State Cigarette Minimum Price Laws --- United States, 2009

State Cigarette Minimum Price Laws --- United States, 2009
Weekly
April 9, 2010 / 59(13);389-392


Cigarette price increases reduce the demand for cigarettes and thereby reduce smoking prevalence, cigarette consumption, and youth initiation of smoking (1,2). Excise tax increases are the most effective government intervention to increase the price of cigarettes (1), but cigarette manufacturers use trade discounts, coupons, and other promotions to counteract the effects of these tax increases (3) and appeal to price-sensitive smokers (4). State cigarette minimum price laws, initiated by states in the 1940s and 1950s to protect tobacco retailers from predatory business practices (5,6), typically require a minimum percentage markup to be added to the wholesale and/or retail price. If a statute prohibits trade discounts from the minimum price calculation, these laws have the potential to counteract discounting by cigarette manufacturers (5). To assess the status of cigarette minimum price laws in the United States, CDC surveyed state statutes and identified those states with minimum price laws in effect as of December 31, 2009. This report summarizes the results of that survey, which determined that 25 states had minimum price laws for cigarettes (median wholesale markup: 4.00%; median retail markup: 8.00%), and seven of those states also expressly prohibited the use of trade discounts in the minimum retail price calculation. Minimum price laws can help prevent trade discounting from eroding the positive effects of state excise tax increases and higher cigarette prices on public health (5).

Cigarette prices are increased by several factors, including 1) federal and state excise taxes, which are applied per pack of 20 cigarettes, and 2) percentage markups by wholesalers and retailers (Table 1). All 50 states and the District of Columbia (DC) add a state excise tax to the manufacturer's invoice price (7); the result is referred to as the manufacturer base price. In certain states, state cigarette minimum price laws require the addition of a minimum percentage markup by the cigarette wholesaler to the base price, which results in the wholesale price. Most states with minimum price laws also require the addition of a minimum percentage markup by the cigarette retailer (6). The result is the minimum retail price charged to the consumer. The cigarette minimum price laws in some states also expressly allow or prohibit trade discounts (i.e., reductions in price) from cigarette manufacturers to wholesalers or retailers in calculating the minimum retail price to consumers. Allowing trade discounts can partially reduce the price increases from taxes and minimum markups, which leads to a lower minimum price (Table 1).

To conduct this survey, CDC researchers first reviewed eight known cigarette minimum price statutes (6) for Boolean search terms that would identify all other such statutes in a database of current statutes for all 50 states and DC. Identified statutes were then analyzed to determine 1) the minimum percentage markup that must be applied to cigarette prices by wholesalers and/or retailers, or the actual minimum price required by the law; 2) whether the statute allows or prohibits trade discounts to be considered in calculating minimum price; and 3) the state agency or officer with regulatory enforcement authority. To ensure that all state cigarette minimum price laws were identified, researchers also reviewed all pricing laws in those states that appeared not to have a minimum price law. When a statute indicated that wholesalers must apply a minimum percentage markup for transportation costs, that percentage was included in the wholesale minimum markup.

As of December 31, 2009, 25 states* had statutory minimum prices for cigarettes (Table 2). The minimum percentage by which these states required markup on the wholesale price of cigarettes ranged from 2.00% in DC, Louisiana, and Mississippi to 6.50% in Connecticut. The median required wholesale percentage markup among the 25 states was 4.00%. The minimum percentage by which states required a markup on the retail price of cigarettes ranged from 6.00% in six states (Alaska, Louisiana, Mississippi, Oklahoma, Pennsylvania, and Wisconsin) to 25.00% in Massachusetts. The median required retail percentage markup among the 25 states was 8.00%. The minimum price laws in Rhode Island and Washington did not require a percentage markup for either wholesale or retail; instead, the state statutes set the minimum price as the "replacement cost" and "actual price paid," respectively. Additionally, Delaware was the only state with a minimum price for wholesalers but not for retailers, and Tennessee was the only state with a minimum price for retailers but not for wholesalers.

Seven of the 25 states with minimum price laws (Arkansas, DC, Minnesota, Montana, Nebraska, New York, and Pennsylvania) expressly prohibit trade discounts in calculating the minimum retail price for cigarettes (Table 2). Fourteen of the states expressly allow trade discounts to be taken into account when calculating minimum price. Cigarette minimum price statutes in four other states (Iowa, Massachusetts, Rhode Island, and Washington) neither expressly prohibit nor expressly allow trade discounts in calculating the minimum retail price for cigarettes.

Reported by
KM Ribisl, PhD, Gillings School of Global Public Health, Univ of North Carolina, Chapel Hill, North Carolina. R Patrick, JD, S Eidson JD, MayaTech Corporation, Silver Spring, Maryland. M Tynan, J Francis, MPH, Office on Smoking and Health, National Center for Chronic Disease Prevention and Health Promotion, CDC.

Editorial Note
Increasing the price of tobacco products is an evidence-based tobacco control strategy that can produce substantial long-term improvements in health (1). Cigarette tax increases are the most effective and direct way that governments can increase the price of cigarettes (1,2). However, cigarette manufacturers spent $12.5 billion on marketing and promotional expenditures in 2006, 74% of which was spent to reduce the price of cigarettes at the point of sale (8). Although 15 states increased their cigarette excise tax rates in 2009 (7), the impact of those increases on consumer prices might have been blunted by trade discounts from cigarette manufacturers. Cigarette minimum price laws, which were initiated by states in the 1940s and 1950s to protect tobacco retailers from predatory business practices by large retailers (e.g., selling an item at a price below cost to attract more customers into a store) (5,6), have the potential to counteract trade discounting. Although excise tax increases remain the most direct way for states to increase the price of cigarettes (1), creating or strengthening minimum price laws is another way to increase cigarette prices.

Cigarette minimum price laws also have the potential to increase the consumer price of cigarettes in states with low cigarette excise tax rates (6). Currently, of the states with the 10 lowest state excise taxes, only one state (Louisiana) has a minimum price law. States with average-to-high excise tax rates also might benefit from minimum price laws, by using them to mitigate the effect discounting by cigarette manufacturers has on cigarette prices. Currently, of the 10 states with the highest excise taxes, eight states (all but Hawaii and Vermont) have a minimum price law. Although minimum price laws that expressly prohibit trade discounts from being considered when calculating minimum price can help preserve the beneficial public health impact of tax increases (6), additional laws might be necessary to prohibit all retail price promotions (e.g., coupons or two-for-one offers) that can decrease cigarette retail prices to consumers.

The findings in this report are subject to at least three limitations. First, this survey only includes states with minimum price laws that apply specifically to cigarettes. At least seven other states† have general minimum price laws (9) that apply to other types or classes of goods but that also might be applicable to cigarettes or amendable to apply to cigarettes. Second, this survey only includes state statutes on minimum pricing for cigarettes and does not include other actions (e.g., attorney general opinions, case law decisions, and regulatory guidelines) that might affect how the statutes are implemented or might be affected if challenged legally. Finally, this survey did not evaluate how rigorously states enforce their cigarette minimum price laws, which might vary among states or over time.

More research is needed to determine how cigarette minimum price laws affect consumer prices and state revenue from tobacco products (5). State tobacco-control programs can partner with state tax departments or other state agencies with regulatory enforcement authority over cigarette minimum price laws to determine how these laws are enforced. The programs also can identify gaps in the law that might be used by cigarette manufacturers and retailers to reduce cigarette prices (e.g., remote sales via the Internet and mail order, direct sales from manufacturers to consumers, or coupons and other direct-to-consumer discounts).

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