the Americans. That sounds annoying and it probably is annoying to many small companies in the whisky trade, so they say forget the Americans. It’s too much extra trouble.
That’s from David Driscoll of K&L Wine Merchants. David’s post goes into the many other obstacles that lay in the path from the distillery to your glass, including importation and distribution laws. Read the whole thing.
Kevin Erskine of The Scotch Blog inquired with the Tax and Trade Bureau as to why the US has this regulation. In short, it’s because the agency transitioned in the late 1970s to metric measurements and 750 ml was very close in volume to the then standard “fifth” (referring to a fifth of a gallon). Allowing 750 ml and 700 ml bottles was deemed too confusing for consumers, and so we’re stuck with an aberrant standard and less access to rare spirits. Attempts to get this rule changed have apparently not gained traction.
[Hat tip: @LushAngeles.]
As soon as I read the introduction to this Reason post about a “lovely California seaside town” with an odor problem, I knew it had to be La Jolla. From the New York Times:
Until a few years ago, the smell was never a problem because the bluffs were open for people to walk on. But since the rocks were closed off, partly because of safety concerns, sea gulls and cormorants have taken over, their droppings have piled up and the smell has grown more acrid by the day.
In theory, a solution could be simple. Sherri Lightner, the local City Council member, said there were biodegradable and nontoxic cleaning agents that could be safely used to clean the bluffs occasionally without any ill effects to the environment.
However, because the waters in the cove are part of a coastal area specially protected by the state, multiple state regulatory agencies would have to issue permits before the agents could be used, a process that regulators have indicated would probably take at least two years.
I visited La Jolla for the first time a couple months ago and both the views and the smells live up to their reputation. The bluffs really are amazing, with daring swimmers paddling among giant sea lions and birds flying along the rocks. And the odors really do permeate everywhere. If the wind blows the right way, you might fool yourself into being reminded of pungent fish sauce. But mostly it just smells like sea bird dung. The town is worth a visit, but business owners there are justifiably upset.
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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