Firms Forecast $1.50-Per-Pack Cigarette Hike

The proposed $368.5-billion national tobacco settlement would lead to a $1.50-per-pack price rise and a 43% decline in cigarette consumption by 2007, according to an analysis released Thursday by four of the nation’s major cigarette companies.

The industry critique takes issue with Clinton administration estimates that the deal would yield only a 62-cents-a-pack price increase. The report states that administration officials and other analysts have failed to take into account expected increases in wholesale and retail markups, increases in state sales taxes and a 3% annual inflation adjustment called for in the deal.

In essence, the industry analysis seems to be an attempt to defend the original settlement in the face of withering criticism from Clinton administration and public health officials that the pact is too good a deal for the cigarette companies.

The report was issued by the Bozell Sawyer Miller Group, which represents the industry in Washington, on behalf of Philip Morris Inc., R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and U.S. Tobacco Co. Scott Williams of Bozell said that Brown & Williamson Tobacco Corp., a subsidiary of British-based BAT Industries that has taken a somewhat harder line than the other companies, will provide a supplement to the study.

The 10-page industry study was given to reporters a day after it was presented to Sen. Kent Conrad (D-N.D.), who requested it. Conrad heads the Senate Democratic Task Force evaluating the proposed deal. Neither his office nor administration officials had an immediate response to the report.

The study was issued just weeks after Clinton announced that the deal would have to be toughened in order for it to garner his support. So far, several Senate committees have held hearings on the proposed deal, which was announced on June 20, but no action has been taken in the House.

On Thursday night, Mississippi Atty. Gen. Mike Moore, the lead negotiator for the 39 state attorneys general who shaped the proposed deal, said he expected that legislation embodying a modified version of the settlement would be drafted within two weeks. He said he thought that a bill would be introduced by early January.

Moore said he thought the industry’s estimate of how much prices would rise might be a bit high.

“Our estimate is close to $1.10 to $1.20 a pack. The administration’s 62-cents-a-pack figure” is off the mark, Moore said.

He said he thought the industry’s estimate of the decline in consumption was even more inflated. “Forty-three percent would be huge. . . . If there’s a 43% overall decline that would mean a much greater decline in teen smoking,” Moore said.

He also said the attorneys general hoped to reduce teen smoking by 60% in a decade. He said such a decline would probably translate into an overall consumption drop of 25%.

Martin Feldman, a tobacco analyst with Smith Barney in New York, offered a sharply contrasting interpretation of the industry report.

“Clearly, the cigarette companies have made a policy decision to take a very conservative view of what will happen to pricing,” he said.

“I think the pricing will go up much faster than they have estimated,” perhaps by as much as $1.89 a pack by 2002, Feldman said. The analyst said he thought the industry made “low estimates in order to prevent criticism from the Senate.” Feldman said that for consumption to drop as much as the industry said it would, prices would have to rise much more than the industry projected.

The bulk of the report consists of dense economic data and includes considerable cautionary language on its forecasts.

“Any projection is a perilous exercise, but in this specific instance, it is particularly difficult to predict with any degree of confidence the proposed resolution’s effect on cigarette consumption. This inherent uncertainty arises from the unprecedented magnitude and scope of the combined impact of the numerous economic and noneconomic measures in the proposed resolution,” the report states. It was referring to the fact that the settlement calls for billions of dollars to be spent on advertising and campaigns aimed at reducing smoking.

For the most part, the report avoids incendiary comments. However, it sharply criticizes a recent Federal Trade Commission study that said cigarette manufacturers could raise prices significantly in lock-step to cover their settlement costs and achieve large profits once they deducted part of the settlement from their taxes.

The tobacco companies characterized the FTC study as “seriously flawed” because it assumed manufacturers would reap all the benefits of higher prices and it miscalculated future industry profits. The agency had no immediate response.

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