Minimum Prices and Taxes

As cigarette taxes have increased in many states and sales have declined nationally, sales of tobacco products other than cigarettes (OTP) have increased.^{Reference Delnevo, Wackowski, Giovenco, Manderski, Hrywna and Ling6} NYC's high-priced cigarettes contributed to its progress, but NYC only taxed cigarettes. Given this disparate treatment and high OTP use, NYC's tobacco control program prioritized increasing prices across this diverse marketplace.

Municipalities within New York State lack the authority to impose taxes, absent authorization from a state law, which is often politically challenging. However, NYC's tobacco control team found a never-used provision of a 1939 state law authorizing a local OTP tax. During the Great Depression, the federal Housing Act of 1937 provided financial support for public housing, but states needed to cover operational expenses. A 1939 New York State public housing law authorized municipalities with more than 5,000 people to impose several taxes, including a tax of up to 10% of the purchase price for OTP, earmarking the tax revenue for public housing.⁷

Using a 1939 law to impose a tax in 2017 presented complications. Current tobacco tax laws are structured around administrative systems that did not exist 75 years ago. Unlike today's unit-based cigarette taxes, which are a set amount per pack, the 1939 tax was an ad-valorem tax based on a percentage of retail price. Additionally, tobacco taxes in New York State are collected at the wholesale level. Approximately 115 wholesalers supply tobacco products to NYC's more than 8000 retail outlets.⁸ Thus, the scale of enforcement at the wholesale level is entirely different than at the retail level. To simplify the OTP tax and further increase prices, local law 145 of 2017 created a schedule of minimum prices for cigarettes and six OTP categories (cigars, little cigars, smokeless, including snus, loose tobacco, and tobacco-containing shisha) to work in tandem with the tax. By setting the tax at 10% of a minimum price set for each product category, the amount of the tax is consistent for each product, making enforcement at the wholesale level feasible. Although the law does not tax OTP at the maximum amount authorized by law, this mechanism facilitates implementation. Many jurisdictions have used minimum price laws for cigarettes to prevent unfair pricing.^{Reference Tynan, Ribisl and Loomis9} But using a flat minimum price to protect health is a novel policy that may reduce disparities even more than taxes.^{Reference Golden, Farrelly, Luke and Ribisl10}

NYC's first minimum price law, local law 97 of 2013, taught several lessons.¹¹ First, tobacco industry lawyers representing Philip Morris and R.J. Reynolds conceded that municipalities have the power to establish minimum prices for tobacco products. In an unsuccessful lawsuit challenging local law 97's restriction on discounts,¹² industry lawyers stated, “The City may raise prices directly, through a minimum price law (which it has enacted).”¹³ Second, a minimum price of $10.50 was effective for little cigars, which previously cost less than $9, but not for cigarettes, which averaged $11.20.¹⁴ Third, data on cigarette prices helped to justify the minimum price law. To establish minimum prices for OTP, an evidence base regarding OTP prices was required.

Armed with this knowledge, NYC prepared to improve its first minimum price law. To calculate the cigarette price, the Health Department relied on a wealth of data regarding the price elasticity of demand for cigarettes.¹⁵ Starting with the average price, $11.20, the law added 16%, using a round number, $13, to simplify the law for retailers and consumers. That 16% increase over the previous average price was projected to lead to a 6.4% decline in adult cigarette smoking.¹⁶ The Health Department's evaluation of local law 97 of 2013 provided baseline data on cigar prices, which was later supplemented to set minimum prices for other types of OTP.

Local law 97 of 2013's minimum packaging provision did not explicitly set a minimum price for cigars. Instead, it required cigars to be sold in packs of 4, except premium cigars, which were defined as cigars priced at $3 or more.¹⁷ In theory, a law that increases the quantity of cigars in a package increases the prices consumers pay in a single transaction. But that theory assumes manufacturers and retailers will not respond by lowering prices on a pro rata basis, or creating new, less expensive products. In practice, after local law 97 of 2013 went into effect, the average price for individual cigars predictably increased from $2.25 to $5.25, driven by the $3 exception for premium cigars (see figure 1). However, the average price for 4-packs decreased from $8.25 to $7.50 (see figure 1). The decline in the average price for 4-packs was influenced by a proliferation of inexpensive 4-packs of cigars designed to circumvent the price intent of the minimum packaging law (see figure 2).

Figure 1

Figure 2

In 2017, local law 145 eliminated the loophole that allowed inexpensive 4-packs, replacing it with minimum prices for packs of cigars, starting with $8 for a single cigar.¹⁸ Packs with more than one cigar, the minimum price escalates by an additional $1.75 for each additional cigar.¹⁹ As a result, the minimum price for a 4-pack is currently $13.25.

NYC did not attempt to increase e-cigarette prices because the health risks posed by e-cigarettes require further study, are likely to be significantly less harmful than combustible tobacco, and may play a role in helping adult smokers to quit.^{Reference Stratton, Kwan and Eaton20} On a practical level, establishing minimum prices for e-cigarettes is complicated by the variety of devices and e-juice refills on the market.^{Reference Giovenco, Hammond, Corey, Ambrose and Delnevo21}

Tobacco Retail Density Reduction

With 27 tobacco outlets per square mile, NYC has higher tobacco retail density than Philadelphia, San Francisco, and Boston.²² NYC's total of 8000 tobacco outlets was ten times greater than the combined total of Starbucks and Dunkin Donuts. The impact of high tobacco retail density manifests itself in two primary ways. First, easy access to tobacco retailers makes it harder for smokers to quit,^{Reference Halonen, Kivimäki, Kouvonen, Pentti, Kawachi, Subramanian, Vahtera, Reitzel, Cromley, Li, Cao, Dela Mater, Mazas, Cofta-Woerpel, Cinciripini and Wetter23} particularly in low-income areas, perhaps because these smokers may be more constrained by limited transport options and safety concerns.^{Reference Cantrell, Anesetti-Rothermel, Pearson, Xiao, Vallone and Kirchner24} Second, NYC youth exposed to retailers 2 or more times per week were 40% more likely to experiment with smoking in the past year.^{Reference Johns, Sacks, Rane and Kansagra25} Using an agent-based simulation model, researchers found that reducing the number of tobacco retailers has excellent potential to reduce tobacco consumption by increasing search and purchase costs.^{Reference Luke, Hammond, Combs, Sorg, Kasman, Mack-Crane, Ribisl and Henriksen26}

Before reducing retail density, NYC had to risk increasing it. NYC's cigarette retail dealer license was not required for selling OTP or e-cigarettes. Given the changing tobacco market and NYC's Tobacco 21 law, fixing this gap was a priority. Thus, the cigarette license was relabeled a tobacco license, and a separate e-cigarette license was created.²⁷ To sell both, a retailer must secure both licenses.²⁸ NYC took numerous steps to notify retailers of the opportunity to apply for these licenses. In this way, NYC would fairly bring OTP and e-cigarette retailers under its authority.