The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.
May 1998
No. 79
SPECIAL
RT
Sinc e
193 7
TAX -ramp
FOUNDATION
How the McCain Bill Will Affect Smokers' Wallet s
and the Underground Cigarette Market
By Patrick Fleenor
Senior Economis t
Tax Foundation
In June 1997 representatives of the tobacco
industry reached an agreement with a number o f
state attorneys general . Under this settlement
the industry would pay federal and state govern -
ments as well as other entities $368 .5 billion over
the next 25 years and would agree to accept a
host of new regulations and restrictions on to-
bacco marketing, advertising, and product ac-
cess. In exchange, the settlement placed limit s
on both future litigation against the industry and
on the Food and Drug Administration's authorit y
Figure 1
Annual Cost of the McCain Bill for Average One- and Two-Smoke r
Households under the Baseline Scenario, 1999-2003 (1998 Dollars)
1999
2000
2001
2002
2003
Source : Tax Foundation.
to regulate tobacco products and smoking .
Any settlement of this type would require
federal legislation . As a result the Senate Com-
merce Committee set about drafting legislatio n
codifying the settlement . On April 29, 1998, th e
Committee reported out the National Tobacc o
Policy and Youth Smoking Reduction Act (here-
in referred to as "the Act"), sponsored by th e
Committee's Chairman, Sen . John McCain (R-
Ariz .) . This Act would require that the industr y
make much larger payments than those calle d
for in the initial settlement. It also sharply
curtails or eliminates some provisions viewed a s
favorable to the industry .
The first half of this report examines the
financial impact this legislation is likely to have
on smokers . The second half looks at a phenom-
ena that has arisen in other countries when the y
have raised tobacco taxes by similar magnitude s
— a growth of an illegal tobacco market and an
increase in cigarette smuggling .
The Legislation
The Act would create a National Tobacc o
Settlement Trust Fund. Upon passage of the Ac t
the industry would be required to pay this fund
$10.0