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,.y TESTIIVI ONY before the House Committee on Wavs and Means on The Health Securitv Act on November 18, 1993 by Gregory N. Connolly, D.M.D., M.P.H. Representing American Public Health Association American Dental Association

My name is Dr. Gregory Connolly and I am testifying on behalf of the American Public Health Association (APHA) and the American Dental Association (ADA) in support of the proposed tobacco tax increases called for in the Health Security Act. I am the director of the Massachusetts Department of Public Health's Tobacco Control Program which is a 550 million state agency established through a voter initiated ballot question that raised the state cigarette excise tax 25 cents last November. Funds were dedicated for tobacco control and comprehensive school health education programs. I will direct my testimony to the proposed increases on smokeless tobacco products including oral snuff and chewing tobacco. I. Summarv of Testimony The APHA and ADA have recommended significant increases in the federal excise cisarette tax. However, the APHA and the ADA support the Administration's proposal to equalize taxes for smokeless tobacco._cigars and smoking tobacco with the tax on cigarettes and support the proposed 99 cents cigarette tax. The following reasons support our position. l) Failure to equalize the smokeless tobacco tax will result in many smokers switching from cigarettes to smokeless tobacco and many youngsters who would not smoke taking up snuff dipping or chewing tobacco instead. Cancers of the lung will be transferred to the mouth. 2) Use of oral snuff has soared among young males in response to a sophisticated marketing campaign. - 3) The most effective toolio curb use among youth is higher taxes. 4) Manufacturers of smokeless tobacco are making excessive profits which could be redirected toward financing health care reform. 5) At the state level, 36 states tax smokeless tobacco at an average rate of 26 percent of wholesale price slightly lower than their rate on cigarettes 31 percent. 6) • Other developed nations have strictly regulated smokeless tobacco with oral snuff being banned in the European Economic Community, Australia. New Zealand and Hong Kong. 7) The new tax will generate significant revenue to finance health care reform. The APHA and ADA, however, recommend that the proposed tax rate on smokeless tobacco be adjusted so that the rate on a pound of smokeless tobacco equals the rate on the wholesale value of a pound of cigarette tobacco. The prop9sed 99 cent tax on a pack of cigarettes represents a tax of $27.62 per pound. The wholesale price of manufactured cigarette tobacco has a value of $26.2 per pound or a rate equal to 105% to wholesale price. Applying this rate to the wholesale value of smokeless tobacco results in a tax of $17.69 per pound for snuff and $4.58 for chewing tobacco. Approximately $1 billion in new revenue could be expected. Based on the cigarette price elasticity of -.26 percent, the number of users should decline approximately 13 percent resulting in 1.3 million fewer smokeless users. In addition, the APHA and the ADA strongly support the dedication of a portion of the tobacco tax to educational campaigns to prevent tobacco use among youth and to help adults quit and the APHA supports funds for programs to help tobacco farmers diversify into other agricultural areas. In lanuary, Massachusetts cigarette taxes were increased 31 cents following a heated public debate that surrounded the cigarette tax referendum and we subsequently launched a multimillion dollar paid advertising campaign to curb smoking. We are pleased to report that state cigarette sales have fallen 11 percent for the first ten months of this year when compared to the same time period last year after adjustments were made for cross border sales. The rate of decline is almost three times greater than the national rate. A similar decline was observed in California when that state voted to increase its tax a few years ago through a ballot question and conduct a similar campaign. The recent Massachusetts experience clearly shows that a federal tax increase can reduce tobacco consumption and save lives. More importantly both the Massachusetts and California experience demonstrates the need to not only raise taxes to finance health services but commit funds to prevent disease from occuring in the first place. /

Finally, APHA supports a substantial rise in the federal alcohol excise tax rate, and an equalization of excise taxes by alcohol content for beer, wine, and distilled spirits. Raising alcohol excise taxes would add extra funds for financing health reform. reduce consumption among our youth, and save lives. If the excise tax on alcohol products was raised to 25 cents an ounce for beer, wine and distilled spirits starting on January 1. 1994, the U.S. would gain an extra $3.7 billion in fiscal 1994 over the fiscal 1992 level of around S8 billion. II. Taxes on Smokeless Tobacco Should be Raised Substantially Description of Smokeless Tobacco Products There are two forms of smokeless tobacco: oral snuff and chewing tobacco. Snuff is a tinely ground tobacco that is held in the mouth next to the cheek and gum. Chewing tobacco is cut-leaf tobacco that is c-liewed. Oral snuff is called "dip" and is sold under brand names such as SKOAL, Copenhagen, and Hawken in 1.2 oz tins.' Chewing tobacco is called ".:hew," and common brands include Red Man and Levi Garrett that come generally in 3 oz pouches. i'ce of Smokeless Tobacco Products Cause Cancer and Other Life ThreateninQ Diseases and are Not Safe Alternatives to Smoking Oral snuff. the most popular form of smokeless tobacco, causes mouth cancer, gum recession. and other oral problems. A North Carolina study found that long-term users of oral snuff were 50 times more likely to develop mouth cancer than nonusers. Mouth cancer is a devastating disease resulting in the loss of portions of the face and jaw. More than 40 percent of patients are dead within five years of diagnosis. Each year 30,000 Americans develop mouth cancer, and 10.000 die from the disease. Cancer-causing chemicals contained in oral tobacco include polonium 210 (a radioactive particle), benzopyrene, and nitrosamines. Nitrosamines are potent carcinogens and are found in oral tobacco at levels 20.000 times greater than that allowed in food or beverages. Cancers are often preceded by oral leukoplakia. white patches caused by the irritation of the tobacco. Approximately 3 to 6 percent of oral leukoplakia exhibit precancerous cell changes. Use of oral snuff also causes breakdown of the gum tissue next to where the tobacco is held. a condition called gingival recession. Treatment of this problem can be painful and expensive. Smokeless tobacco contains nicotine, which is absorbed rapidly across the membranes of the mouth into the bloodstream and then enters the brain. According to the U.S. Surgeon General, nicotine is`the drug in tobacco that makes it addictive. Therefore. -mokeless tobacco is addictive. The amount of nicotine delivered to humans from a tin of snuff or pouch of tobacco is 2 1/2 times greater than that from cigarettes making it a very cheap source of nicotine. Table I Nicotine Yield Cigarettes, Oral Snuff in Chewing Tobacco Nicottne ..4g/g ^ticotine/Untt`" in Mg Percent Nicotine Bioavailable Nicotine Yield in Mg Equivalent Nicotine Yield to 20 cigarettes Ciearettes 15 _ 168 Mg 1Zt'c 20.2 - 1 Oral Snuff 10.5 356 Mg 14% 49.8 2.5 Chewme Tobacco 16.8 1.428 3% 48.6 =.5 _ _0 Ciearettes = 10.8 gratns i.: oz Tim/Snuff = 34 grams 3 oz Pouch/Chew = 85 grams n

. , Smokeless Tobacco Use is Rising Amone YounQ PeoQle and Higher Taxe~ ar Th yfost Effective Way of CurbinQ I)c From 1980 and 1989, consumption of moist snuff increased by 57 percent from 26.7 million pounds to 41.9 million pounds. Almost three quarters of a billion tins of snuff are sold annually. Consumption of chewing tobacco fell 12 percent during the same time period from 72.3 million pounds to 63.5 million pounds. Between 1970 and 1985, the use of the moist snuff increased by 30 percent among all Americans, 6ut eightfold in the 17 - 19-year- old group. Such an increase did not occur by accident, but rather as the result of a carefully crafted marketing strategy by tobacco companies. whi:h uses extensive point-of-purchase displays, wide distribution of free samples, and sponsorship of touring sports and cultural events. Ninety percent of this increase in sales is accounted for by two brands manufactured by the United States Tobacco Company (UST), SKOAL and Copenhagen. The introduction in 1983 of SKOAL Bandits employed a cartoon character to promote use of an easy-to-use tea bag of snuff, with the slogan "Take a pouch instead of a Duff." This product made it extremely convenient for young people to take up the habit. The "Bandit" is low-nicotine teaching tool that allows novices to slowly develop tolerance to the toxic effects of the nicotine. As one industry brochure says: "Like your first beer, SKOAL Bandits can be a taste that takes time to acquire and get the most out of." Once a "taste" is acquired new dippers gradually move to the more potent and addictive brands of snuff, such as SKOAL and Copenhagen. The campaign has been successful. Of the estimated 10 million American users of smokeless tobacco. 3 million are under the age of 21 years. The 1990 Youth Risk Behavior Survey found that 24 percent of all white male high school students use smokeless tobacco at least once during the past month. A 1989 National Collegiate Athletic Association (NCAA) survey of college athletes found a 40 percent increase (from 20 percent to 28 percent) in the use of smokeless tobacco from 1985 to 1989. Among NCAA baseball players an alarming 57 percent use. Table II Changes in Tobacco Consumption 1985 - 1991 Product Cigarettes (Packs) (Millions) Moist Snuff (Tins) (Millions) Chewing Tobacco (Pouches) (Millions) 1986 28.044 480 399 1991 24.201 616 363 `•'c -14% +289c -990 Smokeless Tobacco Manufacturers Prices are Equivalent to igare«P Prices and Taxes Should b Equal In 1991. approximately 700 million tins of oral snuff were sold at an estimated cost of S 1.86 per tin and had an estimated retail market value including taxes of $1.3 billion. The unit price is similar to a pack of cigarettes, (S 1.71 per package of cigarettes 'i.n 1991). Unit sales of oral snuff have increased 60% from 1982 - 1991 while cigarette consumption has fallen 24%. During the same year, approximately 400 million pouches of plug chewing tobacco were sold at an estimated S1.40 per pouch with an estimated retail value of $560 million. Total smokeless tobacco sales are estimated to be S 1.86 billion for that year. 3

Table III Price Components for Selected Tobacco Products 1991 Cigarettes"' Moist Snuff°1 Chewing Tobacco"' Price Percent Price Percent Price Percent Manufacturer Price Federal Tax State Tax w"holesale/Retail 5.85 .20 .25 .41 50% --11.7°ie 15% 24% 31.25`t' .021 .22 .41 67% 15'0 12%°' 25% .84 .018 .17 .35 58% l % 12~~3' 25% Rttatl Price S1.71 100% 51.86 100%'" S1.Y, " 100% , 1) Source USDA: Tobacco Situation Outlook 1992, 75-219 13) Federal Trade Commission 1993 (Does not includes dry snuff) t3) The state tax on snuff and chewing tobacco has been estimated by averaging the tax rate among the 37 states and adjusting for the population for all states. (-i) Retail price data for spit tobacco is not readily available. These estimates have been developed by adding known price data to estimated state tax and including the standard 25% wholesale/retail mark up. In ail likelihood. these are conservative price estimates. Sales and Profits of Smokeless Tobacco Manufacturers are Excessively HiQh US Tobacco Company holds an estimated 65% of all smokeless tobacco sales and 90% of oral snuff sales. From 1981 to 1992, USTs unit volume (tins of snuff sold) rose 63% from 364 million tins to 598 million cans. Dollar sales for oral snuff rose 328% from $195• million to .S833 million and operating profit for all tobacco products rose an astounding 470% from S89 million to $509 million. Approximately 80% of these sales were from oral snuff.' Table IV US Tobacco Company Tobacco Sales and Profits 1981 and 1991 1981 1992 % Change Cans Sold (Millions) 364 592 63% Price Per Can 5.53 $1.39 163% Smokeless Sales (Millions)', $194.7 832.1 328% All Tobacco Sales (Millions) $239.7 884 268% Operating Profit (Millions) $88.8 509.0 473% Percent of Profit of Tobacco Sales 37% 58% 57% Federal Taxes (Million) 0 16.1 NA 1) 8190 of all tobacco sales for oral snuff Source: Annual Reports US Tobacco Company 1981-1991 Operating profit from tobacco products was 37% in 1981 and rose to 58% by 1991. This profit margin is ten times greater than that for other consumer goods and 54% higher than that realized by cigarette manufacturers such as Philip Morris for the sale of domestic 4'

• cigarettes. (40%). During the same ten year period, UST increased prices 163% per tin from S.53 to $1.39 almost more than five times more than inflation. United States Tobacco can raise its price so much because there is little or no real price competition in the oral snuff market which UST controls 90%. Table V Manufacturers Price Components 1991, Philip Morris Domestic Cigarettes and UST Oral Snuff Component Cost Philip Morris 20 Cigarettes % USTM Oral Snuff Cost Advertising $.17 20% $.11 Federal Taxes .20 24% .02 Farm Value .06 7% .15 Operating Profit .17 43% .76 Manufacturer Costs and Other Expenses .25 29% .23 Cost Per Pack or Tin $.85 100% $1.27 Sources: UST and Philip Morris' Annual Repons. FTC. USDA Tobacco Situation Outlook Report. M ana ZNna )LYLYOr 11[6111 )J 67 UIU]IDLi4 N IF' Tin 1.2 oz % 9% 1 % 12% 60% 18% 100% 0 0 0 Prior to 1965 chewing tobacco and oral snuff were subject to a federal excise tax of 10 cents per pound. In 1966 Congress repealed the tax citing the decline in consumption of these products and disproportionate use by low income persons. Following a surge in smokeless tobacco use by teenage boys in the mid 1980s a number of bills were considered by Congress which would reimpose the excise tax. In 1985, the Senate Finance Committee amended pending cigarette legislation to tax oral snuff at 24 cents per pound and chewing tobacco 8 cents per pound. These rates represented a 1.8 cent tax per 1.2 ounce tin of snuff and 1.5 cent tax per 3 ounce pouch of chewing tobacco. The Chairman of the committee stated that he would consider raising the tax once the pending Surgeon General's Report on smokeless tobacco confirmed whether or not the product caused mouth cancer. In 1986, the Surgeon General's Report concluded that smokeless tobacco caused cancer but neither the Senate nor the House raised the tax. Today, the tax on a tin of oral snuff is 2.7 cents and a pouch of chewing tobacco is 2.3 cents. one eighth the tax on a pack of cigarettes. The current tax will generate an estimated S28.5 million in 1993 of which $20 million will come from snuff (55.2 million pounds), and 58.5 million from chewing tobacco (72 million pounds). The combined $28.5 million in excise taxes represents 3% of manufacturers sales versus 23% for cigarettes manufactured. Cigarette Taxes Thirty-six states tax spit tobacco and 34 do so at a fixed percent of wholesale or manufacturer's price. Two tax on weight. The states that don't tax spit tobacco generally have very small cigarette excise tazes such as Virginia, North Carolina and Kentucky. Of the 36 states, 23 have spit tobacco taxes that are within 10% of the rate on cigarettes, 10 less than 10% and 3 greater than 10%. The average tax for the 34 is 26% of manufacturer or wholesale price slightly less than their rate on manufacturers' price of cigarettes, 31%. These 36 states realized S190 million in taxes in 1991 from taxation of all tobacco products other than cigarettes and this represented 4% of their tobacco taxes. This data indicates that these states tax spit tobacco on an equivalent or basis to cigarettes which is not the case at the federal level. 5' :

The Tax on Smokeless Tobacco can be Equalized Easilv With the Tax On i arettes An equivalency factor can be developed to convert the tax rate on cigarettes to an equivalent tax rate per pound of snuff or chewing tobacco. A weight to value comparison can be used to do this. For example, the 1992 wholesale value of one cigarette is 5.047 and its weight is .0287 ounces. The value of one pound of cigarette tobacco is computed by multiplying the number of cigarettes in a pound of tobacco 558 (16/.0287 = 557.49) by the value of one cigarette S.047 and results in a value of S26.2/lb cigarette tobacco. The equivalency factor for the current tax is determined by dividing the cigarette tax per pound S6.69 by the value of a pound 526.2/lb for a factor of 25.2%. S6.69 (Tax on a pound of cigarettes) = 25.2r'~ (cigarette equivalency factor) 526.53 (Wholesale value of a pound of cigarettes) This equivalency factor can then be applied to wholesale value of a pound of snuff or 'chewing tobacco and tax per pound determined. The equivalency factor at 99¢ per pack is 105% of wholesale price. A similar method has been sucessfully used in California when that state equalized its tax on smokeless tobacco with that for cigarettes. The following table computes equivalent taxes for snuff and chewing tobacco for various cigarette tax levels. An arc price elasticity of -.4 is used to control for expected decline in demand for price increases due to tax increases. Table VI Tax Rates by Weight and Unit for Snuff and Chewing Tobacco Equalized to Cigarette Taxes Product Wholesale Current Tax on Smokeless Current Cigarette 24e Proposed Cigarette Tax 99e Per/Ib Price/Ut»t Value/lb Per/Unit Per lb Per/Unit Per/lb Per/Unit Per/lb Cigarette 5.94 $26.2 NA NA 5.24 $6.69 5.99 $27.62 Oral Snuff 1.20 $16.8 S.027 5.36 .32 4.23 1.32 17.64 Chewing Tobacco .84 4.37 .023 .12 .21 1.10 .86 4.58 Source USDA Tobacco Situation, Outlook Report, annual report US Tobacco. Federal Trade Commission. Consumption on nmouetess rooa Wi e and Red Table VII Projected Sales and Revenue of Smokeless Tobacco Current Smokeless Tax 5.03 Current Cigarette Tax 5.24 Proposed Cigarette Tax $•99 Ratelbs lbs Revenue Rateflbs lbs Revenue Rate lbs Revenue Oral Snuff S.36 55.2 $19.9 $4.25 52.4 5222.7 517.64 45.3 5785 4 Chewing Tobacco .12 72.0 8.6 1.12 68.8 77.1 4.58 60.3 275.6 Total 127.2 '8.5 121.2 299.8 95.6 1.061.0 In Millions ~ ~ The decline in consumption is based on use of an arc price elasticity of -.4 and the ~ assumption that tobacco manufacturers decision on pricing will not change. The -.4 is taken from research among cigarette smokers and there is no reason to believe why it would not apply to smokeless tobacco. In keeping with the practice of the Joint Committee on Taxation, Ca~ ~ N O 6 >

this estimate should be reduced by 25°c to approximate potential decreases in other categories of tax revenue brought about by higher tobacco taxes. Number of Fewer Users 51.3 million ------------------------ --------------------------- -------- \ew Revenue Generated S750 million The number of fewer users is based on an estimated population of 10 million users and app!ying cigarette price elasticity from smoking participation of -0.26. In other words a 10~-'c increase in price will result in 2.6% decrease in the total number of smokeless users. An arc elasticity is applied. In summary. the tax on all tobacco products should be raised significantly to finance health care reform and we support the Administration's proposal to do so. All tobacco should be taxed equally and adjustments are needed for the proposed rates on snuff and chewing tobacco.

STATE TAX RATES CHEWING TOBACCO/SNUFF (From TMA Guide to Tobacco Taxes 1992) i r Tobacco Products State Tax Rate Per Cigarette Converted To Ad Valorem (I) Rate % Basis (2) Alabama S.0083 16% (3) Alaska S.015 30% 25% W Arizona S.009_ 18% (3) .-krkansas S.o 173 35% 16% W California 5.018 36% 41.7% Colorado S.010 20% 20% M Connecticut S.023 46% 20% M Delaware S.012 24% 15% W Florida S.017 34% 25% W Hawaii .40% NA 40% W Idaho S.009 18% 35% W Indiana $.008 16% 15% W Iowa 5.018 36% 22% W Kansas 5.012 24% 10% W Maine S 10185 37% 50% W Massachusetts S.26 52% 50% M Minnesota S.022 44% 35% W Mississippi S.009 18% 15% M Montana S.009 18% 12.5% W New Hampshire $.013 26% 24% Nebraska $.014 28% 15% P New Jersey 5.020 40% 24% Nevada 5.018 36% 30% W . New York S.020 40% 15% New Mexico S.008 16% 25% W North Dakota S.014 28% 25% W Oklahoma S.012 24% 30% M (4) Oregon 5.014 28% 35% W Rhode Island S.0185 37% 20% W South Carolina 5.004 8% 5% M Tennessee S.007 14% 6% W Texas S.021 42% 35.2% M Utah 5.0133 66% 35% M Vermont 5.009 18% 20% W Washington 5.017 34% 64.9% W (4) Wisconsin S.019 38% 20% M Average -13.69a 31% 26% 8

i r, BIBLIOGRAPHY Benowitz NL. Jacob P III, Yu L. Daily use of smokeless tobacco: systemic effects. Ann Intern Med 1989:111"l 12-116. Benowitz NL. Pharmocologic aspects of cigarette smoking and nicotine addiction. N.Eng. J Med. i988:319:1318-1330. Connolly GN. Smokeless tobacco in developed countries: an epidemic prevented. In: Durston B. Jamrozik K. eds. T~:n Global War. Proceedings of the Seventh World Conference on Tobacco and Health. Penh. Australia: Western Australian Health Department; 1991 Dougherty PN. Moving smokers to snuff. New York Times, January 13, 1984:4. Federal Trade Commission report to Congres pursuant to the Comprehensive Smokeless Tobacco Health Education Act of 1986. Washington. DC: Federal Trade Commission: 1991:1-3. The Health Consequences of Using Smokeless Tobacco: A Report of the Advisory Committee to the Surgeon General, Bethesda, Md: National Institute of Health; April 1986. NIH Publication No. 86-2879. __ Introducting SKOAL Bandits.Cranleigh, England: David Brown Promotions Ltd: 1985. Maxwell JL. The smokeless tobacco industry in 1989. Richmond, Va: First Wheat Securi ties:1990:1-7. Replication of the national study on the College of Human Medicine, substance use and abuse habits of college student-athletes. East Lansing, Mich: Michigan State University; October 1989:1-12. Tobacco use among high school students-United States, 1990.MMWR 1991;40:617-619. The Tax Burden on Tobacco. Washington, DC: Tobacco Institute; 1990:25;1-225. United States Department of Agriculture. Tobacco Situation Report; TJ-219. June 1992. United States Tobacco Company. UST 1990 Annual Report. Greenwich, Conn: United States Tobacco Company; 1991.