Comments of Lorillard Tobacco Company - Steve Watson, 2/26/01 1:50PM  

Tobacco Commission

STOP 0574
1400 Independence Ave., SW
Washington, DC 20250-0574

Dear Commission Members:

Lorillard Tobacco Company submits the attached comments on the Preliminary Report of the President’s Tobacco Commission. Thank you for the opportunity to present our views.


Steve Watson


Comments of Lorillard Tobacco Company


Recent Changes in the U.S. Tobacco Industry

     Lorillard Tobacco Company commends the idea behind the President’s Commission on Improving Economic Opportunity in Communities Dependent on Tobacco Production While Protecting Public Health. Substantial changes have taken place in the tobacco industry in recent years. Far too often, the impact on tobacco growers and their communities has been given inadequate consideration by policy makers and others involved in causing these changes.

     In 1998, major tobacco manufacturers and the Attorneys General from all 50 states entered into a Master Settlement Agreement to resolve pending litigation. This agreement was reached in the context of the broad recognition throughout our society that tobacco products, while legal products for adults, were inherently dangerous.

     In addition to $268 billion in payments to states over a 25 year period, the agreement set forth several new restrictions on the practices of the industry, including the following:

bulletA ban on most outdoor advertising
bulletA ban on cartoon characters in packaging, marketing or advertising
bulletA ban on brand sponsorship for concerts, athletic events, or events with a significant youth audience
bulletA limit on brand sponsorship for any other type of event
bulletA ban on payments for product placement in media
bulletA ban on tobacco brand name merchandise
bulletA ban on youth access to free samples of tobacco products
bulletA ban on gifts to underage persons based on proof of purchase of tobacco products
bulletA ban on the use of non-tobacco brand names
bulletA minimum cigarette pack size of 20
bulletCorporate culture commitments
bulletDocument disclosure, available over the internet
bulletEstablishment of a $1.45 billion American Legacy Foundation to provide counter-advertising to combat youth smoking
bulletCreation of a national enforcement fund available to states

     In addition, in 1999 Lorillard launched its own Voluntary Youth Smoking Prevention initiative. This program is a multifaceted nationwide effort that has received wide acclaim for its effectiveness and unique approach. The program includes an advertising campaign and interactive websites which utilize a very unique approach in delivering the youth message. The initiative also includes a parenting program designed to educate parents on how best to communicate with their kids about not smoking. In all, Lorillard’s program has been seen by over 40 million children, as well as over 40 million parents.

     Several states have also taken actions individually to place additional restrictions on tobacco products. One recent study outlined several trends which have taken place from 1991 to 2000:

bulletThe number of states restricting smoking in public places increased from 42 to 49
bulletThe average state cigarette excise tax nearly doubled, from 24 cents per pack to 42 cents per pack
bulletThe number of states restricting or banning the placement of cigarette vending machines increased from 14 to 45
bulletThe number of states restricting or banning the distribution of promotional tobacco product samples increased from 18 to 48
bulletThe number of states punishing retailers for violating youth access laws by suspending or revoking licenses to sell tobacco products increased from 3 to 24

     Since the landmark agreement reached in 1998, our industry has experienced several changes:

bulletWe recognize there are health risks associated with our products
bulletWe have been cooperating with governments on additional marketing and advertising restrictions, and have been open to reasonable regulation, including appropriate federal oversight, and
bulletWe are fully committed to achieving significant reductions in youth smoking

     It is equally obvious that these changes have had, and will continue to have, a significant impact on the tobacco grower. The 1998 agreement itself recognized that tobacco grower community "may be adversely affected by the potential reduction in tobacco consumption resulting from this settlement," and manufacturers committed to seek additional ways to address these concerns. Subsequently, a separate $5.15 billion tobacco grower trust was created in 1999 to provide payments to tobacco quota holders and growers to assist them in dealing with the expected decline in consumption resulting from the agreement. These payments to tobacco quota holders and growers have already begun, and are scheduled to continue over a 12 year period.

The Commission’s Missed Opportunities

     In addition to factoring in these many changes that have already occurred, there are also a number of issues relating to the quality and competitiveness of domestic tobacco leaf which still need to be considered. For the last several months, Lorillard Tobacco Company has advocated the creation of a more structured forum to discuss issues affecting the future of tobacco production. Concerns with the relative quality and competitiveness of domestic tobacco leaf extend far beyond the manner in which tobacco is produced on U.S. farms compared to foreign tobacco producers. Quality and competitiveness concerns also extend to the manner in which domestic tobacco is harvested, prepared for market, graded, and ultimately sold and purchased. These concerns are shared by domestic tobacco companies, leaf dealers, and foreign buyers alike, and the issues and potential solutions are well known to the leadership of most tobacco grower organizations.

     When we first heard of the possibility of the formation of a Tobacco Commission last year, we were intrigued by its potential. We were interested to learn whether it might serve as a constructive forum for discussing leaf quality and competitiveness issues, by promoting a dialogue between sellers and buyers of tobacco leaf. Prior to announcing the formation of the Commission, we know that the Clinton Administration was urged to form a balanced panel with representation from all affected parties, including tobacco manufacturers, dealers, warehousemen, and others involved in transactions for the purchase of tobacco leaf.

     Unfortunately, this advice was ignored. The Commission was deliberately structured to exclude from its membership all representatives from the buying side of the industry. The very structure of the Commission has prevented it from serving as a useful panel for discussing issues most relevant to the future of domestic leaf production.

     We also understand that once the Commission was formed, a proposal to create a subcommittee on leaf production issues -- which would provide an opportunity for input from leaf purchasers -- was rejected by certain Commission members. So the dye was cast. At that point, many suspected that the Commission would merely serve to promote the agenda of certain public health organizations, beginning with proposals to raise tobacco taxes and resurrect the broadest possible federal regulatory ideas from the past few years. Unfortunately, the Commission’s preliminary report bears this out.

Purposes of Commission

     Rather than focusing its efforts on fulfilling its mandate to "recommend such measures as may be necessary to improve economic opportunity and development in communities that are dependent on tobacco production, while protecting consumers, particularly children, from hazards associated with smoking," the Commission has instead proposed ideas and embraced concepts that will adversely affect the use of tobacco products by adults, quite apart from how these measures will aid tobacco growers. Its agenda is much more about public health than about the growers’ economic health.

     The Executive Order which created the Commission authorized it to recommend ways to assist tobacco growers, so long as those recommendations are not inconsistent with public health initiatives. The Executive Order does not, however, authorize the Commission to make a series of public health recommendations apart from proposals to help tobacco growers.

     This appears to be precisely the purpose of Part V of the preliminary report, which is titled "Ways to Reduce Tobacco Use that are Consistent with Efforts to Assist U.S. Tobacco Farmers and Reduce their Economic Problems." We believe this section exceeds the authority granted to the Commission under its Executive Order.

Lack of Focus on Recent Developments

     The preliminary report virtually ignores recent developments that have forced changes in the tobacco industry and significantly affected domestic demand. It makes only general – almost casual – reference to the "declines in U.S. smoking" rates in recent years when explaining recent declines in domestic farm marketing quotas. It barely mentions the 1998 Master Settlement Agreement which we have described. It fails to mention the many recent changes in state law that are intended to codify these and other restrictions on the industry.

     The preliminary report mentions the recent ten cents per pack increase in federal cigarette excise taxes, but fails to mention the five cents per pack increase contained in current law and scheduled for January 1, 2002. The preliminary report notes that average state excise tax levels have increased by "only" 23 cents per pack from 1993 to 2000. All of these changes have had significant impacts on growers.

     Perhaps even more significantly, the preliminary report fails to mention at least two other factors that are highly relevant to domestic farm marketing quota levels. First, tobacco leaf purchased by tobacco product manufacturers or leaf dealers is generally aged for a period of two to three years or more before being used in the manufacturing process. Therefore, current quota levels and industry purchasing behavior are determined at least in part by industry expectations of leaf demand two to three years down the road. This factor helps explain how burley and flue-cured quotas showed increases during parts of the last decade while domestic demand continued its steady decline. Second, it is reasonable to assume that current quota levels are influenced in part by perceptions by domestic manufacturers and leaf dealers of how hostile the regulatory climate is likely to be for tobacco products in the years ahead.

     The preliminary report also cites youth smoking statistics – without mentioning any source for its data – that appear to be highly inflated. Both of the annual statistical measures routinely used by the federal government appear to be ignored. Both of these measures show significant declines in youth smoking rates in the last few years. For example, HHS’s National Household Survey on Drug Abuse shows youth smoking rates (past month use by individuals age 12-17) falling from 20.2% in 1995 to 15.9% in 1999. The initial rationale for proposals to dramatically expand federal regulation of tobacco products was based in large part on the need to address increasing rates of youth usage of tobacco products. Public health advocates vigorously denied that their aim was to ban or heavily regulate adult consumption. Now that youth rates are declining appreciably, the Commission should note in its final report that the rationale for far reaching regulation of tobacco products has changed as well.

New Taxes in an Era of $5.6 Trillion Surpluses

     In assessing "funding options" for a potential quota buyout proposal, the preliminary report urges consideration of increased federal excise taxes "or charges" on tobacco products. In its rush to include language to raise taxes, the Commission has completely ignored one of the liveliest public policy debates of the day. Recently, the Congressional Budget Office estimated that the federal budget surplus is projected at $5.6 trillion over the next ten years. The President and Members of Congress will conduct detailed debates in the weeks and months ahead on public policy options in light of this projected record surplus.

     As noted, the last federal tobacco excise tax increase is not even fully implemented yet. Federal and state tobacco taxes and settlement costs have risen dramatically in the last four years. And now we are in an era of record budget surpluses. The existence of this federal budget surplus debate should be acknowledged in any final report. In light of these circumstances, a lengthy debate on "how to spend the surplus" will likely precede any realistic consideration of new tax increases. The Commission should abandon its agenda for increasing tobacco taxes, which has no relationship to improving economic opportunities for tobacco growers.

New Proposals for Federal Regulation

     As noted, we believe Part V of the preliminary report, which sets forth ways to reduce adult consumption of tobacco products, exceeds the authority conferred upon the Commission by the Executive Order. It does cleverly attempt to link, however, regulatory proposals that could reduce adult tobacco use with theoretical benefits to tobacco growers. The preliminary report suggests that additional Food and Drug Administration regulation "could improve the competitive position of U.S. growers." However, tobacco growers should know that some iterations of FDA regulation could absolutely ruin their competitive position in global markets by adding significant costs and restraints to tobacco production and even changing the composition of tobacco leaf itself.

     If the Commission insists on including proposals in the final report that appear to be so clearly beyond its stated authority, we believe there is risk for tobacco growers and the industry generally in keeping the language vaguely worded. If the Commission insists on promoting FDA regulation of the adult use of tobacco products, it should specify which approach it is advocating. The implications for tobacco growers are substantial.

     For example, the 1996 proposed FDA regulations were drafted so that the new regulatory scheme could be shoehorned into existing federal statutory authority relating to medical devices. The Supreme Court ultimately found this approach to be beyond the agency’s authority despite the manner in which it was written. Legislative language debated by the U.S. Senate in 1998 was hurriedly drafted to largely codify the proposed regulations, instead of establishing a new and separate regulatory structure for tobacco products. Last year, new legislation was introduced in the Senate based on the earlier version, with certain modifications, such as the requirement that federal regulations should not make tobacco products "unacceptable for adult consumption." Some in the public health community denounced such modifications. It is clear that regulatory proposals will continue to evolve. The Commission should provide more detail on how broad it is suggesting that new federal regulation of adult use of tobacco products should be.

     In addition, if the Commission proceeds down this avenue beyond its authority, any discussion of additional federal regulation should consider the following factors:

bulletnew federal regulation should distinguish between regulatory authority over reduced risk products and traditional tobacco products, for which any new regulatory authority should be strictly limited
bulletnew federal regulation should not confer competitive advantage on any manufacturer seeking to market "reduced risk" products, and
bulletnew federal regulation should not duplicate steps which have already been taken by all 50 states, merely creating a new federal layer of bureaucracy

Farmers Need to be Fully Informed of the Impact of New Federal Regulation

     Farmers need to be fully informed that granting FDA authority to regulate the composition of tobacco products may dramatically change the way they produce tobacco, regardless of whether FDA regulators ever set foot on the farm. As noted, there have been several variations of proposals to regulate the adult use of tobacco products. However, even the most recent versions grant authority to regulate the components, constituents, ingredients, and properties of tobacco products, including those that occur naturally in tobacco leaf.

     Recent proposed legislation in Congress would prohibit the FDA from regulating the production of tobacco leaf, "other than activities by a manufacturer affecting production." This large loophole grants a new federal regulator broad potential authority to indirectly regulate tobacco leaf production, by linking new production requirements to the activities of a manufacturer.

     Recent proposals also allow the FDA to set new standards to regulate "the construction, components, ingredients, and properties of the tobacco product." Words like "components" and "properties" are not defined. This would give the FDA broad authority to force changes even to those components or properties which occur naturally in tobacco leaf, through genetic engineering as well as through more traditional methods.

     In other words, assurances in the preliminary report that "we don’t mean that we support FDA on the farm" should be viewed with skepticism by tobacco growers. If the FDA is granted unlimited authority to force tobacco product manufacturers to modify components or constituents that naturally occur in tobacco leaf, they can in effect force manufacturers to deal only with tobacco growers that produce a certain type of tobacco leaf or produce it in a certain way. If the Commission insists on including proposals in its final report on new regulation of adult use of tobacco products, it should tell tobacco growers how this might dramatically affect production practices in the years ahead.

The Need for a Process to Address Leaf Quality and Competitiveness Issues

     As noted, Lorillard Tobacco Company believes a forum is needed for discussing issues that are directly related to leaf quality and competitiveness. There is a need for some future process to achieve program improvements and other steps that might be taken to promote the quality and competitiveness of domestic leaf production. The Commission has apparently spent little time on these issues and is ill equipped to produce recommendations, since this would require input from both the buying and selling side.

     It is unclear what steps may follow the final report of this Commission. However, we believe that the manner in which the Commission has been structured – and the resulting exclusion of the buying side of the tobacco industry – has caused an unfortunate delay in establishing a meaningful process for addressing truly important and pressing issues surrounding the growing and buying of leaf tobacco. We hope this can be corrected once the Commission has completed its work. Unfortunately, in the meantime much attention and effort will continue to be directed at the efforts of the Commission, which appears likely to continue to fail to address basic leaf quality and competitiveness issues.

     Lorillard Tobacco Company remains willing to participate in any future efforts directed to these vital issues, however, and looks forward to playing a constructive role in this eventual debate.