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Editor,—It is estimated that provisions of the proposed settlement of the United States attornies general with American tobacco companies would add about US$0.52 to the cost of a packet of cigarettes.1
Although cigarettes in the highest taxing American states—Hawaii, Alaska, Washington and California—are among the most expensive in the developed world, cigarettes in low-taxing states are among the least expensive. Even with the increases that would result from the proposed settlement, the average cost of cigarettes in the United States would still be only half the cost of cigarettes in the United Kingdom, and considerably less than cigarette prices in countries such as Denmark, Ireland, Australia, New Zealand, and the highest taxing Canadian provinces (table 1).
Taxes are only one contribution to the price of cigarettes. As is evident from the tax incidence figures in table 2, manufacturers’ costs and margins, and retail margins must also vary considerably between countries.
The low percentage that tax makes up the final price of American cigarettes gives manufacturers considerable scope to adjust prices to maximise sales and profits. This might be done, for instance, by having some low-price brands for price-sensitive consumers and higher margins for brands favoured by less price-sensitive smokers. In a country where specific taxes make up a major share of the price of cigarettes, the manufacturers have far less ability to establish significantly differentiated pricing. Even with the estimated $0.52 increase that would result from the settlement, the currently moderate-to-low levels of tax paid in the United States and the extremely low tax incidence combine to leave vast pricing power in the hands of the tobacco trade.
“Some smokers always make decisions based on price alone and we would rather keep them in the smoker community than lose them.”
Edward Horrigan, president-elect, RJ Reynolds Industries, Inc, 1984.