The U.S. Food and Drug Administration (FDA) is considering two regulatory changes that would drastically alter the market for combustible tobacco products. With its proposed very low nicotine (VLN) standard, the agency would require manufacturers to reduce the amount of nicotine in cigarettes and cigars sold in the U.S. to minimally addictive or non-addictive levels. The FDA has also proposed to ban the sale of menthol cigarettes. Both of these regulations, if adopted, would have far-reaching impacts on the entire supply-chain of the tobacco industry in North Carolina, from farms to retail outlets. This report quantifies the economic importance for the state of the various parts of the tobacco industry: farming, manufacturing, wholesaling, transportation, and retailing. The economic impact of the proposed regulatory changes for the state and the five top tobacco producing counties is estimated. In addition to an industry impact analysis showing the direct economic effects, impacts on the larger state economy, using standard tools of regional economic analysis, are estimated. The additional potential harms from illicit trade and disruption for tobacco farmers, as well as possible policy responses to mitigate the latter, are also discussed.
The tobacco supply chain in North Carolina begins on its 822 tobacco farms, which have revenue of $557 million and add $197 million to the state’s GDP. Tobacco manufacturers in the state produce $36 billion of output and add $31 billion to state GDP, employing about 5,000 workers and paying them $370 million to do so. Tobacco wholesaling in the state brings in $15.3 billion in revenue, adding $9 billion to state GDP and creating 4,500 jobs. Retailers garnered about $5 billion from sales of tobacco products, adding $3 billion to GDP and supporting 11,000 jobs. Transportation companies in the state also earn revenue shipping tobacco products from manufacturers to wholesalers and retailers. Public sector revenue from sales and excise taxes, Master Settlement Agreement (MSA) payments, and corporate income and franchise taxes are $845 million from all tobacco products and $700 million from cigarettes alone.
All this direct economic activity has a multiplied effect on the state, once the inter-industry effects from purchase of inputs and so forth are included in the analysis. The total economic impact of the cigarette industry alone (farm to retail), after accounting for inter-industry effects, is $49 billion of output (revenue), $32 billion added to GDP, 101,900 jobs created, and labor earnings of $10 billion. If the entire tobacco industry is included, not just cigarettes, the figures are about 20 percent larger. Once the additional economic impact from households spending their labor earnings is included in the analysis, the tobacco industry generates $74 billion of output, $48 billion added to GDP, 196,000 jobs created, and labor earnings of $16 billion from all the products it produces.
Both of the proposed regulations would have a large economic impact on the state. If most nicotine is taken out of cigarettes and cigars, the former demand for those products would likely shift mainly to illicit sources for these products. Apart from reducing the intended effect of regulation on reducing smoking, illicit markets for tobacco create harms of their own, including the availability of more-dangerous products, lack of age controls on purchasing tobacco, and lost tax revenue. After VLN regulation, some other smokers would turn to e-cigarettes or smokeless tobacco, some would quit nicotine use altogether, and some—although likely not many—would use the VLN cigarettes. Two scenarios for the VLN regulatory impact analysis are considered. Under a more optimistic scenario, the industry would lose $26 billion in revenue and 12,900 jobs up and down the supply chain. Under a more realistic scenario, revenue losses are $39 billion and 21,000 jobs are lost. Assessing the total economic impact (inter-industry and household spending effects) leads to far larger estimates. Even under the optimistic assumptions, the state would lose $32 billion of GDP, over 100,000 jobs, and $8.6 billion in workers’ earnings. The impacts are larger still in the pessimistic scenario, with a hit to GDP of $48 billion, 169,000 lost jobs, and $13.6 billion lost wages.
Almost two out of every five cigarettes purchased are menthol flavored. If menthol were to be banned in cigarettes (and cigars, in a related proposed FDA action), all those consumers would be forced to find other options. Again, some users of menthol cigarettes would turn to illicit sources, others would quit, and some would turn to other tobacco products. Many former menthol smokers would likely just switch to regular cigarettes. Therefore, the economic impacts for the state are not as large as for the VLN regulation. However, even adopting the FDA’s somewhat rosy assumptions, $6 billion in revenue and 2,800 jobs are lost directly in the tobacco industry. Under more realistic assumptions, $11 billion of revenue is lost and 8,000 jobs are destroyed. Including the multiplied economic impact throughout the economy, between $13 and $27 billion in output would be lost due the ban, $8 to $17 billion of GDP would disappear, employment would fall by 30,700 to 92,600 jobs, and labor earnings of $2.5 to $6 billion would be lost.
Some parts of the state would be affected much more than others, particularly in the agricultural sector. The top five tobacco-growing counties in North Carolina are Wilson, Johnston, Nash, Sampson, and Harnett counties. The VLNC regulation would hit farming revenue and employment particularly hard in these five counties, with revenue falling between $11 million to $19 million per county under the pessimistic scenario and dropping between $7 million and $12 million under the optimistic scenario. The total economic impacts include $55 million to $88 million in lost output for these five counties in total, with a loss of 2,300 to 3,600 jobs. For the menthol ban, direct industry losses are $1.6 million to $7 million in revenue and between 65 to 270 jobs per county. Including all impacts, the menthol ban would subtract $13 to $33 million for the region’s output and result in 540 to 1,400 fewer jobs.
Finally, special attention is necessary regarding the disruption these potential regulatory changes would create for tobacco farming. The VLN regulation would create possibly insurmountable obstacles for farmers to grow compliant tobacco (even if there would be any sizeable demand for VLN products, which there likely will not be). Setting that issue aside (which farmers will not have the luxury of doing), both proposals would greatly reduce demand for tobacco grown in the state, raising the question of transition costs for farmers. Acreage could be devoted to other, less profitable crops. More likely, many smaller farms would sell their land for other purposes and exit farming, as happened with the last major shock to tobacco agricultural profits (the Tobacco Buyout in 2004). Options for the state or its counties to cushion the blow for farmers may include funding for programs to help them transition to and market other agricultural commodities and support of private or non-profit programs to help farmers with the same.
