Wednesday, February 25, 2015

Plain Packaging Mandates Push Tobacco Consumption into Black Markets

On February 15th, John Oliver’s HBO show “Last Week Tonight” featured a segment that tackled the tobacco industry. In the segment, Oliver showed disgust that tobacco companies have become more profitable over time despite decreasing rates of tobacco consumption.
There is an easy explanation for this. Tobacco products are heavily regulated and taxed in most states throughout the US. The costs of these regulations and taxes push smaller tobacco companies who cannot afford them out of the market. This leaves larger market shares and profit shares for the bigger companies who can afford to cover the costs of these regulations. So while John Oliver is supporting heavy regulations because he thinks they are reducing the profits of these big tobacco companies, in reality, these companies are benefitting from them.
Oliver pointed to the Australian tobacco market and praised its government for its plain packaging mandate, which eliminates branding and requires all similar tobacco products to look the same. Oliver suggested that the United States adopt a similar policy because tobacco companies are too profitable and he claims such a policy would help lower tobacco consumption. Not only is a plain packaging mandate a massive violation of intellectual property rights because it strips companies of their trademarks and branding, but there is also no evidence that the Australian plain packaging regulations have caused lower levels of tobacco consumption.
Sinclair Davidson and Ashton de Silva, authors of “The Plain Truth about Plain Packaging: An Econometric Analysis of the Australian 2011 Tobacco Plain Packaging Act” found that the plain packaging policy introduced in Australia “has not reduced household expenditure[s] of tobacco once we control for price effects.” The last part is important because over the same span that plain packaging was introduced, Australia imposed a 12.5 percent excise tax increase. This tax increase likely is the driver of any decreases in tobacco consumption, not plain packaging regulations.
Ernst & Young LLP also released a paper entitled “Historical Trends in Australian Tobacco Consumption: A Case Study” which found “no evidence that plain packaging in Australia has reduced total consumption to date.” But plain packaging has had an effect on the tobacco market. Since Australia’s mandate went into effect, consumption of black market tobacco products has increased by roughly 55 percent. Because the supply of black market tobacco products has increased, the access to children has also increased, resulting in a 30 percent hike in daily smoking rates of 12-17 year olds, according to the International Property Rights Index. I doubt these are the results John Oliver is trying to promote.
Granted, these are results from Australia, but the results should not go unnoticed. We already know that tobacco tax rates are so high in some states in the US that individuals are selling “loose cigarettes” despite the aggressive enforcement from police. Removing trademarks and branding, which tobacco users place a high value on, would violate the intellectual property rights of tobacco companies and certainly would push tobacco consumption into a black market.