promote any particular product or service. The resource may provide one
or more FDA-approved over-the-counter cessation products, provided it
does so in a manner that does not advertise or promote a particular
product.
     It must not selectively present information about a subset
of FDA-approved cessation products or product categories while failing
to mention other FDA-approved cessation products or product categories
or reference any drug or other medical product that FDA has not
approved for tobacco cessation.
     It must not encourage the use of any non-evidence based
smoking cessation practices.
    If the resource chosen is a Web site, we propose that it meet the
following additional criteria:
     The Web site must not contain a link to any Web site
unless it meets all of the listed criteria.
     The Web site may refer to one or more toll-free telephone
numbers, provided they meet the applicable criteria.
    If the resource chosen is a toll-free telephone number, we propose
that it meet the following additional criteria:
     The staff that provide smoking cessation information and
advice are trained specifically to help smokers quit by delivering
unbiased and evidence-based information, advice, and support.
     The service has appropriate controls to ensure the
applicable criteria are met.

    The smoking cessation information would be included as part of one
or more of the required warnings and therefore would not appear outside
of the areas specified for the required warning (i.e., 50 percent of
the area of each of the front and rear panels of cigarette packages and
20 percent of the area of advertisements). Thus, no additional space on
cigarette packages or in advertising would be needed to display this
information. Some or all of the images in the two documents that will
be incorporated by reference in the final rule would contain this
smoking cessation referral information where this information, along
with the textual warning statement and accompanying graphic, are clear,
legible, and fit within the specified area. FDA requests comments
regarding the selection of an appropriate smoking cessation resource
and the applicable criteria identified in the bullets above.
    Reducing the number of Americans who smoke by increasing the
likelihood that smokers will quit smoking would provide substantial
public health benefits by reducing the life-threatening consequences
associated with continued cigarette use. Moreover, studies have found
that health warnings are more effective if they are combined with
cessation-related information (Ref. 5 at p. C-7). Thus, FDA is
proposing to require information about an appropriate smoking cessation
resource under section 906(d) of the FD&C Act as appropriate for the
protection of the public health.

G. Proposed Effective Date

    Section 201(b) of the Tobacco Control Act specifies that the
requirements for health warnings on cigarette packages and
advertisements for cigarettes are effective fifteen months after the
issuance of the regulations that FDA is proposing in this proposed
rule, and that a final rule must be issued not later than 24 months
after the date of enactment of the Tobacco Control Act. Therefore, FDA
proposes that any final rule will become effective fifteen months after
the date the final rule publishes in the Federal Register. During this
time, parties should take whatever steps they need to plan and
implement business operations that will comply with the final rule. As
of the effective date, no tobacco product manufacturer, importer,
distributor, or retailer of cigarettes may advertise or cause to be
advertised within the United States any cigarette product unless the
advertising complies with the final regulation. Also, cigarette
packages that do not comply with the requirements of the final rule
must not be manufactured for sale or distribution in the United States
as of the effective date.
    As specified in section 201(b) of the Tobacco Control Act, however,
if a packaged cigarette product was manufactured prior to the effective
date of the final rule but does not contain the warning statements and
graphics required under the final rule, the product may be introduced
into commerce in the United States within thirty days from such
effective date. Therefore, manufacturers, distributors, importers, and
retailers may continue to introduce into domestic commerce existing
inventory that may not contain the warning statements and graphics
required under the final rule for an additional thirty days after the
effective date of any final rule. After the 30-day period,
manufacturers must not introduce into domestic commerce any cigarette
packages that do not contain the warning statements and graphics
required under the final rule, irrespective of the date of manufacture.
While this limitation only applies to manufacturers, we note that
keeping products without the new, updated warnings on the market for an
extended period of time is not in the interest of public health. We
request comments regarding mechanisms for enforcing this rule and its
effective date, such as ways to differentiate cigarette packages sold
from existing inventory from those that were manufactured after the
effective date.

V. Paperwork Reduction Act of 1995

    The required warning disclosures are the ``public disclosure of
information originally supplied by the Federal government to the
recipient for th[at] purpose,'' and are, therefore, not within the
scope of the Paperwork Reduction Act. See 5 CFR 1320.3(c)(2).

VI. Executive Order 13132: Federalism

    FDA has analyzed this proposed rule in accordance with the
principles set forth in Executive Order 13132. FDA has determined that
the proposed rule, if finalized, would not contain policies that would
have substantial direct effects on the States, on the relationship
between the National Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
Accordingly, the agency tentatively concludes that the proposed rule
does not contain policies that have federalism implications as defined
in the Executive order and, consequently, a federalism summary impact
statement is not required.

VII. Environmental Impact

    FDA has determined under 21 CFR 25.30(k) that this action is of a
type that does not individually or cumulatively have a significant
effect on the human environment. Therefore, neither an environmental
assessment nor an environmental impact statement is required.

VIII. Analysis of Impacts

A. Introduction and Summary

    FDA has examined the impacts of the proposed rule under Executive
Order 12866, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Order
12866 directs agencies to assess all costs and benefits of available
regulatory alternatives and, when regulation is necessary, to select
regulatory approaches that maximize net benefits (including potential
economic, environmental, public health and safety, and other
advantages; distributive impacts; and equity). This proposed rule would
be an economically significant regulatory action under the Executive
order.
    The Regulatory Flexibility Act requires agencies to analyze
regulatory options that would minimize any significant impact of a rule
on small entities. This proposed rule would have a significant economic
impact on a substantial number of small entities.
    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires
that agencies prepare a written statement, which includes an assessment
of anticipated costs and benefits, before proposing ``any rule that
includes any Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100,000,000 or more (adjusted annually for
inflation) in any one year.'' The current threshold after adjustment
for inflation is $135 million, using the most current (2009) Implicit
Price Deflator for the Gross Domestic Product. This proposed rule would
result in a 1-year expenditure that would meet or exceed this amount.
    FDA's estimate of the benefits of the proposed rule is determined
by the predicted reduction in the number of U.S. smokers and the
consequent reduction in the number of people who will ultimately become
ill or die from causes related to smoking. FDA estimates that this
proposed rule will reduce the number of smokers by 537,000 in 2013,
with small additional reductions over the following 20 years. We
estimate the present value of the rule-induced benefits at a 3 percent
discount rate to be $10.1 to $28.4

billion, including $8.96 to $26.89 billion in gained life-years, $202.1
to $606.2 million in reduced non-fatal emphysema, $393.1 million in
reduced fire losses, and $498.9 million in medical cost reductions. At
a 7 percent discount rate, our estimates of total benefits become $2.29
to $6.03 billion, including $1.80 to $5.41 billion due to the increase
in life-years, $64.9 to $194.7 million in reduced emphysema, $180.6
million in reduced fire losses and $244.0 million in medical cost
reductions. The annualized benefits range from $676.0 million to $1.91
billion with a 3 percent discount rate and from $216.6 to $569.6
million with a 7 percent discount rate. Most of the public health
benefits from the proposed rule would be realized in the future;
perhaps several decades after the rule took effect. In other words, the
benefits estimated here for the typical dissuaded smoker consist of
health gains to be realized decades in the future.
    The estimated totals may understate the full public health benefits
of the proposed rule because they fail to quantify reductions in
smokers' non-fatal illnesses other than emphysema, the reduction in
external effects attributable to passive smoking, and the reduction in
infant and child fatalities caused by mothers' smoking during
pregnancy.

                                        Table E1--Benefits of Regulation
----------------------------------------------------------------------------------------------------------------
                                                             Annualized benefits ($ mil)
                                   -----------------------------------------------------------------------------
        Impacts of the rule                       3 percent                              7 percent
                                   -----------------------------------------------------------------------------
                                        Low         Medium        High         Low         Medium        High
----------------------------------------------------------------------------------------------------------------
Smokers' Life-Years Saved.........        602.5      1,205.0      1,807.5        170.4        340.7        511.1
Emphysema Reductions..............         13.6         27.2         40.7          6.1         12.2         18.4
Fire Loss Averted.................         26.4         26.4         26.4         17.1         17.1         17.1
Medical Expenditure Reduction.....         33.5         33.5         33.5         23.0         23.0         23.0
                                   -----------------------------------------------------------------------------
    Total.........................        676.0      1,292.1      1,908.2        216.6        393.1        569.6
----------------------------------------------------------------------------------------------------------------
Note: Table entries are annualized over twenty years, but many of the benefits represented will not be realized
  until well beyond the twentieth year of the proposed rule's implementation.

    The total estimated costs of the final rule include $219.2 million
to $529.5 million in one-time costs and $6.2 million in annual costs.
Annualized over 20 years, the total costs range from $20.3 million to
$40.6 million with a 3 percent discount rate and from $25.1 million to
$52.5 million with a 7 percent discount rate, as shown in Table E2.
These costs will arise primarily due to the need to change cigarette
package labels and remove point-of-sale promotions that do not comply
with the new restrictions. FDA could not quantify every regulatory
cost. Some commercial sectors will experience costs for short-term
dislocations of current business activities, but the costs would be
mitigated for those businesses that anticipate the industry's
adjustments.
    In addition to the costs described above, the rule will lead to
private costs in the form of reduced revenues for many firms in the
affected sectors. These sector-specific revenue reductions are for the
most part distributional effects and cannot be counted as social costs.

                                          Table E2--Costs of Regulation
----------------------------------------------------------------------------------------------------------------
                                                              Annualized costs ($ mil)
                                   -----------------------------------------------------------------------------
     Requirements of the rule                     3 percent                              7 percent
                                   -----------------------------------------------------------------------------
                                        Low         Medium        High         Low         Medium        High
----------------------------------------------------------------------------------------------------------------
Private Sector
    Labeling Change...............         11.0         20.0         29.2         14.9         27.0         39.4
    Market Testing................          0.3          0.7          2.4          0.4          1.0          3.3
    Point-of-Sale Advertising.....          3.0          3.0          3.0          4.0          4.0          4.0
                                   -----------------------------------------------------------------------------
        Subtotal..................         14.3         23.7         34.6         19.3         32.0         46.7
                                   -----------------------------------------------------------------------------
Government                          ...........  ...........  ...........  ...........  ...........  ...........
    FDA...........................          6.0          6.0          6.0          5.8          5.8          5.8
                                   -----------------------------------------------------------------------------
        Subtotal..................          6.0          6.0          6.0          5.8          5.8          5.8
                                   -----------------------------------------------------------------------------
            Total.................         20.3         29.7         40.6         25.1         37.8         52.5
----------------------------------------------------------------------------------------------------------------

    As tobacco industry revenues decline, state and Federal tobacco tax
revenues will also fall. If excise tax rates on tobacco products remain
at current levels, annual state tax revenues would fall by
approximately $106.1 million and annual Federal tax revenues by $80.5
million.

B. Need for Rule

    According to the nation's health experts, tobacco use remains the
most important preventable cause of morbidity and premature mortality
in the United States, accounting each year for over 400,000 deaths
(Ref. 58; Ref. 1). Written with the goal of ameliorating the enormous
toll on the public health that is directly attributable to the
consumption of cigarettes, the Tobacco

Control Act mandates the publication of this proposed rule. Section 201
of the Tobacco Control Act modifies section 4 of FCLAA (15 U.S.C. 1333)
to require that nine new health warning statements, along with color
graphics depicting the negative health consequences of smoking, appear
on cigarette packages and in cigarette advertisements. In the following
analysis, we estimate the costs and benefits of this statutory
requirement.

C. Benefits

    We estimate the benefits of the proposed rule by comparing expected
life-cycle events of smokers with those of nonsmokers. Nonsmokers tend
to live longer and contract fewer lung and other diseases, so the
benefits in our analysis include the discounted value of life-years
gained, cases of emphysema avoided and medical services freed for other
uses. We also include an estimate of the monetary value of the property
and lives saved as a result of the rule-induced reduction in the number
of accidental fires caused by smoking.
1. Reduced Smoking Rates
    The changes outlined in this proposed rule are projected to
decrease smoking initiation and increase smoking cessation. For each of
the first twenty years of the proposed rule's implementation (2012-
2031),\6\ FDA calculates the predicted decrease in the number of U.S.
smokers by multiplying together the following:
---------------------------------------------------------------------------

    \6\ The effects of anti-smoking policies occur over a long
period of time, so we want to include at least one full generation
in our analysis. Using a twenty-year time horizon allows us to do
this while still avoiding the extreme uncertainty regarding effects
occurring in the more distant future.
---------------------------------------------------------------------------

    (a) The estimated effect (a percentage point change) of cigarette
warning labels on the national smoking rate, and
    (b) The population in a particular year in the absence of the
proposed regulation (as projected by the U.S. Census Bureau).
    To obtain estimates of the effect of cigarette warning labels on
smoking rates (item (a) in the list above), we look to the experience
of Canada, which has required the use of graphic warning labels since
December, 2000 (Ref. 59). The advantage of this approach lies in our
ability to observe actual consumer behavior--in the form of changes in
smoking rates--before and after a graphic warning label requirement
went into effect. The warning labels to be required in the proposed
rule are generally similar to those developed by Health Canada and
other international authorities. As in Canada, the labels required by
the proposed rule would occupy at least half the front and rear display
panels of a cigarette package. Moreover, under the proposed rule, there
would be a mix of warning statements and images that depict the
negative consequences of smoking. Although the proposed rule would
follow much the same approach as the Canadian warning label
requirements, it would differ in some ways: Canada has 16 labels in
rotation, rather than 9; warning statements appear in English on one
side of a package and in French on the other; and health and cessation
information is included on leaflets within Canadian cigarette packages
(Ref. 60). These details, combined with general differences in legal
and social trends, indicate that Canada's experience with warning
labels can give only a general idea of the changes in smoking rates to
be expected as a result of the proposed rule. In addition, other
smoking control initiatives, including an increase in the cigarette tax
and new restrictions on public smoking also occurred in both the United
States and Canada during the period of our analysis. These and other
confounding factors make our estimate of the effect of proposed warning
labels highly uncertain.
    Health Canada (Ref. 61) reports Canadian smoking rates for ages 15
and above for each year from 1999 through 2008. FDA obtained smoking
rates for adults, aged 18 and above, in the United States from the
National Health Interview Survey (Ref. 62). We used the results from
these two reports to calculate the U.S.-Canada smoking rate difference
for each year.
    Using data from Health Canada (Ref. 63), the National Institutes of
Health (Ref. 64) and the National Health Interview Survey (Ref. 62),
FDA finds that Canadian smoking rates followed a roughly linear
downward trend from 1985-2000, while U.S. smoking rates declined
logarithmically over the same time period; the predicted smoking rate
decrease was 0.67 percentage points per year in Canada and, as of the
year 2000, 0.24 percentage points per year in the United States. Using
the estimated trends, we predict smoking rates for the United States
and Canada, and the difference between them, for each year up to 2008.
We then subtract the predicted U.S.-Canada smoking rate differences
from the actual differences observed in the data. Implicit in this
method is the assumption that these otherwise unexplained differences
may be attributed solely to the presence in Canada of graphic warning
labels. We do not account for potential confounding variables; our
method is therefore a rudimentary approach to estimating the smoking
reduction that would be effected by the proposed warning labels and may
be producing results that are off by one or more orders of magnitude.
FDA requests comments on this issue.
    Using this rudimentary approach, FDA estimates that the average
unexplained difference between the United States and Canada in national
smoking rates is 0.212 percentage points higher for the 2001-2008
period than for 1999-2000. Applying this estimate to population
projections (Ref. 65) and summing over all age groups yields an
estimate that the rule would reduce (either through cessation or
avoided initiation) the United States' smoking population by
approximately 537,000 in 2013, with the total decrease rising to
approximately 619,000 in 2031 due to population growth.
2. Expected Life-Years Saved
    The largest health consequence of smoking is the increased rate of
mortality from cardiovascular disease, cancer, and certain other
illnesses. As a result, the largest benefits of this proposed rule stem
from the increased life expectancies for those individuals who, in the
absence of this proposed rule, would be smokers and thus susceptible to
premature mortality from one of these often-fatal diseases. We
calculate the number of life-years saved using differences in the
probabilities of survival for smokers and nonsmokers. Sloan et al.
(Ref. 66) construct life tables for various categories of individuals,
including ``non-smoking smokers'' and typical 24-year-old smokers. A
non-smoking smoker is someone who does not use cigarettes but otherwise
exhibits the lifestyle and personal characteristics \7\ of the average
smoker. A typical 24-year-old smoker does not necessarily smoke for his
or her entire life, but instead faces cessation probabilities that are
in line with values observed for all ages in the National Health
Interview Survey; the life expectancy effects of cessation at older
ages are netted out of life expectancy effects of avoiding smoking at
age 24 (results reported below). Sloan et al.'s life tables allow us to
calculate how many additional deaths, per 100,000 population, may be
expected among typical smokers than among non-smoking smokers between
the 24th and 25th birthdays, the 25th and 26th, and so on until the
100th birthday. (To simplify the calculation, FDA assumes

that differences in survival probabilities for smokers and nonsmokers
are negligible below age 24 and above age 100.) Overall, Sloan et al.
find that a typical 24-year-old female smoker can expect to live
another 55.5 years, while a comparable nonsmoker can expect another
57.8 years of life, producing an overall regulation-induced gain of 2.4
life-years per individual who is prevented from starting to smoke.
Comparing male 24-year-old typical and non-smoking smokers, life
expectancy increases from 49.8 to 54.2 years, producing a gain of 4.4
years. The gap between male and female life expectancy results may be
due to different physiological responses to equal amounts of smoking,
different lifetime cessation patterns or different smoking intensities.
Taylor et al. (Ref. 67), for instance, find that male smokers are more
likely than female smokers to consume more than a pack a day. Sloan et
al. do not report how much of the male-female difference in their
estimated life expectancy effects may be attributed to each possible
mechanism.
---------------------------------------------------------------------------

    \7\ In their multivariate regression analysis, Sloan et al.
control for alcohol intake, body mass index, financial planning
horizon, race, education and marital status.
---------------------------------------------------------------------------

    While FDA considers Sloan et al.'s methodology to be the most
suitable in the literature for purposes of the present analysis,
several other studies of survival probabilities among smokers who quit
early in life compared with smokers who persist in smoking into later
decades suggest that the average life expectancy gains of not smoking
may be much higher for both males and females. Since these other
studies have found larger increases in life expectancy attributable to
smoking avoidance, the Sloan et al. results may be considered
conservative.
    We assume that each person who reaches age 24 during the twenty
years (2012-2031) of our analysis and is dissuaded from smoking extends
his or her life by the gender-specific amount Sloan and co-authors
report. For older individuals, whose post-smoking cessation survival
probabilities cannot be plausibly assumed to equal those of individuals
who were nonsmokers at age 24, we predict life extensions using former
smoker life tables that we construct using Sloan et al.'s results and
cessation probabilities from the 1998 National Health Interview Survey
(Ref. 62).
3. Benefits of Reduced Premature Mortality
    OMB Circular A-4 (Ref. 68) advises that the best means of valuing
benefits of reduced fatalities is to measure the affected group's
willingness-to-pay to avoid fatal risks. Three life-year values (also
known as values of a statistical life-year, or VSLY) used frequently in
the literature and in previous analyses are $100,000, $200,000 and
$300,000 (Ref. 69; Ref. 70; 74 FR 33030, July 9, 2009), which we update
to $105,000, $210,000 and $315,000 in 2009 prices. These values
constitute our estimates of willingness-to-pay for a year of life
preserved in the present. The economic assessment of a future life-year
requires discounting its value to make it commensurate with the value
of present events. For this analysis, we use 3 percent and 7 percent
discount rates to calculate the present value of the life-years we
predict will be saved.
    For each dissuaded smoker, we multiply a VSLY by the relevant age-
and gender-specific life extension and then discount appropriately to
arrive at a per-person value of reduced mortality. For 24-year-olds,
this value ranges from $9,166 (for a female applying a VSLY of $105,000
and a 7 percent discount rate to her 2.4 life-years gained due to
smoking avoidance) to $358,864 (for a male applying a VSLY of $315,000
and a 3 percent discount rate to his 4.4 life-years gained due to
smoking avoidance). Multiplying the per-person values by the predicted
number of dissuaded smokers yields estimates of rule-induced mortality
benefits that range from $3.61 to $53.78 billion.
    This range tends to overstate the net benefits of reduced smoking
because it does not account for lost consumer surplus associated with
the activity of smoking. Cutler (Ref. 69) suggests that lost consumer
surplus might equal around fifty percent of the dollar value of life-
year gains, which necessitates dividing the estimated gross benefits in
half. This adjustment is based on a very simple linear model of
cigarette demand that is not definitive; a more data-intensive model
may produce an adjustment factor very different from fifty percent. FDA
requests comments, additional data and research on this adjustment. Net
benefits estimates, for all VSLY ($105,000, $210,000 and $315,000) and
both discount rates (3 percent and 7 percent) and produced using the
Cutler adjustment factor, appear in Table E3.
    These totals may understate the full value of rule-induced
reductions in mortality because they fail to quantify any reduction in
either the external effects attributable to passive smoking or the
infant and child fatalities caused by mothers' smoking during
pregnancy. Sloan et al. (Ref. 66) indicate that, historically, the
inclusion of spouse and infant deaths increased estimates of smoking's
mortality effects by approximately 26.3 percent. We do not incorporate
this adjustment into our analysis, however, since recent public smoking
restrictions and educational campaigns have reduced external smoking
exposure to well below historical levels, though not to zero.

                          Table E3--Present Value of Lifetime Reduced Smoker Mortality
----------------------------------------------------------------------------------------------------------------
 Value of a Statistical Life-Year =    Value of a Statistical Life-Year =    Value of a Statistical Life-Year =
              $105,000                              $210,000                              $315,000
----------------------------------------------------------------------------------------------------------------
 3% Discount rate   7% Discount rate   3% Discount rate   7% Discount rate   3% Discount rate   7% Discount rate
----------------------------------------------------------------------------------------------------------------
 $8,963,863,457     $1,804,953,192    $17,927,726,915     $3,609,906,384    $26,891,590,372     $5,414,859,576
----------------------------------------------------------------------------------------------------------------

4. Reduced Emphysema
    In the previous section, we estimated the benefits that will accrue
as a result of the rule-induced reduction in premature deaths from lung
cancer, cardiovascular disease and other smoking-related illnesses.
Cigarette smoking is also a major risk factor for diseases that are
less immediately fatal. As with premature death, individuals are
assumed to be willing to give up valuable resources in the present in
order to avoid the pain and distress associated with these non-fatal
illnesses.
    Emphysema, a form of COPD,\8\ is perhaps the most notable such
illness. Sloan et al. (Id.) estimate young smokers' lifetime illness
profiles and report that smoking has a larger effect on expected years
with emphysema than on expected years with cancer, coronary heart
disease or any of the

other conditions they study.\9\ In order to quantify the value of rule-
induced reductions in years spent experiencing emphysema, we scale our
estimates of the value of a statistical life-year ($105,000, $210,000
and $315,000, as discussed in section VIII.C.3) by a ratio representing
the tradeoff individuals are willing to make between perfect health and
the state of having emphysema. Sullivan and Ghushchyan (Ref. 71)
estimate this tradeoff with a regression of EQ-5D health index scores
on disease indicators. EQ-5D survey responses--to questions about five
areas of health, including mobility, pain, and ability to perform usual
activities--are mapped so that a score of one represents best-
measurable health, a score of zero represents death, and fractional
values represent intermediate levels of health. Sullivan and
Ghushchyan's regression analysis indicates that a year with emphysema
decreases, on average, a patient's welfare as much as the loss of
0.0667 years of perfect health. Multiplying this average welfare loss
by life-year values of $105,000, $210,000 and $315,000 yields estimates
of $7,000, $14,000 and $21,000 for the amounts individuals are willing
to pay to avoid a year of emphysema.
---------------------------------------------------------------------------

    \8\ Chronic obstructive bronchitis is a smoking-related illness
that is closely related to emphysema so that the two conditions are
now generally categorized together as chronic obstructive pulmonary
disease (COPD). Because the sources we use in this section only
report the health and welfare effects of emphysema, our resulting
benefits estimates include only a portion of the total social gains
associated with rule-induced COPD reductions.
    \9\ Due to the slow progressive nature of emphysema, patients
with emphysema experience a diminished quality of life for longer
periods than do patients with other smoking-related illnesses, which
more rapidly progress to death.
---------------------------------------------------------------------------

    Sloan et al. (Ref. 66) estimate that a 24-year-old smoker can
expect, on average, an extra 0.46 discounted years (using a discount
rate of 3 percent) or 0.22 discounted years (using a discount rate of 7
percent) of emphysema over his or her lifetime, as compared with an
otherwise equivalent nonsmoker. Sloan and co-authors do not report the
effect of smoking on emphysema years for members of other age cohorts,
so FDA takes the conservative approach of estimating benefits only for
those individuals who reach age 24 sometime during the first twenty
years of the proposed rule's implementation. (Smoking cessation brought
about by this rule will almost certainly reduce emphysema for some
individuals who are over age 24 at the time of the rule's
implementation. However, due to data constraints, we omit the benefits
to these older individuals; this is why we describe our estimate as
conservative.)
    Multiplying our predictions of per-smoker decreased discounted
disease-years by Sullivan and Ghushchyan's welfare loss per year of
emphysema and FDA's estimates of the rule-induced reduction in the
number of smokers (see section VIII.C.1 for a discussion of
methodology), discounting appropriately, and dividing in half (per Ref.
69) yields a rule-induced welfare gain of $64.9 to $606.2 million.
Results appear in Table E4. Smokers also suffer from other non-fatal
illnesses but we do not include those losses in this analysis. Since we
do not quantify reductions in smokers' non-fatal illnesses other than
emphysema, these estimates represent lower bounds on the value of rule-
induced morbidity reductions.

                       Table E4--Present Value of 24-Year-Olds' Lifetime Reduced Emphysema
----------------------------------------------------------------------------------------------------------------
 Value of a Statistical Life-Year =    Value of a Statistical Life-Year =    Value of a Statistical Life-Year =
              $105,000                              $210,000                              $315,000
----------------------------------------------------------------------------------------------------------------
 3% Discount rate   7% Discount rate   3% Discount rate   7% Discount rate   3% Discount rate   7% Discount rate
----------------------------------------------------------------------------------------------------------------
   $202,075,479        $64,886,926       $404,150,958       $129,773,852       $606,226,437       $194,660,778
----------------------------------------------------------------------------------------------------------------

5. Reduced Fire Costs
    Each year, fires started by lighted tobacco products kill and
injure people and destroy structures and other property. In the United
States in 2007, civilian deaths caused by smoking-related fires totaled
720, with direct property damage of $530 million (Ref. 72). A reduction
in the number of smokers, and the coinciding number of cigarettes
smoked, will reduce the number of future fires.
    The percentage reduction in fires may not equal the percentage
reduction in cigarette consumption, however, because since 2003 forty-
nine states have passed legislation that requires cigarettes to be
self-extinguishing or fire-safe (with the effectiveness dates of some
of these state laws extending into 2011). FDA acknowledges some
uncertainty in the effectiveness rate of fire-safe cigarettes; \10\ for
this analysis, we estimate that 50 percent of apparently rule-induced
future fire reductions would have been avoided even without the
proposed rule due to fire-safe cigarette design.
---------------------------------------------------------------------------

    \10\ One of the first states to enact these laws, New York,
requires cigarettes to self-extinguish 75% of the time (Ref. 73).
First-year (2004) data in New York show a reduction in smoking-
caused fires by about 33% from the average of the three previous
years of complete data (Ref. 74).
---------------------------------------------------------------------------

    Using a $7.9 million value of a statistical life (Ref. 75, which is
the 2006 value updated to 2009 dollars using Ref. 76), FDA projects
fire-cost savings of $393.1 million (at a three percent discount rate)
or $180.6 million (at a seven percent discount rate); of these totals,
9.7% consists of averted property damage and the rest of lives saved.
These estimated savings may significantly underestimate the potential
benefits because they exclude the value of reduction in fire-caused
non-fatal injuries.
6. Medical Services
    Sloan et al. (Ref. 66) estimate that smokers use more medical
services over their life cycles than do comparable nonsmokers, with a
specific net cost of $3,757 per female 24-year-old smoker and $2,617
per male 24-year-old smoker (in 2000 dollars and with a 3 percent
discount rate). If these payments are distributed equally from ages 24
to 100, given FDA's projected 20-year reductions in smoking prevalence,
smoking-related medical expenditures would fall by $1.87 billion, of
which $997.7 million would be realized as savings by smokers themselves
and $870.6 million by nonsmokers (in the form of decreases in private
insurance premiums or taxes used to fund government health programs
such as Medicare). With a 7 percent discount rate, the total decrease
in expenditure becomes $915.5 million, with $488.0 million of those
savings accruing to smokers and $427.5 million to nonsmokers.
    In the absence of the rule, some portion of smoking-related medical
expenditures accrues to health service providers as economic rent (also
known as producer surplus). Any reduction of this portion would not
contribute to the social benefit of the rule but would instead be a
transfer of value from producers to consumers and other payers. If,
however, the supply of smoking-related medical services is highly
elastic, especially in the long run, producer surplus would be small.
For this reason, FDA does not adjust for potential rent transfer. We
do, however, include only the decrease in medical expenditure by
smokers as a contribution to the rule's benefits.

Because nonsmokers' payments take the form of a subsidy for smoking-
related medical services, some portion of their expenditure in the
absence of the rule is greater than smokers' own willingness-to-pay for
medical services. Hence, the avoidance of this portion of the spending
would transfer value from smokers to nonsmokers but not contribute to
an overall social benefit of the rule. We do not know the size of this
portion relative to nonsmokers' overall rule-induced expenditure
change, so we take the conservative approach of excluding nonsmokers'
expenditures from our benefits calculation.
    As a final adjustment, we divide the remaining expenditure change
in half to account for smokers' lost consumer surplus associated with
the activity of smoking. This yields a rule-induced benefit of $498.9
million (at a 3 percent discount rate) or $244.0 million (at a 7
percent discount rate).
7. Summary of Benefits
    The discussion above demonstrates the considerable magnitude of the
economic benefits available from smoking reduction efforts. Estimates
are summarized in Table E5. FDA requests comments on the sources and
methods used to produce these results.

                                                       Table E5--Present Value of Benefits ($ Mil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  VSLY = $105,000                 VSLY = $210,000                 VSLY = $315,000
                                                         -----------------------------------------------------------------------------------------------
                                                           3%  Discount    7%  Discount    3%  Discount    7%  Discount    3%  Discount    7%  Discount
                                                               rate            rate            rate            rate            rate            rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Life-Years..............................................         8,963.9         1,805.0        17,927.7         3,609.9        26,891.6         5,414.9
Non-Fatal Emphysema.....................................           202.1            64.9           404.2           129.8           606.2           194.7
Fire Loss...............................................           393.1           180.6           393.1           180.6           393.1           180.6
Medical Expenditure Reduction...........................           498.9           244.0           498.9           244.0           498.9           244.0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................        10,057.9         2,294.5        19,223.8         4,164.3        28,389.8         6,034.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

8. Uncertainty Analysis
    Estimation of the effectiveness of the proposed rule (on reducing
the future U.S. smoking rate) is subject to a large uncertainty that is
not fully reflected in the benefits estimates appearing in the
preceding sections, which only reflect different estimates of the value
of a statistical life year. In this section, we show the uncertainty
associated with our estimate of the effectiveness of the proposed rule.
    Our primary estimate, that the U.S. smoking rate will decrease by
0.212 percentage points, was calculated in the following steps. First,
we found the decrease in Canadian smoking rates since 1999 over and
above what would have been expected using the pre-2001 trend. We then
subtracted the analogous unexplained decrease in the U.S. smoking rate
over the same period. This middle step was driven by the idea that the
U.S. experience could proxy for recent social or policy changes (such
as public smoking restrictions) that may have had effects on Canada's
smoking rate and thus needed to be subtracted in order to isolate the
effect of graphic warning labels. The last step was to calculate the
difference between U.S. and Canadian unexplained decreases in smoking
before and after graphic warning labels were introduced in Canada. We
attributed the remaining unexplained difference to graphic warning
labels.
    However, the U.S. social and policy climate may have been so
different from Canada's during the years 1999-2008 that this proxy is
inappropriate. To account for this possibility, we calculate the
unexplained difference in Canadian smoking rates before and after
graphic warning labels were introduced, this time omitting any U.S.
adjustments. (Anti-smoking policies and programs other than the graphic
warning labels are assumed to be incorporated in the pre-2001 trend,
with no additional effects of these variables occurring post-
introduction of graphic warning labels.) This approach indicates that
graphic warning labels may have been responsible for a 1.648 percentage
point decrease in the Canadian smoking rate. If the proposed rule were
to achieve this effectiveness level in the United States, benefits
would be approximately eight times larger than those reported earlier
in this analysis.
    On the other hand, because FDA has had access to very small data
sets, our effectiveness estimates are in general not statistically
distinguishable from zero; we therefore cannot reject the possibility
that the proposed rule would not change the U.S. smoking rate. In this
case, the proposed rule would not generate any quantifiable benefits,
so the appropriate lower bound on benefits is zero. Ranges of benefits,
representing the zero-effect case and the Canada-only modeling
approach, appear in Table E6. The wide ranges shown in the table
highlight the uncertainty inherent in our approach.

                                                 Table E6--Present Value of Benefits, Ranges ($ Billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  VSLY = $105,000                 VSLY = $210,000                 VSLY = $315,000
                                                         -----------------------------------------------------------------------------------------------
                                                           3%  Discount    7%  Discount    3%  Discount    7%  Discount    3%  Discount    7%  Discount
                                                               rate            rate            rate            rate            rate            rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Life-Years..............................................       [0, 69.7]       [0, 14.0]      [0, 139.3]       [0, 28.1]      [0, 209.0]       [0, 42.1]
Non-Fatal Emphysema.....................................        [0, 1.6]        [0, 0.5]        [0, 3.1]        [0, 1.0]        [0, 4.7]        [0, 1.5]
Fire Loss...............................................        [0, 3.1]        [0, 1.4]        [0, 3.1]        [0, 1.4]        [0, 3.1]        [0, 1.4]
Medical Expenditure Reduction...........................        [0, 3.9]        [0, 1.9]        [0, 3.9]        [0, 1.9]        [0, 3.9]        [0, 1.9]
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................       [0, 78.2]       [0, 17.8]      [0, 149.4]       [0, 32.4]      [0, 220.1]       [0, 46.9]
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Costs

    The proposed rule would create new burdens for cigarette
manufacturers. In particular, manufacturers would incur the large up-
front costs associated with a major labeling change.\11\ Cigarette
manufacturers and retailers would be responsible for the removal of
noncompliant point-of-sale advertising. Consumers are likely to
ultimately bear a share of these costs in the form of increased prices.
In addition, the tobacco industry and possibly other sectors will
experience lost sales and employment, but these revenue transfers will
be offset by gains to other sectors, as discussed in the
``Distributional Effects'' section of this document.
---------------------------------------------------------------------------

    \11\ All of the up-front costs of this rule are assumed to occur
at the beginning of the first period of the time horizon of this
rule (2011). The cost tables present raw undiscounted calculations
of these up-front costs. For summary tables requiring a present
value, these costs are discounted 1 year to the present (2010).
---------------------------------------------------------------------------

1. Number of Affected Entities
    Labeling and advertising requirements would affect domestic
cigarette manufacturers and importers of foreign-made cigarettes.
Statistics of U.S. Businesses' data show that there were 24 cigarette
manufacturing firms in the United States in 2007 (Ref. 77). An
undetermined number of importers would also be affected.
    Noncompliant point-of-sale advertising would be removed by
manufacturers (or importers) and retailers. We use detailed data from
the 2002 Economic Census report on product line sales for
establishments with payroll to estimate the percentage of various types
of retail establishments that sell tobacco products. Searching by the
Economic Census product line 20150 (cigars, cigarettes, tobacco, and
smokers' accessories), we find accommodation and food service
establishments (NAICS 72) and retail trade establishments (NAICS 44-45)
that report tobacco sales (Ref. 78, Ref. 79). Although some
establishments in other industries may have unreported sales of tobacco
products, the product line sales data provide a reasonable basis to
determine which types of establishments would be affected by the
proposed rule.

             Table E7--Establishments With Payroll That Sell Tobacco Products, 2002 Economic Census
----------------------------------------------------------------------------------------------------------------
                                                                                Percentage
                                                                     Number in    Number selling      selling
          Kind of business                      NAICS                  NAICS          tobacco         tobacco
                                                                                products        products
----------------------------------------------------------------------------------------------------------------
General merchandise................  452........................          40,723           6,991              17
Food & beverage....................  445 excluding 44512........         119,592          65,255              55
Convenience \a\....................  44512......................          29,212          24,871              85
Gasoline stations with convenience   44711......................          93,691          86,152              92
 \a\.
Gasoline stations..................  44719......................          27,755           8,745              32
Health & personal care.............  446........................          81,797          17,761              22
Other retail establishments........  \(a)\......................         595,558           3,470               1
Accommodation and food services....  72 excluding 7224..........         516,734          12,347               2
Drinking places....................  7224.......................          48,856          11,490              24
Tobacco stores.....................  453991.....................           6,184           6,184             100
Nonstore retailers.................  454........................          49,000             848               2
Vending machine operators..........  4542.......................           5,921             892              15
                                    ----------------------------------------------------------------------------
    Total..........................  ...........................       1,615,023         245,006              15
----------------------------------------------------------------------------------------------------------------
\a\ Includes NAICS 441, 443, 444, 448, 451, 453 excluding 453991.
Sources: Ref. 79; Ref. 78.

    Because the 2007 Census data on product line sales for retail
establishments with employees are not yet available, we update the
number of various types of retail establishments using 2007 Statistics
of U.S. Businesses data but assume the share of establishments selling
tobacco products is unchanged (since 2002) within each category.
Likewise, we lack 2007 Census data on product line sales for
nonemployer establishments. Without additional information, we assume
that, within a NAICS category, the share of establishments selling
tobacco products will be the same for nonemployer establishments in
2007 as for establishments with payroll in the 2002 Census. As shown in
Table E8, we estimate that about 249,000 retail establishments with
payroll and 126,000 nonemployer establishments sell tobacco products.

                                                   Table E8--Establishments That Sell Tobacco Products
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Establishments with payroll     Nonemployer establishments
                                                                            Percentage   ---------------------------------------------------------------
                                                                              selling                        Estimated                       Estimated
            Kind of business                          NAICS                   tobacco                     number selling                  number selling
                                                                           products \a\     Number \b\        tobacco       Number \c\        tobacco
                                                                                products                        products
--------------------------------------------------------------------------------------------------------------------------------------------------------
General merchandise stores.............  452............................              17          47,456           8,147          32,978           5,661
Food & beverage stores.................  445 excluding 44512............              55         122,858          67,037         104,026          56,761
Convenience stores.....................  44512..........................              85          28,173          23,986           (\e\)
Gasoline stations with convenience       44711..........................              92          95,389          87,713           (\e\)
 stores.

Gasoline stations......................  44719..........................              32          20,144           6,347           9,454           2,979
Health and personal care stores........  446............................              22          89,406          19,413         138,800          30,138
Other retail stores....................  (\d\)..........................               1         600,537           3,499         735,266           4,284
Accommodation and food services........  72 excluding 7224..............               2         585,541          13,991         281,104           6,717
Drinking places........................  7224...........................              24          46,948          11,041          27,170           6,390
Tobacco stores.........................  453991.........................             100           6,458           6,458           (\e\)
Nonstore retailers.....................  454 excluding 4542.............               2          42,565             737         782,759          13,547
Vending machine operators..............  4542...........................              15           5,158             777          27,595           4,157
                                        ----------------------------------------------------------------------------------------------------------------
    Total..............................  ...............................              15       1,690,633         249,147       2,139,152         126,477
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Percentage of establishments with payroll from Table E7.
\b\ Ref. 77.
\c\ Ref. 80.
\d\ Includes NAICS 441, 443, 444, 448, 451, 453 excluding 453991.
\e\ Data on nonemployer establishments unavailable for this NAICS category.

2. Costs of Changing Cigarette Labels
    In order to estimate the cost of changing cigarette labels to
comply with the proposed rule, FDA used three sources. The
``Methodology Report'' for the forthcoming ``Model to Estimate Costs of
Using Labeling as a Risk-Reduction Strategy for Consumer Products
Regulated by the Food and Drug Administration'' provided the basic
framework (Ref. 81). The Methodology Report contains few numerical
values, but we obtained preliminary estimates of several cost
components and updated product counts through personal communication
with our contractor, RTI International (Ref. 82). Because the
forthcoming model is not yet complete, we filled in missing pieces
using the RTI Final Report entitled ``FDA Labeling Cost Model,'' which
describes an earlier model developed by RTI for FDA to estimate the
cost of food label changes (Ref. 83). We were able to combine the
models because the older food labeling model serves as the basis for
the forthcoming general labeling model.
    The front and back of every cigarette package must be redesigned to
incorporate graphic warnings occupying the entire top half. This type
of change requires what is known as a complete redesign in the 2003
model or as a major change in the forthcoming model. In addition, the
requirement to incorporate 9 different warnings will increase costs
beyond what the labeling models estimate. FDA accounted for the
additional warnings by first calculating the cost of a complete
redesign for cigarettes and then inflating the specific cost components
expected to increase due to the requirement for 9 warnings.
    The RTI labeling models incorporate three potential cost components
of a labeling change: label design costs (incurred on a per-UPC basis),
testing costs (incurred on a per-formulation basis), and inventory
costs (incurred on a per-unit basis). For this analysis, we restrict
the calculation of market testing costs to the largest firms and
perform certain other modifications to make the estimated cost match
the likely effects of the proposed rule. The large cigarette
manufacturers can plausibly be expected to conduct quantitative studies
and focus group testing for each of their brands to gauge the effect of
the new graphic warnings and to study how they might best be able to
mitigate their effects. By contrast, small manufacturers with lower
sales revenues are highly unlikely to conduct expensive market testing
in response to the new requirements.
    We estimate that 3,234 cigarette UPCs (Ref. 82), would be affected
by this proposed rule. FDA conservatively assumes that because the
required change is so radical, none of the labeling changes can be
coordinated with a previously-scheduled labeling change.
    Based on communication with RTI about the forthcoming model (Id.),
FDA estimates that, per UPC, administrative labor costs are $375 to
$1,014, graphic design labor costs are $1,120 to $3,206, prepress labor
costs are $1,482 to $3,816, recordkeeping labor costs are $33 to $434,
prepress materials costs are $100 to $2,439, and printing plate costs
are $4,840 to $10,580.\12\ Summing these costs yields a per-UPC design
cost of $7,950 to $21,489. Multiplying by the number of affected UPCs
and inflating by 10 percent to account for rush charges associated with
a compliance period shorter than 24 months results in total label
design costs of $28 million to $76 million (Ref. 83).
---------------------------------------------------------------------------

    \12\ Rotogravure, the most expensive printing method, is used
for cigarette labeling.
---------------------------------------------------------------------------

    Manufacturers incur inventory costs if they discard unused
inventory at the end of the compliance period. Because cigarette
manufacturers do not keep large inventories of labels, FDA assumes that
all inventory will be exhausted during the 15-month compliance period,
leaving no inventory cost. Table E9 summarizes the total costs of a
standard label redesign for cigarettes.

                                Table E9--Cost of a Label Redesign for Cigarettes
----------------------------------------------------------------------------------------------------------------
                                                                        Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Label Design Cost \a\
Number of UPCs..................................................           3,234           3,234           3,234
    Administrative labor cost ($)...............................             375             695           1,014
    Graphic design labor cost ($)...............................           1,120           2,163           3,206
    Prepress labor cost ($).....................................           1,482           2,649           3,816
    Recordkeeping labor cost ($)................................              33             234             434
    Prepress materials ($)......................................             100           1,225           2,439
    Printing plate cost ($).....................................           4,840           7,710          10,580
Cost per product UPC ($)........................................           7,950          14,676          21,489
Total label design cost, 24-month compliance ($)................      25,710,300      47,462,184      69,495,426
Total label design cost, < 24-month compliance ($)..............      28,281,330      52,208,402      76,444,969
Total Cost ($)..................................................      28,281,330      52,208,402      76,444,969
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

    Administrative costs, recordkeeping costs, and labor costs
associated with graphic design and prepress activities would probably
be unaffected by the requirement to use 9 different picture-warning
pairs. By contrast, we expect printing plate costs and prepress
materials costs to be 9 times as large as previously calculated because
of the requirement for 9 warnings. Table E10 shows the total costs of
the cigarette labeling change, adjusted for the 9 warnings. The
labeling cost increases to $169 million to $447 million.

                          Table E10--Cost of a Label Redesign With Nine Warning Labels
----------------------------------------------------------------------------------------------------------------
                                                                        Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Label Design Cost \a\
Number of UPCs..................................................           3,234           3,234           3,234
    Administrative labor cost ($)...............................             375             695           1,014
    Graphic design labor cost ($)...............................           1,120           2,163           3,206
    Prepress labor cost ($).....................................           1,482           2,649           3,816
    Recordkeeping labor cost ($)................................              33             234             434
    Prepress materials ($)......................................             900          11,025          21,951
    Printing plate cost ($).....................................          43,560          69,390          95,220
Cost per UPC ($)................................................          47,470          86,156         125,641
Total label design cost, 24-month compliance ($)................     153,517,980     278,628,504     406,322,994
Total label design cost, < 24-month compliance ($)..............     168,869,778     306,491,354     446,955,293
Total Cost ($)..................................................     168,869,778     306,491,354     446,955,293
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

3. Market Testing Costs Associated With Changing Cigarette Package
Labels
    As stated above, FDA expects that only the large manufacturers will
conduct market tests for their brands. Using several state directories
of certified tobacco products, FDA estimates that 75 brands are
marketed by the 4 largest domestic manufacturers (Refs. 84-89). The
cost of focus group tests is estimated to range from $18 to $42
thousand; the cost of a quantitative study is estimated to range from
$47 to $453 thousand (Ref. 82). The total cost of both types of market
testing is estimated to be $65 to $495 thousand per brand. Multiplying
by 75 brands yields a total cost estimate ranging from $5 to $37
million with a medium estimate of $11 million, as shown in Table E11.
We assume that the requirement to use 9 different warning-text pairs
does not affect these costs.

                                        Table E11--Cost of Market Testing
----------------------------------------------------------------------------------------------------------------
                                                                        Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Market Testing Cost \a\
Number of brands to be tested...................................              75              75              75
    Cost of focus group testing ($).............................          18,000          30,000          42,000
    Cost of quantitative studies ($)............................          47,000         114,000         453,000
Market testing cost per brand ($)...............................          65,000         144,000         495,000
Total Market Testing Cost ($)...................................       4,875,000      10,800,000      37,125,000
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

4. Advertising Restrictions: Removal of Noncompliant Point-of-Sale
Advertising
    The principal effect of the restrictions on advertising in the
proposed rule stem from the requirement that retailers and
manufacturers of cigarettes remove any point-of-sale advertising for
cigarettes that fails to conform to the requirements. In this analysis,
we estimate the social resource costs for the removal. In the analysis
of FDA's 1996 final tobacco rule, we based much of our estimate of the
cost of removing noncompliant point-of-sale advertising on a report
from the Barents Group that

used average removal costs for seven types of retail establishments,
calculated using in-store surveys conducted by A.T. Kearney, Inc (61 FR
44580). We use the same baseline and retain our assumptions from 1996
about the level of effort required. We acknowledge, however, that this
approach may overstate or understate the costs for a particular action
or type of business.
    Table E12 regroups the information from Table E8 according to the
categories studied by AT Kearney. Because our analysis considers only
the removal of point-of-sale advertising from physical retail
locations, we do not include non-store establishments. Table E13 shows
that in current dollars one-time per-establishment costs range from
about $12 for ``other establishments'' to about $198 for convenience
stores. To estimate the total costs to comply with the restriction on
point-of-sale advertising, we apply the updated per-establishment costs
from Table E13 to affected establishments. As shown in Table E14, the
one-time costs to remove point-of-sale materials would total $45.4
million.

     Table E12--Estimated Number of Establishments Selling Cigarette Products Affected by the Proposed Rule
----------------------------------------------------------------------------------------------------------------
                                                                  Establishments    Nonemployer
                        Kind of business                           with payroll   establishments       Total
                                                                        \a\             \a\
----------------------------------------------------------------------------------------------------------------
AT Kearney Category
    General Merchandise.........................................           8,147           5,661          13,808
    Supermarket & Grocery.......................................          67,037          56,761         123,799
    Convenience Stores..........................................          23,986  ..............          23,986
    Convenience Stores with Gas.................................          87,713  ..............          87,713
    Service Stations............................................           6,347           2,979           9,326
    Drug Stores.................................................          19,413          30,138          49,552
    Specialty Tobacco Stores....................................           6,458  ..............           6,458
    Other establishments \b\....................................          28,531          17,391          45,922
                                                                 -----------------------------------------------
        Total...................................................         247,633         112,931         360,564
----------------------------------------------------------------------------------------------------------------
\a\ Source: Table E8.
\b\ Includes miscellaneous retail establishments and accommodations and food services establishments (including
  drinking places), but excludes nonstore retailers.

     Table E13--Estimated Average Per-Establishment Costs To Remove
                         Prohibited Materials a
------------------------------------------------------------------------
                                      Remove promotional materials ($)
   AT Kearney business category    -------------------------------------
                                       1996 dollars     Current dollars
------------------------------------------------------------------------
General Merchandise...............              23.42              30.94
Supermarket & Grocery.............             125.14             165.30
Convenience Stores................             150.02             198.16
Convenience Stores with Gas.......             146.43             193.42
Service Stations..................              36.09              47.67
Drug Stores.......................              11.72              15.48
Specialty Tobacco Stores..........             123.21             162.75
Other establishments \b\..........               9.37              12.38
------------------------------------------------------------------------
\a\ Sources: 61 FR 44585, Table 8; 1996 to 2009 (most recent) GDP
  deflator rose 32.1% (Ref. 76).
\b\ Excludes adult-only establishments, nonstore retailers and vending
  machine operators.

       Table E14--Estimated One-Time Costs To Remove Point-of-Sale Materials From Affected Establishments
----------------------------------------------------------------------------------------------------------------
                                                                                Total one-time
                      A.T. Kearney category                          Number of     Average cost    costs \b\ ($
                                                                  establishments        ($)          million)
----------------------------------------------------------------------------------------------------------------
General Merchandise.............................................          13,808           30.94             0.4
Supermarket & Grocery...........................................         123,799          165.30            20.5
Convenience Stores..............................................          23,986          198.16             4.8
Convenience Stores with Gas.....................................          87,713          193.42            17.0
Service Stations................................................           9,326           47.67             0.4
Drug Stores.....................................................          49,552           15.48             0.8
Specialty Tobacco Stores........................................           6,458          162.75             1.1
Other establishments \a\........................................          45,922           12.38             0.6
                                                                 -----------------------------------------------
    Total.......................................................         360,564  ..............            45.4
----------------------------------------------------------------------------------------------------------------
\a\ Excludes adult-only establishments and non-store retailers.
\b\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

    Sources: Tables E12 and E13.
5. Government Administration and Enforcement Costs
    FDA's estimated internal costs for administering and enforcing this
regulation are uncertain. As a best estimate, however, FDA projects
that 25 full-time equivalent employees (FTEs) would be needed to
implement the proposed rule. Fully loaded employee costs vary with the
type of employee (e.g. field inspectors versus administrative), but an
average of $247,049 per FTE places the dollar cost at approximately
$6.2 million per year.
6. Summary of Costs
    Table E15 summarizes the cost estimates from the preceding sections
and Table E16 displays the present value and annualized value of costs.

                                           Table E15--Summary of Costs
----------------------------------------------------------------------------------------------------------------
                                                                                One-Time ($m) \b\
            Requirements of the rule                Annual ($m)  -----------------------------------------------
                                                        \a\             Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Private Sector
    Labeling Change.............................  ..............           168.9           306.5           447.0
    Market Testing..............................  ..............             4.9            10.8            37.1
    Point-of-Sale Advertising...................  ..............            45.4            45.4            45.4
                                                 ---------------------------------------------------------------
        Subtotal................................  ..............           219.2           362.7           529.5
                                                 ---------------------------------------------------------------
Government
    FDA.........................................             6.2  ..............  ..............  ..............
                                                 ---------------------------------------------------------------
        Subtotal................................             6.2  ..............  ..............  ..............
                                                 ---------------------------------------------------------------
        Total...................................             6.2           219.2           362.7           529.5
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted annual costs assumed to be incurred at the end of each period for a total of 20 years.
\b\ Undiscounted one-time costs assumed to be incurred at the start of the first period of the time horizon of
  this rule.

                                                Table E16--Present Value and Annualized Value of Costs a
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Present value ($ mil)                         Annualized costs ($ mil)
                                                         -----------------------------------------------------------------------------------------------
                Requirements of the rule                         3 percent               7 percent               3 percent               7 percent
                                                         -----------------------------------------------------------------------------------------------
                                                            Low    Med.    High     Low    Med.    High     Low    Med.    High     Low    Med.    High
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Sector
    Labeling Change.....................................   164.0   297.6   433.9   157.8   286.4   417.7    11.0    20.0    29.2    14.9    27.0    39.4
    Market Testing......................................     4.7    10.5    36.0     4.6    10.1    34.7     0.3     0.7     2.4     0.4     1.0     3.3
    Point-of-Sale Advertising...........................    44.1    44.1    44.1    42.5    42.5    42.5     3.0     3.0     3.0     4.0     4.0     4.0
                                                         -----------------------------------------------------------------------------------------------
        Subtotal........................................   212.8   352.2   514.1   204.8   339.0   494.9    14.3    23.7    34.6    19.3    32.0    46.7
                                                         -----------------------------------------------------------------------------------------------
Government
    FDA.................................................    89.2    89.2    89.2    61.2    61.2    61.2     6.0     6.0     6.0     5.8     5.8     5.8
                                                         -----------------------------------------------------------------------------------------------
        Subtotal........................................    89.2    89.2    89.2    61.2    61.2    61.2     6.0     6.0     6.0     5.8     5.8     5.8
                                                         -----------------------------------------------------------------------------------------------
            Total.......................................   302.0   441.4   603.3   266.0   400.2   556.0    20.3    29.7    40.6    25.1    37.8    52.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The present value of upfront costs differs from previous tables because here these costs have been discounted 1 year back to 2010. Similarly, annual
  costs have been discounted back to 2010 before being annualized, resulting in a slight difference between annual and annualized costs.

E. Cost-Effectiveness Analysis

    We measure the effectiveness of the proposed rule as the sum of
saved life-years and quality-adjusted life years. In order to assess
the cost-effectiveness of the proposed rule, we must adjust the costs
to account for effects that are not captured by life-years or quality-
adjusted life years. As shown in detail in the previous section, we
calculated the first twenty years' costs attributable to the proposed
rule and found present values of $266.0 to $556.0 million (using a 7
percent discount rate) or $302.0 to $603.3 million (using a 3 percent
discount rate). We add to each total the estimated monetary value of
lost consumer surplus (previously netted out of life-years and
emphysema benefits estimates); this yields overall costs of $2.14 to
$6.17 billion (using a 7 percent discount rate) or $9.47 to $28.10
billion (using a 3 percent discount rate). In order to focus on the
costs associated with extensions of quality-adjusted life (see Ref. 68
at pp. 11-12), we then subtract both medical cost reductions and the
value of property savings due to reductions in accidental fires and
arrive at a net cost of $1.88 to $5.91 billion (using a 7 percent
discount rate) or $8.93 to $27.57 billion (using a 3 percent discount
rate).
    Discounting over the same twenty-year time period, we calculate
that this proposed rule would lead to 476,000 to 549,000 discounted
smoking preventions or cessations. Similarly, we find that 34,627 to
171,660 discounted quality-adjusted life-years would be saved (this
includes both fractional life-years associated with reduced emphysema
and full life-years associated with reduced premature

mortality).\13\ This yields a cost per smoking prevention of $3,940 to
$50,204, and a cost per life-year saved of $52,047 to $170,552.
---------------------------------------------------------------------------

    \13\ This total reflects reduced premature mortality for smokers
themselves and for others caught in the path of cigarette-related
fires. The National Fire Protection Association (Ref. 90) reports
the percentages of fire fatalities by age category; along with the
CDC's estimate of average American life expectancy (Ref. 91), these
data allow FDA to calculate that the expected number of life-years
lost by fire victims is 37.3.

                                          Table E17--Cost-Effectiveness
----------------------------------------------------------------------------------------------------------------
                                                  3 Percent                              7 Percent
             Cost ($)              -----------------------------------------------------------------------------
                                        Low         Medium        High         Low         Medium        High
----------------------------------------------------------------------------------------------------------------
Per Smoking Prevention............       16,271       33,217       50,204        3,940        8,149       12,403
Per Life-Year Saved...............       52,047      106,255      160,594       54,176      112,050      170,552
----------------------------------------------------------------------------------------------------------------

F. Distributional Effects

    This proposed rule would bring about a variety of distributional
effects not yet discussed in detail. Sectors affiliated with tobacco
and tobacco products would lose sales revenues. Simultaneously, non-
tobacco-related industries would gain sales, because dollars not spent
for tobacco products would be spent on other commodities.
1. Tobacco Manufacturers, Distributors, and Growers
    FDA estimates that implementation of the proposed regulation may
reduce the annual cigarette consumption of U.S. smokers by 80 million
packs. Meanwhile, the FTC (Ref. 39) reports that, in 2006, 1.75 billion
cigarette packs were manufactured and distributed to consumers. These
numbers imply that tobacco manufacturer revenues would be 0.68 percent
lower in the rule's first year, and 0.79 percent lower in 2031, than
they were in 2006. The U.S. Census Bureau (Ref. 92) reports that
tobacco manufacturers' revenues totaled $41.6 billion in 2006; hence,
the rule-induced decrease in annual tobacco sales would range from
approximately $284 to $328 million. These estimates would rise somewhat
higher if we were accounting for the decrease in price that accompanies
the decrease in demand for a good (in this case, cigarettes).
Experimental evidence from Mexico (Ref. 93) indicates that graphic
warning labels may decrease smokers' willingness-to-pay for cigarettes
by 17 percent; however, without supply elasticity data, we cannot
determine how much this decline in willingness-to-pay would change
cigarettes' market price.
    We estimate that the tobacco manufacturing, warehousing and
wholesale trade sectors employ about 74,000 full-time workers (Ref.
77). Under the assumption of constant production-to-employment ratio,
we project that a 0.68-0.79 percent reduction in sales would result in
the displacement of 500-600 jobs among manufacturers, warehouses, and
wholesalers.
    Effects of the rule would also be observed in the agricultural
sector. According to USDA's 2007 Census of Agriculture (Ref. 94), there
are 16,234 tobacco farms. Upon implementation of the proposed rule,
these farms may shift some of their acreage from growing tobacco to
producing other agricultural products.
2. National and Regional Employment Patterns
    Several studies estimate the contribution of tobacco to the U.S.
economy or, alternatively, the losses to the U.S. economy that would
follow a decline in tobacco-related consumption. Economists have shown
both theoretically and empirically that, for the nation as a whole,
employment gains from spending on other products would offset any
employment losses from reduced spending on tobacco products (Ref. 95).
The major tobacco-growing states, however, would experience some
adverse economic effects. An economic simulation of the regional
impacts of spending on tobacco products carried out in 1994 found that
after 8 years, a 2 percent per year fall in tobacco consumption (which
substantially exceeds the FDA forecast for this regulation) would cause
the loss of 36,600 jobs for the Southeast Tobacco region of the United
States (0.2 percent of regional employment), whereas the nontobacco
regions of the United States would gain 56,300 jobs (Ref. 96). That
study, if carried out today, would find a much smaller net effect
because total employment in tobacco-related industries has fallen.
Overall, FDA finds that the income and employment impacts associated
with reduced tobacco consumption would be quite small.
3. Retail Sector
    As would tobacco growers, distributors and manufacturers, tobacco
retailers would be affected by any decrease in cigarette sales.
Retailers would, however, be in a position to shift shelf space and
promotional activities to non-tobacco products, in order to take
advantage of the increase in demand for other products that would be
expected to accompany the decrease in spending on cigarettes.
4. Advertising Industry
    The overall impact of the proposed rule on the advertising industry
is uncertain. Advertiser revenue may decrease because advertisements
with graphic warning labels are less desirable from a cigarette
seller's standpoint and thus tobacco manufacturers would choose to
conduct less advertising. On the other hand, advertising industry
revenue may increase due to cigarette sellers' need to re-design ads to
accommodate new warning labels and to devise new promotional
strategies. In either case, few net social costs or benefits would be
generated. Moreover, the effect on advertising would likely be
relatively small since spending on cigarette advertising has been
declining substantially in recent decades. By 2006, expenditures on
magazine advertising had fallen to about $50 million and outdoor
advertising to under $1 million. Most of the remaining affected
advertising expenditures were point-of sale promotions, which totaled
$240 million (Ref. 39).
5. Excise Tax Revenues
    In 2009, Federal tobacco tax revenues totaled $16.3 billion, while
state and local tax revenues totaled $16.5 billion (Ref. 97). The
proposed rule would decrease government tobacco tax revenues as fewer
Americans consume cigarettes.
    FDA estimates this change in excise tax revenues by multiplying
together the percentage change in smoking, whose calculation was
described in section C1, the projected population in a given year (Ref.
65), age-appropriate discounted lifetime cigarette consumption (in

packs) per smoker, and current Federal and average state tax rates
(Ref. 98; Ref. 99). FDA calculates average consumption for 15-year-
olds, 16- to 17-year-olds, and 18- to 23-year-olds using the May 2006,
August 2006, and January 2007 Tobacco Use Supplements to the Current
Population Survey (Ref. 100). Sloan et al. (Ref. 66) report lifetime
discounted consumption for typical 24-year-old smokers.
    FDA estimates that annual rule-induced decreases in excise tax
collections would be approximately $106 million for state governments
and $80.5 million for the Federal government. Assuming that excise
taxes rise, on average, at the rate of inflation allows us to sum these
values over the time horizon of our analysis, yielding an overall
revenue loss to state governments of $1.35 to $2.93 billion and to the
Federal government of $1.03 to $2.23 billion. Given inelastic cigarette
demand (Ref. 95), some state governments could raise tobacco product
excise rates to offset these revenue losses.

G. International Effects

    Of the $87.9 billion worth of tobacco products consumed in the
United States in 2009 (Ref. 101), only $156 million consisted of
imported cigarettes, with another $897 million imported as tobacco in a
less-processed state (Ref. 102; Ref. 103). As in the United States,
foreign manufacturers, distributors, and growers of tobacco and tobacco
products would lose revenue as a result of the proposed rule, though
their loss would be a small fraction of the overall revenue loss. As
consumers who would have been smokers purchase other products, there
would be a shift in patterns of international trade. If the preferred
substitute products are American-made, there would be a (very small)
decrease in overall imports into the United States; otherwise, there
would be a small increase in imports from the source countries of the
newly-demanded goods and services and a corresponding decrease in
imports from tobacco-producing countries.
    The proposed rule does not apply to cigarettes manufactured for
export, whose value totaled $417 million in 2009 (Ref. 102).

H. Regulatory Alternatives

    We compare the proposed rule to two hypothetical alternatives: An
otherwise identical rule with a 24-month compliance period and an
otherwise identical rule with a 6-month compliance period. Even though
we estimate costs and benefits for these alternatives, they do not
provide viable regulatory options, as they are inconsistent with FDA's
statutory mandate.
1. 24-Month Compliance Period
    The cost of the labeling changes for this proposed rule depends far
less than most labeling rules on the compliance period. The main effect
of a longer compliance period would be to eliminate the 10 percent
premium for overtime and rush charges added to the per-UPC label design
activities for compliance periods shorter than 24 months (Ref. 83). All
other costs are the same as in the 15-month analysis.
    Table E18 shows that extending the compliance period to 24 months
would reduce the up-front labeling change cost by $15 to $41 million,
to a total of $154 to $406 million.

      Table E18--Cost of a Cigarette Label Redesign With Nine Warnings With a 24-Month Compliance Period a
----------------------------------------------------------------------------------------------------------------
                                                                        Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Label Design Cost
Number of UPCs..................................................           3,234           3,234           3,234
    Administrative labor cost ($)...............................             375             695           1,014
    Graphic design labor cost ($)...............................           1,120           2,163           3,206
    Prepress labor cost ($).....................................           1,482           2,649           3,816
    Recordkeeping labor cost ($)................................              33             234             434
    Prepress materials ($)......................................             900          11,025          21,951
    Printing plate cost ($).....................................          43,560          69,390          95,220
Cost per product UPC ($)........................................          47,470          86,156         125,641
    Total label design cost, 24-month compliance ($)............     153,517,980     278,628,504     406,322,994
    Total Cost ($)..............................................     153,517,980     278,628,504     406,322,994
                                                                 -----------------------------------------------
Change from 15-month Compliance Period..........................     -15,351,798     -27,862,850     -40,632,299
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

    Extending the compliance period to 24 months would delay the
accrual of health and fire reduction benefits by nine months. An
approximation of the effect of this delay may be found by discounting,
at three and seven percent discount rates, the previously-calculated
total benefits. As shown in Table E19, FDA finds that a 24-month
compliance period would decrease benefits by between $113.5 and $622.5
million.

                                      Table E19--Present Value of Benefits With 24-Month Compliance Period ($ Mil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  VSLY = $105,000                 VSLY = $210,000                 VSLY = $315,000
                                                         -----------------------------------------------------------------------------------------------
                                                           3%  Discount    7%  Discount    3%  Discount    7%  Discount    3%  Discount    7%  Discount
                                                               rate            rate            rate            rate            rate            rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Life-Years..............................................         8,767.3         1,715.6        17,534.7         3,431.3        26,302.0         5,146.9
Non-Fatal Emphysema.....................................           197.6            61.7           395.3           123.4           592.9           185.0
Fire Loss...............................................           384.5           171.7           384.5           171.7           384.5           171.7
Medical Expenditure Reduction...........................           487.9           231.9           487.9           231.9           487.9           231.9
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................         9,837.4         2,180.9        18,802.4         3,958.3        27,767.3         5,735.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

Change from 15-Month Compliance Period..................          -220.5          -113.5          -421.5          -206.0          -622.5          -298.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Six-Month Compliance Period
    In the 2003 labeling-cost model, overtime and rush charges equal 10
percent of the per-UPC label design costs with a 6-month compliance
period. The model further assumes that 12 months is the shortest
compliance period that can be met without resorting to covering up the
old labels with stickers as a temporary solution. Therefore, the cost
of discarded inventory is the same as under a 12-month compliance
period, but there is an additional cost for applying appropriate
stickers to cover the old package label design for a period of 6
months.
    FDA assumes that no additional inventory will remain unused after 6
months of applying stickers. The number of units sold annually is about
10.7 billion.\14\ Therefore, 5.3 billion units would be relabeled with
stickers. We estimate the per-unit cost for the sticker and application
cost to be between $0.017 and $0.045 (Ref. 83). Reducing the compliance
period to 6 months would then increase compliance costs by $91 to $239
million to a total of $259 to $686 million. The use of 9 graphic-text
combinations is not expected to materially affect this cost.
---------------------------------------------------------------------------

    \14\ The AC Nielsen data for total equivalent units show sales
totaling 38,632 million sticks in 2008 (Ref. 104), whereas The
Maxwell Report states that industry volume was 345,300 million
sticks in 2008 (Ref. 105). Thus the Nielsen data capture 38,632/
345,300 = 11.2 percent of cigarettes sold. Nielsen data show total
sales units of 1.195 billion in 2008. Dividing by 0.112 yields an
estimate of 10.7 billion sales units per year.

      Table E20--Cost of a Cigarette Label Redesign With Nine Warnings With a Six-Month Compliance Period a
----------------------------------------------------------------------------------------------------------------
                                                                        Low           Medium           High
----------------------------------------------------------------------------------------------------------------
Label Design Cost
Number of UPCs..................................................           3,234           3,234           3,234
    Administrative labor cost ($)...............................             375             695           1,014
    Graphic design labor cost ($)...............................           1,120           2,163           3,206
    Prepress labor cost ($).....................................           1,482           2,649           3,816
    Recordkeeping labor cost ($)................................              33             234             434
    Prepress materials ($)......................................             900          11,025          21,951
    1Printing plate cost ($)....................................          43,560          69,390          95,220
Cost per product UPC ($)........................................          47,470          86,156         125,641
Total label design cost, 24-month compliance ($)................     153,517,980     278,628,504     406,322,994
Total label design cost, < 24-month compliance ($)..............     168,869,778     306,491,354     446,955,293
Sticker Costs
    Stick and application costs per unit ($)....................           0.017           0.031           0.045
    Number of units sold in 6 months............................   5,338,051,475   5,338,051,475   5,338,051,475
    Total sticker cost ($)......................................      90,501,325     168,073,889     239,182,072
Total Cost ($)..................................................     259,371,103     474,565,243     686,137,366
                                                                 -----------------------------------------------
Change from 15-month Compliance Period..........................      90,501,325     168,073,889     239,182,072
----------------------------------------------------------------------------------------------------------------
\a\ Undiscounted costs assumed to be incurred at the start of the first period of the time horizon of this rule.

    Reducing the compliance period to six months would hasten the
accrual of health and fire reduction benefits by nine months. An
approximation of the effect of this change in timing may be found by
compounding, at three and seven percent discount rates, the previously-
calculated total benefits. As shown in Table E21, FDA finds that a six-
month compliance period would increase benefits by between $119.4 and
$636.4 million.

                                      Table E21--Present Value of Benefits With Six-Month Compliance Period ($ Mil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  VSLY = $105,000                 VSLY = $210,000                 VSLY = $315,000
                                                         -----------------------------------------------------------------------------------------------
                                                           3%  Discount    7%  Discount    3%  Discount    7%  Discount    3%  Discount    7%  Discount
                                                               rate            rate            rate            rate            rate            rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Life-Years..............................................         9,164.8         1,898.9        18,329.6         3,797.8        27,494.4         5,696.7
Non-Fatal Emphysema.....................................           206.6            68.3           413.2           136.5           619.8           204.8
Fire Loss...............................................           401.9           190.0           401.9           190.0           401.9           190.0
Medical Expenditure Reduction...........................           510.0           256.7           510.0           256.7           510.0           256.7
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................        10,283.4         2,413.9        19,654.8         4,381.1        29,026.2         6,348.2
                                                         -----------------------------------------------------------------------------------------------
Change from 15-Month Compliance Period..................           225.5           119.4           430.9           216.8           636.4           314.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Summary of Regulatory Alternatives
    Table E22 summarizes the regulatory alternatives by displaying
ranges for the present values of the total benefits and total costs.
Estimated ranges for the cost ratios (per smoking prevention and per
life-year saved) of the proposed rule and its regulatory alternatives
appear in Table E23.

                                                      Table E22--Summary of Regulatory Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Present value of total benefits ($ mil) \a\                   Present value of total costs ($ mil) \b\
       Compliance period        ------------------------------------------------------------------------------------------------------------------------
                                               3%                            7%                            3%                            7%
--------------------------------------------------------------------------------------------------------------------------------------------------------
24-Month Total.................  9,837.4 to 27,767.3..........  2,180.9 to 5,735.6..........  285.2 to 561.9..............  248.6 to 515.0.
(Proposed Rule) 15-Month Total.  10,057.9 to 28,389.8.........  2,294.5 to 6,034.1..........  302.0 to 603.3..............  266.0 to 556.0.
6-Month Total..................  10,283.4 to 29,026.2.........  2,413.9 to 6,348.2..........  391.9 to 837.5..............  353.8 to 782.7.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Range in benefits is based on a VSLY of $105,000 to $315,000.
\b\ Range in costs is based on low cost and high cost values.

                                          Table E23--Incremental Cost-Effectiveness of Regulatory Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Discount rate = 3 percent                         Discount rate = 7 percent
                                                     ---------------------------------------------------------------------------------------------------
                                                                  Incremental              Incremental              Incremental              Incremental
                                                          Low         CE *        High         CE *         Low         CE *        High         CE *
--------------------------------------------------------------------------------------------------------------------------------------------------------
24-Month Compliance:
    Per Smoking Prevention..........................     $16,252          N/A     $50,152          N/A      $3,819          N/A     $12,024          N/A
    Per Life-Year Saved.............................      51,986          N/A     160,426          N/A      52,512          N/A     165,336          N/A
15-Month Compliance:
    Per Smoking Prevention..........................      16,271      $17,121      50,204      $52,545       3,940       $9,337      12,403      $29,324
    Per Life-Year Saved.............................      52,047       54,768     160,594      168,081      54,176      128,383     170,552      403,225
6-Month Compliance:
    Per Smoking Prevention..........................      16,419       23,021      50,597       68,133       4,207       16,118      13,170       47,376
    Per Life-Year Saved.............................      52,521       73,641     161,852      217,946      57,847      221,637     181,095      651,438
--------------------------------------------------------------------------------------------------------------------------------------------------------
* As the compliance period decreases, the number of rule-induced smoking preventions and life-years saved increases. Hence, the incremental costs of 15-
  Month Compliance are calculated relative to 24-Month Compliance, and the incremental costs of 6-Month Compliance are calculated relative to 15-Month
  Compliance.

I. Impact on Small Entities

    The Regulatory Flexibility Act requires agencies to prepare an
initial regulatory flexibility analysis if a proposed rule would have a
significant effect on a substantial number of small entities. We expect
this proposed rule to have a significant effect on a substantial number
of small entities. Consequently, this analysis, together with other
relevant sections of this document, serves as the Initial Regulatory
Flexibility Analysis, as required under the Regulatory Flexibility Act.
1. Description and Number of Affected Small Entities
    The proposed rule would affect small entities in several
industries, from tobacco farming to the retail industry. Most of the
nation's 16,234 tobacco farms are small; between 90.7 and 95.8 percent
(between 14,732 and 15,555) of the farms growing tobacco in 2007 had
total farm sales under the U.S. Small Business Administration (SBA)
small business size standard of $750,000 (Ref. 94; Ref. 106).
    Table E24 shows the breakdown of domestic cigarette manufacturers
by employment size. Census data indicate that most cigarette
manufacturing firms are small businesses, with only 4 of 24 firms
employing more than 500 employees, while the small business size
standard established by the SBA for this industry is 1,000, so a
minimum of 20 small cigarette manufacturers would be affected (Ref. 77;
Ref. 106).

        Table E24--Cigarette Manufacturers by Number of Employees
------------------------------------------------------------------------
                                                              Number of
                Size by number of employees                     firms
------------------------------------------------------------------------
Less than 20...............................................            9
20 to 99...................................................            7
100 to 499.................................................            4
------------------------------------------------------------------------
Source: Ref. 106.
SBA size standard: 1,000 employees.

    Statistics of U.S. Businesses data show that 1,067 of 1,159 tobacco
wholesale trade firms (92 percent) employ fewer than the 100-employee
threshold that constitutes a small business according to the SBA (Ref.
77; Ref. 106). If the size distribution of cigarette importers is
similar to that of all tobacco wholesale trade firms, then 92 percent
of them would be affected small businesses.
    Also likely to be affected by the regulation are small retail and
service entities that sell cigarettes. Retail establishments bear
shared responsibility with manufacturers for the cost of removing
noncompliant advertising. SBA size standards for the retail trade and
the accommodations and food services industries differ from size
categories used by the U.S. Census. Table E25 shows the 2002 Census
size categories that most closely match the SBA size standards. In all
cases, the closest Census size category is smaller than the SBA size
standard. As a consequence, any estimate based on the Census size
categories may underestimate the number of small entities.

 Table E25--SBA Size Standards and Census Size Categories for Retail and Service Firms in NAICS Categories With
                                          Tobacco Product Line Sales a
----------------------------------------------------------------------------------------------------------------
                                                                     SBA size standard     Census size category
  NAICS with tobacco product line        Description of NAICS         (employees or $         (employees or $
               sales                           category                  million)                million)
----------------------------------------------------------------------------------------------------------------
General Merchandise
    452990.........................  Other General Merchandise..  11....................  10.
    452 excluding 452990...........  Department, Discount         27....................  25.
                                      Department, Warehouse
                                      Clubs, and Superstores.
Supermarket and Grocery
    4452 and 4453..................  Other Food and Beverage      7.....................  5.
                                      Stores.
    445110.........................  Supermarkets and Grocery...  27....................  25.
    445120.........................  Convenience Stores.........  27....................  25.
    447110.........................  Convenience Stores with Gas  27....................  25.
    447190.........................  Service Stations...........  9.....................  5.
    446............................  Health and Personal Care     7.....................  5.
                                      Stores.
    453991.........................  Specialty Tobacco Stores...  7.....................  5.
    B..............................  Other Kinds of Business....  Varies................  Varies.
----------------------------------------------------------------------------------------------------------------
Source: Refs. 106-108.
\a\ Includes only firms with payroll.
\b\ Includes NAICS 4413, 443112, 444, 448, 451, 4532, 453998, 72 (excluding 72231), 722310.

    The Census reports establishment numbers for business by product
line, and establishment and firm size by type of business, but provides
no size data by type of business and product line. To estimate the
number of affected entities that SBA classifies as small, we begin by
counting the number of firms that fall below the Census size standard
shown in Table E25, including only firms in NAICS categories with
tobacco product line sales. Next, we calculate the percentage of small
firms in each NAICS category. Depending on the type of business, the
percentage of small firms ranges from 41 percent for Discount
Department, Warehouse Clubs, and Superstores to almost 100 percent for
Convenience Stores.

 Table E26--Estimated Percentage of Small Retail and Service Firms in NAICS Categories With Tobacco Product Line
                                                     Sales a
----------------------------------------------------------------------------------------------------------------
                                                                                Number of
                                                                                firms below   Percentage
                  NAICS                    Description of NAICS category    Number of   census size    of small
                                                                              firms       standard      firms
                                                                                \b\
----------------------------------------------------------------------------------------------------------------
General Merchandise
452110, 452910..........................  Discount Department, Warehouse            88           36         40.9
                                           Clubs, and Superstores.
452990..................................  Other General Merchandise......        7,451        7,320         98.2
    General Merchandise Subtotal          ...............................        7,539        7,356         97.6
Supermarket & Grocery
445110..................................  Supermarkets & Grocery.........       34,017       33,328         98.0
4452 and 4453...........................  Other Food and Beverage Stores.       34,807       34,082         97.9
    Supermarket & Grocery Subtotal......  ...............................       68,824       67,410         97.9
                                                                          --------------------------------------
445120..................................  Convenience Stores.............       18,705       18,676         99.8
447110..................................  Convenience Stores with Gas....       37,437       36,848         98.4
447190..................................  Service Stations...............       19,822       18,103         91.3
4461....................................  Drug Stores....................       36,198       33,894         93.6
453991..................................  Tobacco Stores.................        3,238        3,017         93.2
                                          Other Kinds of Business........      589,400      572,619         97.2
----------------------------------------------------------------------------------------------------------------
Source: Refs. 107, 108, 78, 79.
\a\ Includes only firms with payroll.
\b\ Based on the Census size standards shown in Table E25.

    Finally, we apply the percentages in Table E26 to our current
estimate of the number of affected establishments with payroll (Table
E7). This approach implicitly assumes that small establishments are
similar whether or not they sell tobacco products. In addition, we
classify all nonemployer establishments as small. In total, we estimate
that about 355,000 small retail and service establishments would be
affected by the proposed rule. This number represents about 98 percent
of the estimated 361,000 establishments selling tobacco products.

     Table E27--Estimated Number of Small Establishments With Tobacco Product Line Sales by Kind of Business
----------------------------------------------------------------------------------------------------------------
                                                                                Estimated
                                   Percentage of    Number with     Small with    Non- employers   total number
        Kind of business             small \a\      payroll \b\       payroll           \b\          of small
                                                                                establishments
----------------------------------------------------------------------------------------------------------------
General Merchandise.............            97.6           8,147           7,949           5,661          13,611
Supermarket & Grocery...........            98.0          67,037          65,679          56,761         122,441
Convenience Stores..............            99.8          23,986          23,949               0          23,949
Convenience Stores with Gas.....            98.4          87,713          86,333               0          86,333
Service Stations................            91.3           6,347           5,797           2,979           8,775
Drug Stores.....................            93.6          19,413          18,178          30,138          48,316
Specialty Tobacco Stores........            93.2           6,458           6,017               0           6,017
Other Establishments............            97.2          28,531          27,719          17,391          45,110
                                 -------------------------------------------------------------------------------
    Total.......................  ..............         247,633         241,621         112,931         354,552
----------------------------------------------------------------------------------------------------------------
a From Table E26.
b From Table E12.

2. Description of the Potential Impacts of the Final Rule on Small
Entities
    a. Effect on manufacturers. In order to estimate how much of the
label design and inventory costs would be incurred by small domestic
cigarette manufacturers, FDA subtracts the proportion of those costs
estimated to be incurred by large domestic manufacturers and foreign
manufacturers. Scanner data indicate that, approximately 55 percent of
UPCs can be readily identified as belonging to a brand marketed by one
of the 4 largest cigarette firms by volume (Ref. 105; Refs. 84-89).
Because the costs of labeling changes are roughly proportional to the
number of UPCs, FDA then attributes 55 percent of the total label
design and inventory costs to the 4 firms employing at least 500
people. FDA attributes an additional 3 percent of the labeling change
costs to foreign manufacturers.\15\ These adjustments leave 42 percent
of labeling change costs, or $71 to $188 million, to be incurred by the
20 small manufacturers. Assuming costs are equal among these firms
implies a per-firm cost of $3.5 to $9.4 million. Table E28 compares
this estimated compliance cost to average annual receipts in order to
gauge the potential impact of labeling change requirements on small
cigarette manufacturing firms. Because the number of UPCs is probably
larger for larger firms, costs are likely greater for larger firms than
for smaller firms; if so this method overstates the impact on the
smallest firms and understates the impact on the largest firms (within
the category of firms employing fewer than 500 people).
---------------------------------------------------------------------------

    \15\ In 2008, 9.9 billion out of 345.3 billion individual
cigarettes sold were imported. FDA assumes the same proportion holds
for UPCs. These UPCs should not overlap with those produced by the 4
largest domestic producers.

     Table E28--Potential Impact of Labeling Change Compliance Costs on the 20 Small Cigarette Manufacturers
----------------------------------------------------------------------------------------------------------------
                                                                  Average labeling          Average labeling
                                                   Average        compliance costs        compliance costs as a
                                     Number of      annual            ($1,000)             percent of average
    Size by number of employees        firms       receipts  --------------------------      annual receipts
                                                   ($1,000)                            -------------------------
                                                                  Low          High         Low          High
----------------------------------------------------------------------------------------------------------------
Less than 20......................            9       11,195        3,546        9,386           32           84
20 to 99..........................            7       21,265        3,546        9,386           17           44
100 to 499........................            4      147,896        3,546        9,386            2            6
----------------------------------------------------------------------------------------------------------------
Source: Ref. 77.
SBA size standard: 1,000 employees.

    b. Effect on retailers. As shown in Table E29, retail trade
businesses account for almost all sales of tobacco products (Ref. 78;
Ref. 79). About 90 percent of tobacco product line sales occur at
gasoline stations, food and beverage stores, general merchandise
stores, or tobacco stores. Convenience stores (with gasoline stations
and stand-alone convenience stores) account for about half of all
tobacco product line sales.

               Table E29--Sales of Tobacco Product Line by Kind of Business and Industry Sector a
----------------------------------------------------------------------------------------------------------------
                                                              Sales of tobacco product  Sales of tobacco product
                                                              line by kind of business   line by industry sector
            Kind of business and industry sector             ---------------------------------------------------
                                                                ($ bil)        (%)        ($ bil)        (%)
----------------------------------------------------------------------------------------------------------------
Retail Trade
NAICS 447--Gasoline Stations................................  ...........  ...........         22.2         43.3
    Convenience Stores with Gas.............................         21.2         41.3  ...........  ...........

    Gasoline Stations.......................................          1.0          2.0  ...........  ...........
NAICS 445--Food and Beverage Stores.........................  ...........  ...........         13.4         26.2
    Supermarket & Grocery...................................          7.7         15.0  ...........  ...........
    Convenience Stores......................................          4.5          8.8  ...........  ...........
    Liquor Stores...........................................          1.2          2.4  ...........  ...........
NAICS 452--General Merchandise..............................  ...........  ...........          7.1         13.9
    General Merchandise.....................................          7.1         13.9  ...........  ...........
NAICS 453--Miscellaneous Store Retailers....................  ...........  ...........          5.8         11.3
    Tobacco Stores..........................................          5.7         11.1  ...........  ...........
    Miscellaneous store retailers...........................          0.1          0.3  ...........  ...........
NAICS 446--Health and Personal Care Stores..................  ...........  ...........          1.5          3.0
    Drug Stores.............................................          1.5          3.0  ...........  ...........
NAICS 454--Nonstore Retailers...............................  ...........  ...........          0.7          1.3
    Nonstore Retailers......................................          0.5          1.0  ...........  ...........
    Vending machine operators...............................          0.2          0.4  ...........  ...........
Other Subsectors \b\........................................  ...........  ...........          0.1          0.2
    Other Kinds of Business.................................          0.1          0.2  ...........  ...........
Accommodation & Food Services
NAICS 72....................................................  ...........  ...........          0.4          0.8
    Other establishments....................................          0.3          0.5  ...........  ...........
    Drinking places.........................................          0.1          0.3  ...........  ...........