rationality on the part of smokers. Another comment objected to the
model in the cited reference because it is very simplified and
stylized, with a linear demand curve for smoking. One of the comments
suggested FDA should instead consider modern economic analyses of
addiction that account for time inconsistencies in preferences,
including the work of Fritz Laux (Ref. 109) or Jonathan Gruber and
Botond K[ouml]szegi (Ref. 104). Another of the comments suggested past
regulatory changes and their effect on smoking be used to measure
demand and the lost surplus associated with those changes to get a more
empirically relevant measure of the effect of the proposed rule.
    (Response) The concept of consumer surplus is a basic tool of
welfare economics. If consumers respond to price, information, or other
market changes, there will be a change in consumer surplus. Although
some economists describe consumer surplus as a measure of the pleasure,
satisfaction, or usefulness that a product provides to consumers,
others simply say that whatever generates a demand for the product
generates consumer surplus. Moreover, how we qualitatively describe
consumer surplus does not affect how it is measured--the measurement is
independent of the description. In an analysis of benefits based on
willingness-to-pay, we cannot reject this tool and still fulfill our
obligation to conduct a full and an objective economic analysis under
Executive Orders 12866 and 13563.
    Although it does not affect our use of consumer surplus, we note
that virtually all studies of the economics of smoking and addiction
assume that smoking is pleasurable to smokers. In their 2001 paper in
The Quarterly Journal of Economics, Gruber and K[ouml]szegi state that
``smoking is a short-term pleasure'' (emphasis added) (Ref. 104).
Economists Warner and Mendez state: ``Many members of the tobacco
control community dismiss the notion that smoking can be pleasurable.
But those people were never smokers or, if they were, have selective
memory. For some smokers, the relief of withdrawal symptoms might
suffice as a `pleasure.' But smokers derive much more from their
cigarettes, including everything from `mouth feel' to the nicotine drug
rush, from relaxation to self-image (think Marlboro Man), and from
enhanced ability to concentrate to companionship'' (Ref. 121).
    FDA's approach to the economics of smoking treats it as an
addiction and draws on many economic theories of addiction, including
the studies cited in the comments, as already detailed in our response
to comments on market failure.
    FDA agrees that the model we used in the PRIA to explain changes in
consumer surplus is not detailed enough to fully explain the
assumptions about consumer behavior underlying our estimates. In the
revised analysis, we have made some important changes in the
presentation and the model used to adjust our estimates and account for
uncertainty. The key assumption made explicit in the new model is that,
on average, smokers are informed of, and able to internalize, some but
not all health and life expectancy effects of their smoking. Full
graphical and algebraic analyses have been added to the final analysis,
as has a discussion of the implications of Gruber and K[ouml]szegi's
work in the context of the new model. Moreover, we have supplemented
our benefits analysis with another approach, in which we replace the
steps of summing all health effects and then subtracting lost consumer
surplus with a direct estimation of the value to smokers and potential
smokers of cessation and avoided initiation, as shown by their
willingness-to-pay for cessation programs.
    (Comment 246) One comment stated that FDA's preliminary benefits
analysis inappropriately excluded the effects of the rule on employer
and government cleaning and maintenance costs.
    (Response) Reductions in the cost of cleaning and maintenance were
not included in the analysis because we did not find reliable data.
    (Comment 247) One comment stated that FDA should conduct its
uncertainty analysis by performing a Monte Carlo simulation.
    (Response) FDA agrees and has conducted a Monte Carlo simulation
for the Final Regulatory Impact Analysis.
    (Comment 248) Two comments stated that FDA's preliminary analysis
inappropriately excluded the effects of the rule on government-funded
health care and Social Security expenditures.
    (Response) In our analysis of the proposed rule, FDA did not
exclude government health care costs. In section VIII.C.6 of the PRIA,
FDA reported estimates of reductions in smoking-related medical
expenditures, paid for both by smokers themselves and by nonsmokers via
insurance premiums or, notably, taxes used to fund government health
care. For the Distributional Effects portion of the Final Regulatory
Impact Analysis, we have expanded the discussion of this effect of the
rule to include greater detail.
    We have also added a discussion of Social Security payments to the
Distributional Effects section of the final analysis. We note, however,
that the cost to taxpayers of Social Security are exactly offset by
payments to Social Security recipients or users of any other government
programs and services funded with Social Security contributions, so
this effect does not generate a substantial net social cost or benefit,
with the exception of a probably small deadweight loss.
    (Comment 249) One comment stated that the FDA's preliminary
analysis did not, as required by the Office of Management and Budget,
provide a year-by-year schedule of undiscounted cash flows that
displays the timing of estimated rule-induced benefits.
    (Response) FDA has added stream-of-benefits and -costs tables as
appendices to the final analysis.
4. Costs
    In the analysis of the proposed rule, FDA focused on three main
costs to industry: The cost of changing cigarette package labels, the
cost of conducting market testing for redesigned packages, and the cost
of removing noncompliant point-of-sale advertising. FDA received
several comments about costs, which are summarized and responded to in
the following paragraphs.
    (Comment 250) One comment took issue with FDA's characterization of
the up-front costs associated with a major label change as ``large'' by
pointing out: ``In the context of tobacco marketing, with the companies
spending $12.5 billion on marketing and promotion in 2006, the amounts
of money being described are not `large.'''
    (Response) FDA has removed the term ``large.''
    (Comment 251) One comment asserted that the cost section was
systematically biased, and that all costs were upper bound estimates as
opposed to ``best'' point estimates.
    (Response) FDA did not rely on upper bound estimates of any costs.
The label change costs (the largest single cost component FDA
estimated) and the market testing costs have low, medium, and high
estimates. For the other cost components, we use our best estimates.
    (Comment 252) One comment argued that because tobacco manufacturers
spend large amounts of money on marketing activities, changing labels
is just an ordinary cost of business to them, and one that they can
``write off.'' Furthermore, the comment argued that manufacturers can,
to some extent, pass the costs on to consumers. The comment ends by
stating: ``It is not appropriate for the FDA to fear that its
regulatory efforts on this industry might impose costs on them, and to
use these costs as a reason not to proceed with its

regulations. The agency is supposed to act in the public interest, not
the interest of a particular industry to protect it from protecting the
public in the first place.''
    (Response) The baseline expenditures of the tobacco industry are
irrelevant. There is a cost to society when its scarce resources are
expended to comply with this rule. The costs the comment refers to are
economic or opportunity costs. Cost estimation is concerned with the
value of the resources used to carry out some activity, not their
incidence (i.e., who ultimately pays), which is a separate question. As
acknowledged in the proposed rule (section VIII.D, Costs), although
cigarette manufacturers are legally responsible for complying with this
rule, the costs may be borne at least in part by tobacco consumers. The
potential for ``passing costs on'' to consumers is a matter of economic
incidence but does not negate the fact that there are costs, nor does
it change those costs.
    In the cost-benefit analysis we estimate costs and benefits that
accrue to citizens and residents of the United States (Ref. 103)
regardless of who we think may bear them. The ``interest of a
particular industry'' is a subject we rightly leave to the
``Distributional Effects'' section of our analysis.
    (Comment 253) A comment stated that FDA should estimate ``the
marginal cost of changing the warning labels that the cigarette
companies would incur accounting for ongoing expenses associated with
producing cigarette packages and assuming that the companies
implemented the new labels using economical strategies.''
    (Response) The labeling cost model's baseline already accounts for
ongoing expenses associated with producing cigarette packages.
Manufacturers change product labels at regular intervals without
regulatory changes in labeling requirements. Based on both product type
and compliance period, the model provides an estimate of the percent of
UPCs that can be coordinated with a previously scheduled labeling
change. For those UPCs, the only costs assumed by the model are a small
fraction of the administrative labor cost and recordkeeping costs.
    If anything, this approach taken by the model quite possibly
understates the labeling costs for so-called coordinated UPCs. For
example, even though a graphic designer can redesign a label to satisfy
both regulatory and nonregulatory goals at once, such a redesign would
plausibly take longer than a redesign to satisfy only nonregulatory
requirements, and time devoted to regulatory compliance must be taken
away from other activities. However, because this rule requires a set
of 9 plates for the 9 different graphic labels, we manually adjust the
model to add back the 8 extra plates.
    (Comment 254) A comment asserted that although there are 3,324
different UPCs, each UPC would not have to be redesigned because
product varieties within a brand family share essential trade dress and
package design features. The comment asserted that using a number equal
to 10 percent of the number of UPCs, 332, would still result in an
overestimate of costs.
    (Response) Although products within a brand family share certain
package design features, the packages for different UPCs still contain
unique features. Thus, every individual UPC represents a separate
design job. Furthermore, the labeling cost model presents an average
cost per UPC of similar types within a product category, not the cost
of changing one UPC. The model therefore accounts for the existence of
brand families with similar label designs.
    (Comment 255) A comment asserted that FDA overestimates production
and printing costs by ``not accounting for the realities of how such
work is actually done.'' The comment provided the following quote from
an unknown large job printer: ``In looking at the costs associated with
each label, this might be fairly accurate for 1 label, but they don't
take into account the economies of scale. After the first one, the
second and subsequent package costs will go down exponentially. The
only costs that might remain static would be the costs of printing
plates, which depending on how they print them, could be reduced if
they gang run several different packages of similar production runs
together on the same sheet. All the non-production costs would be
amortized over the whole.''
    (Response) The labeling cost model does not measure the cost of
changing one label, but the average cost when a large number of labels
are changed at once. Due to resource constraints, the economic cost
could be higher when a large number of labels are changed at once. The
comment did not provide either alternate cost estimates for FDA to
consider, or potential sources for such data.
    (Comment 256) A comment asserted that design costs should not be
inflated due to the requirement to use nine different warnings because
all warnings would occupy the same portion of each package, so the
redesign would only have to be done once regardless of which warning
would be used.
    (Response) The comment appears to misunderstand which cost elements
are affected by the need for nine labels. The term ``Design costs,'' as
used in the labeling cost model, could refer to all per-UPC costs
associated with a labeling change or specifically to graphic design
labor costs. FDA inflated some, but not all, per-UPC labeling change
costs by a factor of nine.
    For graphic design labor costs, FDA agrees that the part of the
package design that is under the control of the manufacturer will
probably be the same regardless of which of the nine warning labels is
used. Therefore, the work of designing the new package label only has
to be done once for each UPC; in the cost estimates, graphic design
labor costs were not inflated by a factor of nine.
    Likewise, FDA assumed that the need to incorporate nine different
warnings on every package would have a negligible impact on
administrative labor costs, prepress labor costs, and recordkeeping
labor costs. These costs therefore were not inflated by a factor of
nine.
    It was only for materials costs, which specifically includes
prepress materials and printing plate costs, that FDA assumed costs
increased by a factor of nine due to the need to incorporate nine
separate warning labels. We employed this assumption because nine times
as many printing plates will be needed upfront.
    (Comment 257) A comment argued that some of the costs attributed to
the label change would be incurred on an ongoing basis. The example
provided is that printing plates wear out after a few million
impressions and have to be replaced at regular intervals. The comment
argued our cost estimates need to be adjusted to account for this. An
analysis follows which claims to demonstrate that the average cigarette
label printing plate has to be replaced every 3 weeks.
    (Response) The calculation provided in the comment contains errors.
Once those errors are fixed, the calculation no longer supports the
assertion that printing cylinders are being constantly replaced, as
discussed in the following paragraphs. Furthermore, the model accounts
for possible coordination with previously scheduled labeling changes,
which provides the most likely opportunity for cigarette manufacturers
to avoid some of the incremental cost from new printing plates
(cylinders). New cylinders must be engraved when a nonregulatory
labeling change takes place. Given the expense of the printing
cylinders, manufacturers would avoid engraving new cylinders right
before a

nonregulatory labeling change. In other words, we would expect some
coordination between cylinder wear out and nonregulatory changes.
    Rotogravure plates are the longest lasting, good for making
millions of labels. The comment assumed a life of only 3 million labels
and did not justify this point estimate. For rotogravure, this estimate
is too low.
    In attempting to determine weekly sales per UPC, the comment
divided weekly cigarette sales (in packs) by their estimate of the
number of brands, not by the number of UPCs. Dividing by the number of
UPCs, even under the assumption that plates wear out after 3 million
labels, yields a life of 29 weeks for the average brand. Updating this
analysis for the revised number of cigarette UPCs yields a life of 38
weeks for the average brand.
    Additional calculations can be performed for the ``average'' brand,
but it is important to keep in mind that most brands are not average. A
few products will have high volume. A large number of lesser-known
products will have low volume.
    Because manufacturers will have to buy nine plates up front for
each UPC, those nine plates would have a life of 346 weeks, or 6.6
years, based on the comment's assumptions about the life of a
rotogravure plate and the updated UPC count. Manufacturers of the
average product would not wear out all these plates before they changed
labels again for nonregulatory reasons.
    (Comment 258) Multiple comments argued that FDA should not include
10 percent rush charges in calculating the cost of changing labels in
15 months. In particular, the argument was made that cigarette
manufacturers have known this was coming before publication of the
final rule.
    (Response) Although it is true that manufacturers have known this
rule was coming, in some form, since the passage of the Tobacco Control
Act, it is only with the publication of the final rule that they will
know its exact form, i.e., what the images will be. Tobacco companies
will need to see the final images and the exact provisions of the final
rule before the bulk of the work for a labeling change can be
undertaken.
    In evaluating the need for rush charges, it is important to keep in
mind that the labeling model is designed to measure the cost of
changing a large number of labels at once. Resources are scarce and a
large number of labeling changes cannot be simultaneously rushed
without increasing costs.
    The previous labeling cost model assumed 10 percent rush charges
for compliance periods shorter than 2 years. The new labeling cost
model assumes constant rush charges equal to 40 percent for compliance
periods of 3 to 15 months. In reality, rush charges are likely to
decline continuously as the compliance period increases. The rush
charges under a 3-month compliance period could exceed 40 percent, and
the rush charges for a 15-month compliance period are likely to be far
less. FDA has therefore retained the original assumption of 10 percent
rush charges for a 15-month compliance period.
    (Comment 259) One comment stated that FDA has underestimated costs
because of technical implementation difficulties associated with
providing for equal, random, simultaneous display of nine different
images.
    (Response) FDA does not agree that there is a technical
infeasibility. Similar requirements have been successfully implemented
in other countries. The cost analysis for the label change includes
administrative labor and recordkeeping costs, part of which would be
associated with devising and implementing a method for ensuring equal
random display. However, FDA is now persuaded that there will be some
ongoing cost associated with equal, random display. In other words,
once a system for compliance is designed and implemented, it will
require some work to ensure continuing compliance with equal, random
display. Therefore, in the Final Regulatory Impact Analysis FDA has
added recordkeeping costs and administrative costs as ongoing costs in
years 2 through 20 after the final rule takes effect.
    (Comment 260) Comments argued that market testing costs undertaken
by the tobacco industry should not be counted. Various arguments were
presented: Such costs would be beyond the minimal cost required to
implement the law ``effectively and in good faith.'' Such costs would
be incurred in order to ``undermine the effect of Congressionally-
mandated warning labels.'' Such costs would not be societal costs at
all, but distributional effects because the cost to the tobacco
companies would be a benefit to employees or contractors paid to do the
work. If FDA includes market testing costs, it should also include
legal fees for potential challenges to this rule and lobbying fees to
get the statute repealed.
    (Response) We do not simply estimate the cost of minimal
compliance. In benefit-cost analyses of regulations, we assume agents
react to a new regulation by changing behavior in many ways. The
analysis itself then compares the expected outcomes with and without
the rule. Regardless of whether the rule requires it, if manufacturers
conduct market testing as a direct result of this rule, the costs are
attributable to this rule. Resources devoted to this market testing
have an opportunity cost, so there is a social cost. We have been
unable to obtain reliable data with which to quantify potential costs
incurred to challenge the rule in litigation. Lobbying costs associated
with the repeal of the statute do not represent incremental costs of
this rule and therefore are appropriately excluded from the analysis.
    (Comment 261) A comment stated that cigarette manufacturers and
retailers change advertisements and labels frequently and only the
incremental cost of replacements that would not have otherwise been
made should be attributed to this rule. The comment asserted that this
incremental cost is negligible.
    (Response) FDA only looked at the cost of removing point-of-sale
advertisements. Other forms of cigarette advertisements are now
relatively rare. The comment assumes that some or all manufacturers and
retailers could perform the removal of noncompliant point-of-sale
advertising at zero cost by coordinating it with the usual replacement
schedule for point-of-sale advertising. Manufacturers and retailers
would only remove noncompliant advertising early if the benefit from
keeping them longer did not justify the modest cost (between $12 and
$198 per establishment) of removing the advertising at the deadline.
FDA expects that the most likely response will be for most
establishments to continue displaying noncompliant advertisements up
until the enforcement deadline and resources will therefore be expended
to achieve compliance at the deadline.
    (Comment 262) One comment stated that the cost analysis needs to
include reduced government revenue from lost taxes due to lowered
cigarette sales.
    (Response) FDA notes that, leaving aside potential deadweight loss,
there are two principal effects of tax reductions: Gains to former
payers and losses to former recipients. Because these effects exactly
offset each other, there is no net social cost or benefit associated
with the reduction in excise tax collections induced by the rule. As
such, we discuss rule-induced changes in tax collections in the
Distributional Effects section of our analysis (section XI.G.5 of this
document).
    (Comment 263) One comment stated that the disturbing nature of the
graphic warning labels will cause adverse mental reactions in those who
view them, especially cashiers at cigarette-

selling retail establishments because they must handle these products
daily.
    (Response) FDA is not aware of any scientific evidence that mental
or emotional costs would be incurred by the general public as a result
of this regulation, and the comment did not provide any.
5. Distributional Effects
    In the analysis of the proposed rule, FDA estimated a variety of
effects that are experienced as transfers away from some segments of
society and as roughly equal transfers to other segments of society.
FDA received several comments about these distributional effects.
    (Comment 264) One comment stated that FDA's preliminary analysis of
the rule's effect on tax collections ignored offsetting effects due to
increased sales of other taxable goods and services even though the
Joint Committee on Taxation estimates this offset at 25 percent of a
policy's direct effect.
    (Response) FDA agrees with the comment and has adjusted its
analysis of rule-induced changes in tax collections accordingly.
    (Comment 265) One comment stated that, in its preliminary analysis
of the rule's impact on tax collection, FDA suggested that inelastic
demand for cigarettes means that some or all lost tax revenue could be
offset through higher tax rates. The comment went on to note that FDA
undertook no analysis of whether State and local governments could or
would increase excise taxes on cigarettes in response to the graphic
warning label rule and that the political environment, as demonstrated
by recent elections, may not be amenable to tax increases.
    (Response) FDA did not claim any increases in State or Federal
cigarette taxes are likely to occur. Instead, we merely pointed out
that cigarette demand has been shown to be inelastic; therefore, an
increase in tax levels will increase revenue. For the final analysis,
we have removed some of our more confusing language on this issue. We
continue to assume that tax rates will rise at the rate of inflation
because, without such an assumption, we need a reliable forecast of
inflation in order to express the stream of future tax revenue changes
in current dollars. However, we have added discussion of alternative
approaches, including the possible forecasting of inflation using the
difference between interest rates for Treasury Inflation-Protected
Securities (TIPS) and standard Treasury bills.
    (Comment 266) One comment stated that, to the extent that State and
local excise taxes are based on the price of cigarettes, increased
price competition that could result from the proposed rule would reduce
tax revenues beyond what FDA reports in its analysis.
    (Response) At present, all State and Federal cigarette taxes are
applied per unit, not ad valorem; therefore, changes in the pre-tax
price of cigarettes will not change the total excise tax collection
separately from changes caused by decreases in the quantity sold. Sales
taxes, on the other hand, are applied to cigarettes on the basis of
price. FDA has not quantified the effect of the rule on sales tax
collections, but we expect it to be small, both because sales taxes
make up a very small portion of total cigarette-related tax collections
and because any rule-induced change in cigarette prices is also likely
to be small.
    (Comment 267) One comment stated that, in its preliminary analysis,
FDA failed to note that research indicates that U.S. employment will
increase if smoking decreases.
    (Response) In the PRIA (sectionVIII.F.2), FDA stated that decreases
in smoking may cause increases in national employment, citing (Ref.
122) the same paper to which the comment refers.
    (Comment 268) One comment stated that FDA, in its preliminary
analysis, estimated that the proposed rule would result in 500 to 600
displaced jobs among manufacturers, warehouses and wholesalers but
failed to note that these lost jobs probably would occur during a
period of high unemployment, when the displaced individuals would
likely have difficulty obtaining new jobs with similar remuneration.
The comment went on to state that the average unemployment duration in
November 2010 was 34.5 weeks and that one could, by multiplying the
average wage by the average duration of unemployment, obtain a rough
estimate of lost wages.
    (Response) The wages lost are not the appropriate cost to attribute
to the rule; instead, we must include the difference between wages lost
from tobacco-related jobs and the value of next-best options. FDA is
unable to quantify this difference. For instance, average unemployment
tenure from late 2010 would likely give a skewed estimate of length of
rule-induced unemployment because compliance with the rule is not
required until 2012. Unemployment may change substantially between now
and then, especially because the United States is currently in the
early stages of recovery from a recession.
    (Comment 269) One comment stated that manufacturing, warehouse, and
wholesaler jobs displaced by the rule would be permanent losses to the
economy. In addition to failing to note this permanence, FDA did not
account for any job losses in the retail sector. The comment went on to
state that convenience stores are highly dependent on tobacco sales,
both in terms of cigarette sales' portion of profit margins and as a
generator of customer traffic to spur the sale of ancillary products.
Even the small reductions in revenue caused by the graphic warning
label rule could cause retailers to reduce employment, with some stores
possibly going out of business entirely.
    (Response) The portion of dissuaded smokers' budgets that would, in
the absence of the rule, have been spent on cigarettes will, in the
presence of the rule, be spent on other goods and services, thus
creating jobs in other segments of the economy. Only the difference
between losses borne by individuals losing cigarette-related jobs and
gains realized by individuals obtaining employment in other sectors
represents a net social cost. FDA believes this difference to be small
and possibly negative (that is, the losses are less than the gains), as
found by Warner et al. (Ref. 122).
    (Comment 270) One comment stated that, in its preliminary analysis,
FDA incorrectly concluded that there would be no rule-induced losses
experienced by tobacco growers. The comment went on to state that FDA's
assumption that acreage taken out of tobacco production could be easily
shifted to other crops, with no net loss, is not consistent with
economic theory because economic theory indicates that land currently
planted in tobacco is being used in its highest-valued use. Another
comment suggested that FDA work with the Department of Agriculture on
estimating the impact of the rule on tobacco farmers.
    (Response) FDA agrees that a transition from tobacco cultivation to
the next-best option entails some loss for farmers, but only the
difference between first- and second-best uses of land represents a net
social cost in terms of reduced efficiency.
    (Comment 271) One comment stated that the requirement that
cigarette manufacturers print half of their packaging with images
supplied by the government would be a burden to all cigarette
companies, the costs of which would ultimately be paid by consumers.
    (Response) FDA has estimated the cost to cigarette producers of
adding graphic warning labels; however, we have not assessed whether
cigarette consumers or shareholders of cigarette-producing firms will
bear the burden of the cost. We expect that the costs will be shared by
consumers and producers but we are unable to estimate the

portions borne by each group. In the cigarette market, increases in
variable costs are borne almost entirely by consumers. In the case of
the addition of graphic warning labels, however, most of the cost does
not vary with the quantity of cigarettes produced. We therefore expect
that producers will be unable to pass all of the cost on to consumers
through increased prices. Consumer prices could, however, be affected
in the long run. For example, one possibility is that some cigarette
product lines will be discontinued and this decrease in supply would
lead to increased prices paid by consumers. FDA lacks the detailed
market data that would be necessary for predicting which of these or
other possible outcomes would likely be realized.
    (Comment 272) One comment argued that retailers must lose profit
when reallocating space away from cigarettes to other products because
it was suboptimal to make such an allocation in the absence of the
rule.
    (Response) This comment ignores the fact that the final rule will
reduce demand for cigarettes and increase demand for other products.
While it is clear by observation that allocating shelf space away from
cigarettes to other products in the absence of this rule would be
suboptimal, this need not imply that retailers' profits will be lower
after they optimally respond to changes in the demand for cigarettes
and the demand for other products.
    (Comment 273) Some comments argued that retailers (including small
retailers such as convenience stores) may not be able to simply shift
shelf space to other goods.
    (Response) FDA argued in the distributional effects section of the
proposed rule, section VIII.F.3, that the retail sector (as a whole)
will shift shelf space to other products to take advantage of the
increase in demand for noncigarette products. FDA acknowledges that
this substitution may not take place wholly within each retail
establishment. If cigarette-reliant retailers have some (but less than
complete) success shifting shelf space to take advantage of the
increase in demand for noncigarette products, they will suffer an
overall loss in revenue that is less than their loss of cigarette sales
revenue. Other parts of the retail sector would gain sales. This would
be a purely distributional effect within the retail sector. Such an
effect would be small because this rule is only projected to reduce
cigarette consumption by less than one quarter of a percent.
6. Impact on Small Entities
    In the initial regulatory flexibility analysis, FDA considered the
potential effects on small cigarette manufactures of having to change
all cigarette labels in accordance with this rule. FDA also considered
the potential impact on small retailers of having to remove
noncompliant point-of-sale advertising. FDA received comments from
industry pertaining to these matters, which are summarized in the
following paragraphs.
    (Comment 274) A comment stated that FDA ``grossly underestimates''
costs, referring specifically to the estimates of the label change
costs and their impact on small manufacturers. The comment argued that
the necessary changes will cost at least $500,000 to $1 million,
including such factors as package redesign, dye cuts, and the number of
colors needed for the artwork. Further, ``these changes represent
global changes for the manufacturers' products, and that change will
have a far greater effect on the small manufacturer as opposed to
larger entities.'' Many aspects of compliance will require the work of
outside contractors.
    (Response) It is not clear whether the comment intends to argue
that the cost is on average $500,000 to $1 million per UPC, when many
UPC labels are being changed at once, or that the total cost would be
at least this much per firm, among some subset of small manufacturers.
FDA does not agree that the average cost per UPC could be nearly this
high. Although FDA estimates much higher total costs for the average
small manufacturer, $500,000 to $1 million could describe the total
costs for a subset of especially small manufacturers.
    The cost estimate with which the comment takes issue was based on a
combination of the old FDA labeling cost model and early estimates of
some values from the new FDA labeling cost model. Costs have been
updated in the analysis for the final rule to more fully reflect the
estimates of the new model. Interviews with manufacturers and trade
associations were conducted in the process of building the new model.
FDA believes the model provides the best estimate of the average cost
of changing a product label. FDA inflates materials costs by a factor
of nine to account for the requirement to use nine separate warnings.
    The comment also argued that FDA has underestimated the costs to
small businesses but is not specific enough about whether there are
additional factors, beyond the results of the labeling cost model, with
which the comment disagrees.
    FDA agrees that small tobacco product manufacturers are more likely
to hire outside contractors for tasks required to comply with this
rule. However, from a societal point of view, it makes no difference to
costs whether a manufacturer conducts the functions required for
compliance in-house or contracts them out.
    (Comment 275) A comment argued that small manufacturers do not
carry a small inventory of supplies, but must buy materials in bulk to
be cost effective (often as much as 6-months worth). The comment stated
therefore that it is untrue that all label inventories will be
exhausted during the 15-month compliance period. Small manufacturers
will have to discard large amounts of advertising and labeling
material. Another similar comment argued that small manufacturers
purchase long-term quantities of ``advertising pieces such as pole
signs and shelf talkers,'' in order to get better prices. FDA should
take this into account and give small manufacturers time to use up
existing inventories of printed materials. The comment suggested that
manufacturers could provide FDA with inventory counts and usage rates.
    (Response) FDA believes the first comment combines two separate
issues: Label inventory assumptions (the matter at hand in the quote
from the preliminary analysis) and advertising inventory assumptions.
    FDA stands by its conclusion that the costs of discarded label
inventory will be small under a 15-month compliance period. With modern
just-in-time inventory control methods, firms keep far less inventory
on hand than in decades past. However, rather than assume that there is
zero cost for discarded inventory, FDA will accept the new labeling
cost model's default assumptions regarding discarded inventory. This
assumption results in a low inventory cost being attributed to this
final rule, as very little inventory is expected to remain after a 15-
month compliance period. While it may be the case that some small
manufacturers keep large amounts of inventory on hand, the evidence
used to construct the labeling cost model implies that most
manufacturers would not have much (if any) label inventory remaining
after 15 months and the output of the labeling model accurately
represents the average inventory cost.
    While it is possible that some manufacturers will have some point-
of-sale advertising materials in inventory that will be discarded as a
result of this

rule, FDA doubts that this inventory cost is substantial. Manufacturers
will have 15 months to use up existing inventory. Cigarette
manufacturers are known to be sophisticated advertisers, and effective
advertising changes to reflect the times. Therefore, the value of
existing advertisements would decline over time as they become more
dated and less effective. Additionally, the comments themselves do not
provide data with which to estimate any effect that may exist.
    (Comment 276) One comment estimated that the label change cost
would be between $2.1 million and $5.5 million per average small
tobacco product manufacturer, based on an average number of UPCs per
firm of 44. The comment asserted that small manufacturers cannot absorb
the cost of changing all their cigarette labels and many will leave the
cigarette manufacturing business. Two relief options were suggested:
Phasing in the rotational warnings over a longer period of time or
running the warnings sequentially rather than simultaneously.
    (Response) According to this comment, small tobacco product
manufacturers have fewer UPCs each than FDA originally estimated. If
the UPC estimate from the comment holds, the compliance costs for small
firms would be lower than FDA originally estimated. FDA has retained
the original method for estimating the number of UPCs for small firms
so as to take care not to understate the burden on them.
    FDA acknowledges that this rule may put some small manufacturers at
risk of going out of business. However, we do not have the information
necessary to estimate this risk. In the initial regulatory flexibility
analysis, FDA considered the relief that would be provided by allowing
small (or all) tobacco product manufacturers additional time to comply
with the rule, even though this not in keeping with the statutory
mandate. Running nine warnings sequentially rather than in parallel is
a complicated alternative for which it is difficult to estimate the
amount of relief provided. A very large reduction in costs would only
materialize if the warnings were only changed as often as the usual
frequency of nonregulatory label changes (every couple of years).
However, FDA has now included an analysis of the potential impact of a
related relief option, that of letting small manufacturers randomly
assign one label to each distinct UPC.
    (Comment 277) Some comments argued that some small retailers, such
as convenience stores, may go out of business as a result of reduced
cigarette sales and loss of revenue from ancillary products, and that
this effect of the rule on small entities needs to be reflected in the
analysis. Beyond the effect on the retailers themselves, closure of
convenience stores would result in loss of convenience to nearby
customers and could also adversely affect suppliers.
    (Response) Although in the small entity analysis we are only able
to quantify the cost of removing noncompliant advertising, we
acknowledge that small retailers selling cigarettes could also lose
some net sales revenue (to other retailers), to the extent that
shifting shelf space to other goods less than fully offsets the
reduction in revenue from cigarettes. We expect any such loss of
revenue to be modest because the expected reduction in cigarette
consumption is modest to begin with. Convenience store closures as a
result of this final rule are therefore unlikely.
    (Comment 278) One comment recommended that FDA reconsider exempting
small cigarette producers.
    (Response) The initial regulatory flexibility analysis considered
exempting small manufacturers from the label change requirements as a
relief option. Exempting small manufacturers from all or part of this
regulation would cause a significant proportion of consumers to be
exposed to cigarette packages or advertising lacking the new graphic
warnings. In 2008, the combined market share of all but the four
largest firms was 10.3 percent (Ref. 123). This situation would be
inconsistent with the public health objective of the rule as well as
FDA's statutory mandate.

C. Need for the Rule

    Written with the goal of ameliorating the large toll on public
health that is directly attributable to the consumption of tobacco, the
Tobacco Control Act mandates the publication of this rule. Section 201
of the Tobacco Control Act modifies section 4 of FCLAA 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. As discussed in detail in
FDA's response to comments in section XI.B.2 of this document, the
economics literature suggests several sources of market failure \11\
that the new graphic warning labels will address; these include myopia,
lack of salience, time inconsistency, and incomplete information. In
the following analysis, we do not attempt to choose among the many
models of smoking and addiction that potentially cause market failure,
but the models have similar policy implications.
---------------------------------------------------------------------------

    \11\ A situation in which a market left to itself does not
allocate resources efficiently.
---------------------------------------------------------------------------

D. Benefits

    We estimate the benefits of the final rule by comparing expected
life-cycle events of smokers with those of nonsmokers. Nonsmokers tend
to live longer and develop fewer cancers, cardiovascular, pulmonary,
and other diseases, so the benefits in our analysis include the
discounted value of life-years gained, health status improvements 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. There are other benefits, such as reductions in nonsmokers'
morbidity and mortality associated with both passive smoking and
mothers smoking during pregnancy, that are likely generated by the
final rule, but FDA has been unable to obtain reliable data with which
to quantify them. In particular, we were not able to project future
levels of exposure to secondhand smoke from historical trends, nor
predict future decreases in maternal smoking during pregnancy.
1. Reduced Cigarette Smoking Rates
    The changes outlined in this rule are projected to decrease smoking
initiation and increase smoking cessation. For each of the first 20
years of the rule's implementation (2012 through 2031),\12\ FDA
calculates the predicted decrease in the number of U.S. smokers by
multiplying together the following:
---------------------------------------------------------------------------

    \12\ The effects of antismoking policies occur over a long
period of time, so we want to include at least one full generation
in our analysis. Using a 20-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 (percentage point change) of cigarette
warning labels on the national cigarette smoking rate and
    (b) The population in a particular year in the absence of the
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. 124). The advantage of this approach lies in our
ability to observe actual consumer behavior--in the form of smoking
rates--before and after a graphic warning label requirement went into

effect. The warning labels to be required in the final rule are
generally similar to those developed by Health Canada and authorities
in other foreign countries. As in Canada, the labels required by the
rule will occupy at least half the front and rear display panels of a
cigarette package. Moreover, under the rule, there will be a mix of
warning statements and images that depict the negative consequences of
smoking. Although the rule will follow much the same approach as the
Canadian warning label requirements, it will differ in some ways:
Canada has 16 labels in rotation, rather than 9; warning statements
appear in English on one side of a Canadian package and in French on
the other; and health and cessation information is included on leaflets
within Canadian cigarette packages (Ref. 125). 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 rule. In
addition, other smoking control initiatives, including new restrictions
on smoking in indoor public places, 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 new graphic
warning labels highly uncertain.
    Health Canada (Refs. 126 and 127) reports Canadian smoking rates
for ages 15 and above for years from 1994 through 2009. FDA obtained
smoking rates for adults, aged 18 and above, in the United States from
the National Health Interview Survey (Ref. 128) and from ``Health,
United States, 2005,'' published by the National Center for Health
Statistics (Ref. 129). We used the results from these two reports to
calculate the United States-Canada smoking rate difference for
individual years. As shown in table 4 of this document, the smoking
rate in Canada was, as of the most recent survey estimates, more than
three percentage points lower than the rate in the United States and
approximately seven percentage points lower than Canada's own smoking
rate in the year before graphic warning labels were implemented in that
country. It would be unjustified, however, to conclude that the
introduction of graphic warning labels in the United States will cause
the U.S. smoking rate to fall by seven, or even the three percentage
points needed to reach the Canadian rate. Many factors, such as tobacco
advertising restrictions, youth access restrictions, educational
campaigns regarding the health effects of smoking, restrictions on
smoking in indoor public places, and taxes on tobacco products have
influenced smoking rates in the two countries. In order to estimate the
incremental effect of the present rule, we need to isolate the impact
of graphic warning labels on the Canadian smoking rate.
    In order to accomplish this, as discussed in detail in Technical
Appendix X1, we begin by using data from Health Canada (Refs. 126 and
127), the National Center for Health Statistics (Ref. 129), and the
National Health Interview Survey (Ref. 128) to estimate pre-2001
smoking rate trends for both the United States and Canada. Because tax-
induced changes in the price of cigarettes have been shown to
substantially reduce smoking, in each trend estimation we include the
effects of Federal and State or provincial cigarette tax changes on
national smoking rates. (After decreasing substantially in the early
1990s, Canada's real average cigarette excise tax level grew by 9
percent between 1995 and 2000 and by 123 percent between 2001 and 2009.
Real average cigarette tax levels in the United States grew by 29
percent between 1995 and 2000 and by 117 percent between 2001 and
2009.) Using the estimated trends, we predict smoking rates for the
United States and Canada, and the difference between them, for years up
to and including 2009. We then subtract the predicted United States-
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 or for possible substitution by
consumers from cigarettes to other products (such as little cigars)
that may produce similar health effects; our method is therefore a
rudimentary approach to estimating the smoking reduction that will be
effected by the new graphic warning labels and may be producing results
that are off by one or more orders of magnitude.

[GRAPHIC] [TIFF OMITTED] TR22JN11.006

    Using this rudimentary approach, FDA estimates that the average
unexplained difference between United States and Canadian national
smoking rates is 0.088 percentage points higher for the 2001 through
2009 period than for 1994 through 2000. Applying this estimate to
population projections (Ref. 130 provides annual projections only
through 2030, so we assume cohort populations will remain the same from
2030 to 2031); summing over all age groups yields an estimate that the
rule will reduce (either through cessation or avoided initiation) the
United States' smoking population by approximately 213,000 in 2013,
with the total decrease rising to approximately 246,000 in 2031 due to
the predicted smoking rate decrease being applied to a growing
population. FDA has not quantified rule-induced decreases in cigarette
consumption among smokers who do not quit entirely, although such
decreases have the potential to improve health outcomes for affected
individuals.
2. Quantifying Benefits That Accrue to Dissuaded Smokers
    a. Smokers' willingness-to-pay for cessation programs. One method
for estimating dissuaded smokers' net internal benefits involves using
the amount smokers are willing to pay to participate in cessation
programs. This willingness-to-pay will equal the value of cessation
(i.e., the value of health and other benefits of cessation minus any
value that smokers attribute to the activity of smoking) multiplied by
the participation-related probability of success. Warner et al. (Ref.
131) report that the choke price, or the price at which no smokers
would participate in cessation programs, may be around $350 (in 2000
dollars), while a maximum of 10 percent of the smoking population would
participate in cessation programs even if those programs had a money
price of zero. With a linear demand curve, these parameters produce an
average willingness-to-pay among potential cessation program
participants of $175. Warner and coauthors report that approximately 15
percent of smoking cessation program participants successfully quit
without eventual relapse. These parameters indicate that the average
value of cessation is $175/0.15 = $1,167, or $1,444 when updated for
inflation (using Ref. 132).
    We estimate in section XI.D.1 of this document that the final
graphic warning label rule would reduce the U.S. adult smoking
population by 213,000 in 2013. In the absence of the rule, the baseline
2013 smoking population would be approximately 49.5 million, so a
decrease of 213,000 represents a 0.43 percent effectiveness of graphic
warning labels. The value to an individual smoker of graphic warning
labels equals their effectiveness multiplied by the value of cessation,
or 0.0043*$1,444 = $6.22. Multiplying by the predicted 2013 smoking
population yields an aggregate value of the rule of $6.22*49.5 million
= $307.9 million. For each year from 2014 to 2031, we perform an
analogous calculation, but we replace the entire smoking population
with only the particular year's newly exposed cohort (consisting of 18-
year-olds and new immigrants). This results in a present value of net
intrapersonal benefits of $370.3 million, calculated with a 3-percent
discount rate, or $322.4 million, calculated with a 7-percent discount
rate.
    While these values can provide rough estimates of the benefits of
the final rule, there are several reasons to believe they are only
approximations and probably reflect lower bounds. First, we are
implicitly assuming that the value of avoided smoking initiation is
equal to the value of cessation and that the value of cessation is
equal across the entire smoking population. In fact, we have
willingness-to-pay data only from those smokers who are potential
participants in cessation programs. The value of avoided initiation is
likely much higher than the value of cessation, which would tend to
make the present estimates of rule-induced benefits too low. A second
reason willingness-to-pay for cessation programs represents a lower
bound on the rule's benefits is because it captures only the
misinformation and time-inconsistent preferences that smokers
themselves recognize and act upon via participation in cessation
programs.
    b. Gross and net health benefits. We now turn to the literature on
time inconsistency, which is one of the principal forms of market
failure relevant to tobacco, to develop an alternative approach to
estimating rule-induced benefits that accrue to dissuaded smokers. The
papers we will

discuss use the term ``optimal internality tax,'' but the key point is
that taxes and cessation programs are both tools that cause a reduction
in smoking, and the dollar prices of those tools represent estimates of
the amounts that smokers would be willing to pay to gain the net
intrapersonal benefits associated with smoking reduction.
    Gruber and K[ouml]szegi (Ref. 104) estimate the tax rate that would
allow time-inconsistent smokers to consume the quantity that would be
optimal under perfect rationality and in the absence of other forms of
market failure. They first estimate an internal health cost of $30.45
per pack. From this cost, they calculate an internality tax that ranges
from $0.98 to $2.89 (depending on technical parameters of their model),
with an average of $2.17. Because the demand for smoking is downward-
sloping, a decrease in the smoking rate will decrease the optimal
internality tax. In Technical Appendix X5, we account for this
complication. Because we find that Gruber and K[ouml]szegi's results
imply that net internal benefits of the rule equal roughly 7 (=100-93)
percent of the gross internal (health) benefits, the average optimal
tax over the relevant portion of the demand curve is 0.07*$30.45 =
$2.05 per pack. Multiplying this optimal tax by the predicted rule-
induced reduction in cigarette consumption would yield an estimate of
benefits that accrue to dissuaded smokers.
    In other writings, Gruber (Ref. 133) suggests that, because his
work with K[ouml]szegi considered only a limited degree of time
inconsistency, the optimal internality tax on cigarettes could be much
higher than the level estimated with K[ouml]szegi, perhaps between 5
and 10 dollars per pack. (Even this amount does not, however, account
for other forms of market failure that might be relevant to tobacco
use.) The midpoint of the 5 to 10 dollar range, $7.50, yields a net
internal benefits result equal to roughly 24 percent of rule-induced
internal health benefits. Other models of addiction and smoking would
imply different net internal benefits, depending on the implied
severity of the market failure. One comment on the proposed rule, from
a scholar who has done a great deal of professional research on the
economics of smoking, suggested that smokers would assess the value of
quitting smoking as 90 percent of the value of health gained from
smoking. Although this and other public comments suggested high ratios
of net to gross health benefits, none provided evidence supporting
their suggestions.
    The applicability of any of the suggested net-to-gross internal
benefits ratios requires an estimate of the gross benefits realized by
individuals who are dissuaded from smoking. Gruber and K[ouml]szegi
admit that their $30.45 per pack estimate is not exhaustive, so we now
turn to quantifying morbidity, mortality, and other effects of smoking
cessation and avoided initiation.
    i. Expected life-years saved. The largest health consequence of
smoking is the increased rate of mortality from pulmonary and
cardiovascular disease, cancer, and certain other illnesses. As a
result, the largest benefits of this rule stem from the increased life
expectancies for those individuals who, in the absence of the 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. 116) construct life tables for
various categories of individuals, including ``nonsmoking smokers'' and
typical 24-year-old smokers. A nonsmoking smoker is someone who does
not use cigarettes but otherwise exhibits the lifestyle and personal
characteristics of the average smoker.\13\ 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 nonsmoking smokers between the 24th and 25th birthdays, the 25th
and 26th, and so on until the 100th birthday. (FDA assumes that
differences in yearly survival probabilities for smokers and nonsmokers
are negligible below age 24 and above age 100.)
---------------------------------------------------------------------------

    \13\ In their multivariate regression analysis, Sloan et al.
control for alcohol intake, body mass index, financial planning
horizon, race, education, and marital status.
---------------------------------------------------------------------------

    Overall, Sloan et al. find that an average (or what Sloan et al.
call ``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
undiscounted life-years per individual who is prevented from starting
to smoke. Comparing male 24-year-old typical and nonsmoking smokers,
life expectancy increases from 49.8 to 54.2 years, producing a gain of
4.4 undiscounted 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. 117), 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. In spite of this limitation, FDA considers
Sloan et al.'s methodology to be the most suitable in the literature
for purposes of the present analysis due to other studies' omissions of
a nonsmoking smoker adjustment, a lifetime cessation probability
adjustment, or both.
    We assume that each person who reaches ages 18 to 24 during the 20
years (2012 to 2031) of our analysis and is dissuaded from smoking
extends his or her life by the gender-specific amount Sloan and
coauthors 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. 128). The details of these adjustments appear in
Technical Appendix X2.
    ii. Benefits of reduced premature mortality. OMB Circular A-4 (Ref.
103) 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 (Refs. 134
and 135; 74 FR 33030, July 9, 2009), which we update to $106,308,
$212,615, and $318,923 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. As required by OMB Circular A-4, 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 $9,280 (for a
female applying a VSLY of $106,308 and a 7-percent discount rate to her
2.4 life-years gained due to smoking avoidance) to $363,333 (for a male
applying a VSLY of $318,923 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 and discounting the
results back to year 2011 yields estimates of rule-induced mortality
benefits that range from $1.45 to $22.56 billion.
[GRAPHIC] [TIFF OMITTED] TR22JN11.007

    These totals may understate the full value of rule-induced
reductions in mortality because they do not account for increasing
trends in life expectancy. Sloan et al.'s results, from which our
mortality estimates are derived, are based on data from the late 1990s.
Arias (Ref. 136) reports that between 1999 to 2001 and 2006 (the most
recent year for which life tables have been developed), life expectancy
at age 25 increased from 50.54 to 51.5 years, or 1.90 percent, for
males and from 55.41 to 56.1 years, or 1.25 percent, for females. If
these percentage changes are approximately correct for the typical
smoker and nonsmoking smoker populations, then our estimates of
smoking-related life expectancy effects would need to be adjusted
upward accordingly (or perhaps by different percentages because life
expectancy has continued to change since 2006).
    A further reason to believe the values in table 5 of this document
may be underestimates is their lack of quantification of 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. 116) indicate that, historically, the inclusion of
spouse and infant deaths from exposure to secondhand smoke or mothers
smoking while pregnant increased estimates of smoking's mortality
effects by approximately 26.3 percent. We do not incorporate this
adjustment into our analysis, however, because recent restrictions on
indoor public smoking and educational campaigns have significantly
reduced, though not eliminated, nonsmokers' exposure to secondhand
smoke. In other words, an analysis of the rule's impact on health
benefits that accrue to individuals other than smokers themselves
requires three pieces of estimation: (1) The rule-induced change in the
number of U.S. smokers, (2) the relationship between the number of
smokers and exposure of nonsmoking individuals to the harmful effects
of cigarettes, and (3) the effect of cigarette exposure on nonsmokers'
mortality. The ever-changing level of nonsmoker cigarette exposure
means that a simple extrapolation from the recent past provides a much
less reliable prediction of the near future for element (2) than for
other pieces of this analysis. Any estimation of (2) would therefore be
highly data-intensive and subject to an unacceptable level of potential
error. In general, FDA has been unable to obtain data with which to
solve this problem; it is for this reason that we do not quantify
health benefits that will accrue to individuals other than smokers
themselves.
    We do, however, note that the Robert Wood Johnson Foundation (Ref.
137) reports that the percentage of the U.S. population living in homes
where smoking was permitted decreased from 56.9 percent in 1992 to 1993
to 20.9 percent in 2006 to 2007. This may indicate that the ratio of
spouse and infant mortality effects (related to passive smoking) to
smoker mortality effects is now approximately 36.7 (= 20.9/56.9)
percent as large as the 26.3 percent ratio derived from Sloan et al.'s
results (which were calculated using data from the 1990s). Using this
very rough approximation yields a present value of spouse and infant
mortality benefits ranging from $140.3 million (= 0.263*0.367*$1.45
billion) to $2.18 billion (= 0.263*0.367*$22.56 billion). Although
there are serious weaknesses with this estimation approach that make it
inappropriate to include in our overall benefits analysis, the results
may give a sense of the magnitude of mortality benefits generated by
the rule via reductions in spousal and fetal smoking exposure.
    iii. Improved health status (or reduced morbidity). In the previous
section, we estimated the benefits that will accrue as a result of the
rule-induced reduction in premature deaths from cancer, pulmonary and
cardiovascular disease, and other smoking-caused illnesses. Cigarette
smoking also imposes costs on smokers in the form of pain, distress,
and impaired function even before these illnesses cause fatalities. As
with premature death, individuals are assumed to be willing to give up
valuable resources in order to avoid reductions in quality of life
associated with smoking-related illnesses.
    Sloan et al. (Ref. 116) examine survey respondents' self-reported
health status (which can be categorized as poor, fair, good, very good,
or excellent) and estimate that a 24-year-old smoker can expect, on
average, an extra 1.086 discounted years (using a discount rate of 3
percent and averaging over Sloan's estimates for males and females) or
0.521 discounted years (using a discount rate of 7 percent and again
averaging over males and females) of fair or poor health over his or
her lifetime, as compared with a nonsmoking smoker.
    In order to quantify the value of rule-induced reductions in years
spent in fair or poor health, we scale our estimates of the VSLY
($106,308, $212,615, and $318,923, as discussed in the previous section
of this document) by a ratio representing the trade-off individuals are
willing to make between time spent in best-possible and lesser levels
of health. Nyman et al. (Ref. 138) estimate this trade-off by matching
survey respondents' self-reported subjective health statuses with their
EuroQol-5D (EQ-5D) health index scores. The EQ-5D survey responses--to
questions about five areas of health, including mobility, self-care,
pain, anxiety, 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. Nyman et al.'s analysis indicates that, relative to the
health index score of an individual with excellent health, a very good
health score will be lower by 0.03,

a good health score will be lower by 0.078, a fair health score will be
lower by 0.194 and a poor health score will be lower by 0.392.
Weighting by Nyman et al.'s reported percentages of respondents in each
health category, FDA finds that the health index score for the average
individual in good, very good, or excellent health is lower than the
index for excellent health by 0.036 and the health index score for the
average individual in fair or poor health is lower than the index for
excellent health by 0.244; the difference between these averages is
0.208. This result may be interpreted as follows: The harm experienced
by an individual whose health changes, for 1 year, from good, very
good, or excellent to fair or poor is equal, on average, to the harm
experienced by an individual in the best possible health whose death is
hastened by 0.208 years. Thus, the welfare effect of smoking-related
health status changes may be found by multiplying a plausible life-year
value (such as $106,308, $212,615, or $318,923) by 0.208; this
multiplication yields estimates of $21,800, $43,600, and $65,400 for
the amounts individuals are willing to pay to avoid a year of reduced
health status.
    The U.S. Census Bureau (Ref. 130) predicts that the nation's 24-
year-old cohort will be 2.17 million females and 2.25 million males in
2013 and rise steadily to approximately 2.25 million females and 2.33
million males in 2031. FDA's estimate of a 0.088 percentage point
reduction in the U.S. smoking rate thus translates to a decrease of
3,906 24-year-old smokers in 2013, with the decrease rising to
approximately 4,154 in 2037. Multiplying these estimates of the rule-
induced reduction in the number of smokers by Sloan et al.'s
predictions of discounted reduced health-years per smoker and the
quality-of-life loss per year of fair or poor health derived from Nyman
et al., and discounting appropriately, yields a rule-induced welfare
gain of $0.5 to $4.7 billion. Detailed results appear in table 6 of
this document.
[GRAPHIC] [TIFF OMITTED] TR22JN11.008

    Sloan and coauthors do not report the effect of smoking on fair or
poor health years for dissuaded smokers of ages other than 24; in the
absence of a reliable estimate of the morbidity effect of smoking
cessation for individuals aged 25 and above, FDA takes the conservative
approach of estimating benefits only for adults who are at or below
that age sometime during the first 20 years of the rule's
implementation. Smoking cessation brought about by this rule will
improve health status, in some cases substantially, for many
individuals who are over age 24 at the time of the rule's
implementation. Our omission of these benefits to older individuals
produces an underestimate of the rule's morbidity benefits (which is
why we describe our estimate as conservative) but there are several
reasons to believe the magnitude of the underestimate may not be
overwhelmingly large. First, although individuals aged 24 and below
make up a fairly small portion of the smokers we estimate will be
dissuaded from smoking in 2013, they make up the vast majority of
smokers newly dissuaded in years 2014 to 2031 because it is young
people and a few immigrants who will be exposed to graphic warning
labels for the first time in those later years. Overall, then, our
morbidity results include effects for 98,355, or 33.8 percent, of our
estimated 291,103 (undiscounted) smoking dissuasions. Second, the
reduction in health risk experienced by smokers who quit at ages 25 and
above will be smaller than the benefits experienced by individuals who
quit at age 24 and below or who avoid smoking initiation altogether.
Third, in a study conducted with a methodology very different from the
one used in this regulatory impact analysis, Stewart et al. (Ref. 139)
estimate that smoking avoidance can increase discounted life expectancy
by 1.73 years and quality-adjusted life expectancy by 2.17 years; this
implies that, in the realm of smoking avoidance, the magnitude of
morbidity benefits is around 25 percent of the magnitude of mortality
benefits. Compared with this independent evidence, FDA's morbidity
results, which are 15.3 percent (undiscounted), 21.0 percent
(discounted at a 3-percent rate) or 34.5 percent (discounted at a 7-
percent rate) as large as mortality effects, appear to be only moderate
underestimates.
    iv. Medical services. Sloan et al. (Ref. 116) 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). Of the female smoker's net cost, $2,031
will be borne by the smoker herself and the remainder by nonsmokers in
the form of increases in private insurance premiums or taxes used to
fund government health programs such as Medicaid. Of the male smoker's
net cost, $1,372 will be borne by the smoker himself and the remainder
by nonsmokers. We adjust these cost estimates for inflation using the
most recent medical care CPI (Ref. 140).
    Sloan and coauthors do not report expected medical costs for former
smokers, so estimating benefits for individuals aged 25 and above who
cease smoking as a result of the rule requires some assumptions. For
this analysis, we assume that smoking-related annual excess medical
costs are the same whether smokers are compared with never-smokers or
former smokers and that the payments, reported by Sloan et al. as
present values for 24-year-olds, are distributed equally from ages 24
to 100 (in other words, we annualize Sloan et al.'s estimated present
value over the 77 years between ages 24 and 100). With these
assumptions, given FDA's projected 20-year reductions in smoking
prevalence, we anticipate that the regulation will cause smoking-
related medical expenditures to fall by $859.9 million, of which $458.2
million will be realized as savings by smokers themselves and $401.7
million by nonsmokers. With a 7-percent discount rate, the total
decrease in expenditure becomes $491.3 million, with $261.2 million of
those savings accruing to smokers and $230.1 million to nonsmokers.
Further details about the nonsmoker portion of expenditures appear in
the Distributional Effects portion of this analysis.
    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 \14\). Any reduction of this portion will not
contribute to the social benefit of the rule but will instead be a
transfer of resources from health service providers to consumers,
public and private insurers, and others. A further complication in the
analysis of the market for health is generated because nonsmokers'
payments take the form of a subsidy for smoking-related medical
services and thus some portion of their expenditure in the absence of
the rule is greater than smokers' own willingness-to-pay for those
medical services. Both for this reason and due to the existence of
economic rent, the avoidance of at least some portion of nonsmokers'
smoking-related spending will transfer value from one portion of
society to another 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 assume that
50 percent of nonsmokers' smoking-related spending accrues as a net
social benefit of the rule. This produces an overall estimate of rule-
induced reductions in medical expenditures of $659.0 million,
calculated with a 3-percent discount rate, or $376.3 million,
calculated with a 7-percent discount rate.
---------------------------------------------------------------------------

    \14\ The difference between what a supplier is paid for a good
or service and the marginal cost of supplying that good or service.
---------------------------------------------------------------------------

    v. Other financial effects of smoking cessation. In section XI.F.6
of this document, we will discuss in detail the effects of the rule on
Social Security, income taxes, private pensions, and life insurance.
Summaries of these effects will appear in table 23 of this document.
For the most part, we will characterize the values appearing in table
23 as transfers, having equal and offsetting effects on various members
of society. There are, however, some additional consequences of these
transfers that must be considered in light of the optimal internality
tax estimation approach and the related need to estimate gross internal
benefits and costs of dissuaded smoking. The mixture of positive and
negative values in table 23 shows that societal transfers can take the
form of both subsidies and additional costs of smoking; when summed
together, the positive and negative effects in table 23 show a net
smoking subsidy, which individuals relinquish when they avoid
initiating or quit smoking.
    There is a difficulty in quantifying the effect of the types of
transfers appearing in table 23 of this document on internal benefits.
Smokers' experience of these transfers may already be included in the
section XI.D.2.b.ii and XI.D.2.b.iii of this document estimates of
gross health benefits because the willingness-to-pay measure on which
we base our morbidity and mortality calculations includes all the
effects a person will likely experience as a result of improving his or
her health and extending his or her life. These effects include
increased opportunities to collect Social Security and defined benefit
pension payments, a decreased chance of leaving survivors enough life
insurance to make up for the amount paid in premiums, and increases in
pension and income tax payments (due to working longer and receiving
higher wages in compensation for higher productivity). If the results
in section XI.D.2.b.ii and XI.D.2.b.iii of this document already
reflect these phenomena, what is missing from our analysis is not the
intrapersonal effect associated with smokers' experience of table 23
transfers but the direct benefit to the general public of no longer
providing a net smoking subsidy; in this case, the total value of the
subsidy, or 100 percent of the values in table 23, would need to be
added to our net benefits estimate. Because morbidity and mortality are
the primary but not the only ways in which smoking affects Social
Security, income tax, pension, and life insurance payments and
receipts, we do not know the extent to which our morbidity and
mortality willingness-to-pay measures capture smokers' experience of
these transfers. We will assume that 50 percent of the midpoint values
in table 23 are included in our morbidity and mortality estimates; with
this assumption, our estimated net benefits will change in two opposing
directions: They will increase by 100 percent of the midpoint values in
table 23 (representing the reduced subsidy payment from the general
public), but will decrease by an amount equal to 50 percent of the
table 23 midpoint values times the net-to-gross benefits ratio
(representing the effects on dissuaded smokers that are not included in
the morbidity and mortality estimates).
    Summing our estimates of rule-induced life-year extensions, health
status improvements, medical cost reductions, and financial effects, we
find that the present value of health-related and financial benefits
accruing to dissuaded smokers totals $9.29 to $27.50 billion (with a 3-
percent discount rate) or $2.10 to $6.01 billion (with a 7-percent
discount rate). As shown in table 7 of this document, the present value
of financial benefits accruing to the general public totals $733.1
million (with a 3-percent discount rate) or $330.3 million (with a 7-
percent discount rate).
[GRAPHIC] [TIFF OMITTED] TR22JN11.009

    vi. Summary of benefits accruing to dissuaded smokers. Table 8 of
this document presents benefits estimates that reflect a variety of
net-to-gross ratios, ranging, as discussed in Technical Appendix X5,
from the 7

percent derived from the work of Gruber and K[ouml]szegi to the 90
percent suggested in a public comment. Also presented are the net
internal benefits results derived from Warner et al.'s work on the
value to smokers of cessation programs. For each discount rate and
VSLY, we also report the midpoint between the lower and upper bound
benefits estimates, where the upper bound is yielded by the 90 percent
net-to-gross benefits ratio and the lower bound by the 7-percent ratio
in some cases and by the cessation value approach in others. Given the
great variation in estimates of net benefits to dissuaded smokers, we
follow the recommendation of OMB Circular A-4 and use the midpoints for
our primary calculations in the remainder of this analysis. The
resulting midpoints range from $4.37 to $12.56 billion (with a 3-
percent discount rate) or $1.02 to $2.86 billion (with a 7-percent
discount rate). We emphasize that all the net benefits appearing in
table 8 are intrapersonal and thus could not be positive if all tobacco
consumers were time-consistent, fully rational, self-controlled, able
to resist temptation, and in possession of perfect and complete
information; instead, our results are qualitatively consistent with
policy implications of economic models in which consumers are
characterized by hyperbolic discounting, incorrect forecasting,
temptation utility or self-control problems (in addition to Gruber and
K[ouml]szegi (Ref. 104), see Bernheim and Rangel (Ref. 105) and Gul and
Pesendorfer (Ref. 110)) and with Gruber and Mullainathan's (Ref. 182)
examination of the effect of cigarette excise taxes on the happiness of
individuals with a high propensity to smoke.
[GRAPHIC] [TIFF OMITTED] TR22JN11.010

3. 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. 141). A
reduction in the number of smokers, and the coinciding number of
cigarettes smoked, will reduce the number of future fires.
    FDA estimates the rule-induced decrease in cigarettes smoked by
multiplying together the percentage change in smoking whose calculation
was described in section XI.D.1 of this document, the projected
population in a given year (Ref. 130) and age-appropriate discounted
lifetime cigarette consumption (in packs) per smoker. FDA calculates
average consumption for 18- to 23-year-olds using the May 2006, August
2006, and January 2007 Tobacco Use Supplements to the Current
Population Survey (Ref. 142). Sloan et al. (Ref. 116) report lifetime
discounted consumption for typical 24-year-old smokers. Comparing
against total consumption in 2006 (the most recent year for which the
FTC (Ref. 143) reports cigarette sales), we find that discounted
lifetime cigarette consumption will decrease by an amount equivalent to
3.9 percent (using a 3-percent discount rate) or 2.1 percent (using a
7-percent discount rate) of a present-day annual total as a result of
the final rule.
    The rule-induced percentage reduction in fires may not equal the
percentage reduction in cigarette consumption, however, because all 50
States have passed legislation that requires cigarettes to be self-
extinguishing or fire-safe (Ref. 144). FDA acknowledges some
uncertainty in the effectiveness rate of fire-safe cigarettes; \15\ for
this analysis, we

estimate that 10.6 percent of apparently rule-induced future fire
reductions would have been avoided even without this final rule due to
fire-safe cigarette design.
---------------------------------------------------------------------------

    \15\ One of the first States to enact these laws, New York,
requires cigarettes to self-extinguish 75 percent of the time (Ref.
145). Data from New York show a reduction in smoking-caused fires of
about 10.6 percent from the average of the 4 years (2000 to 2003)
prior to passage of the fire-safe cigarette law to the first 2 years
(2006 to 2007) after implementation was complete (Ref. 146).
---------------------------------------------------------------------------

    The National Fire Protection Association (Ref. 147) reports the
percentages of fire fatalities by age category; along with the CDC's
estimate of average American life expectancy (Ref. 136), these data
allow FDA to calculate that the average number of life-years lost by
fire victims is approximately 37.3; we project that total discounted
life-years saved as a result of the rule will be 317.4 (at a 7-percent
discount rate) or 1,198.5 (at a 3-percent discount rate). Using--as in
sections XI.D.2.b.ii and XI.D.2.b.iii of this document--VSLY ranging
from $106,308 to $318,923, FDA estimates total rule-induced fire-cost
savings of $106.0 to $262.5 million (at a 3-percent discount rate) or
$34.1 to $76.5 million (at a 7-percent discount rate); of these totals,
$12.9 (7-percent discount rate) or $27.7 million (3-percent discount
rate) consists of averted property damage, with the remainder being the
value of life-years saved. These estimated savings may significantly
underestimate the final rule's fire-related benefits because they
exclude noncivilian mortality and the value of reduction in fire-caused
nonfatal injuries. There will, however, be some double counting between
the estimated fire-related mortality benefits and the mortality
benefits estimated in section XI.D.2.b.ii of this document to the
extent that it is smokers themselves who are killed in cigarette-caused
fires.
4. Summary of Benefits
    The discussion above demonstrates the considerable magnitude of the
economic benefits available from smoking reduction efforts. As shown in
table 9a of this document, our midpoint benefits estimates range from
$5.21 to $13.55 billion (with a 3-percent discount rate) or $1.38 to
$3.27 billion (with a 7-percent discount rate). Estimates are presented
as annualized values in table 9b of this document, reported over time
in Appendix X3, and subjected to Uncertainty Analysis in Technical
Appendix X6. Nonquantified benefits include reductions in nonsmoker
morbidity and mortality associated with passive smoking and mothers
smoking during pregnancy.
[GRAPHIC] [TIFF OMITTED] TR22JN11.011

[GRAPHIC] [TIFF OMITTED] TR22JN11.012

E. Costs

    Implementation of this final rule, and the statutory requirements
directly linked to it, will create new burdens for cigarette
manufacturers. In particular, manufacturers will incur the upfront
costs associated with a major labeling change.\16\ There will be
additional ongoing costs associated with equal and random display of
the warnings required in this rule, as mandated by the Tobacco Control
Act. Cigarette manufacturers and retailers will 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.
---------------------------------------------------------------------------

    \16\ All of the upfront costs of this rule are assumed to occur
in the first period of the time horizon of this rule (2012). The
cost tables present raw undiscounted calculations of these one-time
costs. For summary tables requiring a present value, these costs are
discounted 1 year back to the present (2011).
---------------------------------------------------------------------------

1. Number of Affected Entities
    Labeling and advertising requirements will 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. 148). An
undetermined number of importers will also be affected.
    Noncompliant point-of-sale advertising will 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, &
smokers' accessories), we find accommodation and food service
establishments (NAICS 72) and retail trade establishments (NAICS 44-45)
that report tobacco sales (Refs. 149 and 150). 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 establishments will be affected by the rule.

[GRAPHIC] [TIFF OMITTED] TR22JN11.013

    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 11 of this document, we estimate that about 249,000 retail
establishments with payroll and 126,000 nonemployer establishments sell
tobacco products.

[GRAPHIC] [TIFF OMITTED] TR22JN11.014

2. Costs of Changing Cigarette Labels
    We have updated our analysis of the cost of changing cigarette
labels based on the availability of improved estimates generated by the
new FDA labeling cost model. Unless stated otherwise, our estimates in
this analysis come from the new model.
    The front and back of every cigarette package must be redesigned to
incorporate graphic warnings that will occupy the entire top half, and
the current warning will be eliminated. This is classified by the
labeling model as a major change. (Any change that affects more than
one color or changes the layout enough to require a redesign is major.)
In addition, the requirement to incorporate nine different warnings
will increase costs beyond what the labeling model estimates. FDA
accounted for the additional warnings by first calculating the standard
cost of a major change for cigarette labels and then inflating specific
cost components expected to increase as a direct result of the
requirement for nine warnings.
    The FDA labeling cost model incorporates three potential cost
components of a labeling change: Label design costs (incurred on a per-
UPC basis), inventory costs (incurred on a per-unit basis), and testing
costs (incurred on a per-formulation basis). Because the model has a
greater focus on analytic testing (e.g., measuring fat grams in a candy
bar) than on market testing (which is the aspect of testing applicable
to cigarettes), we perform several modifications to the model's testing
cost estimation. First, we calculate costs on a per-brand, rather than
per-formulation, basis and, second, we restrict the calculation of
market testing costs to the largest firms. 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. Further details of our estimation
approach will be discussed in section XI.E.4 of this document.
    The labeling model estimates that a total of 4,312 cigarette UPCs
(3,789 branded and 523 private label) will be affected by this rule.
However, it is estimated that label changes for 335 UPCs (8 percent of
branded and 6 percent of private label) can be coordinated with
previously scheduled, nonregulatory labeling changes. Coordination of a
regulatory change with a nonregulatory change reduces the incremental
burden of the regulatory change.
    As discussed in the responses to comments, FDA follows its previous
labeling cost model (Ref. 152) in assuming 10-percent rush charges
under a 15-month compliance period. Using the labeling model cost
estimates for uncoordinated changes and incorporating 10-percent rush
charges, we estimate that labor costs for label design, including
administrative labor costs as well as graphic design and prepress labor
costs, are $4,147 to $10,890. Materials costs are estimated to be
$6,644 to $10,934; included in this total are both prepress materials
and printing plate costs.\17\ Recordkeeping costs are estimated to be
$55 to $99. Summing labor, materials, and recordkeeping costs yields a
per-UPC label design cost of $10,846 to $21,923. The model estimates
that for coordinated labeling changes, there is a per-UPC cost of $340
to $840. This cost is nonzero because there will still be

some administrative labor and recordkeeping associated with
coordinating a regulatory change with a previously scheduled,
nonregulatory change. Total label design costs of this change are thus
estimated to be $43 to $87 million.
---------------------------------------------------------------------------

    \17\ Rotogravure, the most expensive printing method, is used
for cigarette package labels.
---------------------------------------------------------------------------

    Manufacturers incur costs if they discard unused label inventory at
the end of the compliance period and thus have to print new labels
instead of using that inventory. (There is also a small cost associated
with disposal.) The labeling model estimates that 767,016 labels will
be discarded at the end of the 15-month compliance period, each having
a cost of $0.028 to $0.039. The inventory-replacement cost of this
labeling change would then be $21,000 to $30,000. Table 12 of this
document summarizes the total cost of a standard major labeling change
(one warning per UPC), which is estimated to be $43 to $88 million.
[GRAPHIC] [TIFF OMITTED] TR22JN11.015

    We expect materials costs for printing plates and prepress
activities to be approximately nine times as large as previously
calculated for uncoordinated UPCs because of the requirement for nine
separate warnings. Each UPC will require nine printing plates, one for
each warning label. Additionally, the incremental materials cost of a
coordinated label change will be eight times the uncoordinated
materials costs, because eight extra printing plates will be needed. We
assume that this adjustment accounts for all the one-time costs that
arise from the requirement to use nine warnings.\18\ Table 13 of this
document shows the total costs of the cigarette labeling change, making
the adjustment for the nine-warning requirement. The labeling cost
range increases to $273 million to $465 million.
---------------------------------------------------------------------------

    \18\ Some of the subcomponents of other cost categories might
increase due to the nine-warning requirement, but there is far less
reason to believe there will be a direct, proportional relationship
between those cost categories and the number of warnings. For
example, the part of the label that is under the manufacturer's
control only has to be designed once because the same design will be
paired with all nine labels. Likewise, the amount of unused
inventory discarded is unaffected by the number of warnings used
under the new requirements.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TR22JN11.016

    The cost of changing cigarette labels is largely driven by
materials costs. The distribution for the estimate of materials costs
is extremely skewed to the right, as evidenced by the fact that the low
and medium estimate are much closer than the medium and high estimates.
We report the 90th percentile range but note that the high value
appears to be driven by a few extremely high values.
3. Ongoing Costs of Equal and Random Display
    The Tobacco Control Act calls for equal and random display of the
graphic warning images required by this rule. Although the initial
design and implementation of a system for equal and random display will
be part of the upfront label change, continued operation of such a
system in subsequent years will have incremental ongoing administrative
and recordkeeping costs. Such a system will be more burdensome than the
current system of quarterly rotation of four warnings. FDA assumes that
the ongoing yearly administrative labor cost per UPC will be equal to
10 percent of the (non-rush) administrative labor cost of an
uncoordinated labeling change, and the yearly recordkeeping cost will
be equal to 50 percent of the (non-rush) recordkeeping cost of an
uncoordinated labeling change. As shown in table 14 of this document,
FDA estimates that, under these assumptions, ongoing annual
administrative and recordkeeping costs equal $375,000 to $876,000.
[GRAPHIC] [TIFF OMITTED] TR22JN11.017

4. Market Testing Costs Associated With Changing Cigarette Package
Labels
    As stated previously, 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. 153 through
158). If we assume (as in the labeling model) that 8 percent of changes
for these brands are coordinated, then changes for the remaining 69
brands are not coordinated. Including rush charges, the cost of focus
group testing is estimated to range from $8,000 to $14,000 per brand,
and the cost of a quantitative study is estimated to range from $14,000
to $105,000 per brand. Assuming both types of testing are conducted for
69 brands yields a total cost estimate ranging from $1.5 to $8.2
million with a medium estimate of $2.1 million, as shown in table 15 of
this document. We assume that the requirement to use nine

different color graphic-text pairs does not affect these costs.
[GRAPHIC] [TIFF OMITTED] TR22JN11.018

5. Advertising Restrictions: Removal of Noncompliant Point-of-Sale
Advertising
    The principal effect of the restrictions on advertising in the 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 44396 at 44580). We retain our assumptions from
1996 about the level of effort required to remove point-of-sale
advertising. We acknowledge, however, that this approach may overstate
or understate the costs for a particular action or type of business.
    Table 16 of this document regroups the information from table 11 of
this document according to the categories studied by A.T. Kearney.
Because our analysis considers only the removal of point-of-sale
advertising from physical retail locations, we do not include nonstore
establishments. Table 17 of this document 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 17 to affected establishments. As shown in table 18 of this
document, the one-time costs to remove point-of-sale materials will
total $45.4 million.
[GRAPHIC] [TIFF OMITTED] TR22JN11.019

[GRAPHIC] [TIFF OMITTED] TR22JN11.020

6. 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) will be needed to
implement the 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.
    An additional cost of the final rule, borne by government but not
necessarily FDA, arises due to the required reference to the cessation
resource. The rule requires the final graphic warning labels to refer
to an already-existing cessation resource. Therefore, only costs
associated with additional traffic to that resource are attributable to
this final rule. FDA has not quantified these costs.
7. Summary of Costs
    Table 19 of this document summarizes the cost estimates from the
preceding sections and table 20 of this document displays the present
value and annualized value of costs. The tables in Technical Appendix
X4 show the undiscounted stream of costs. The range of total costs
presented in table 20 of this document is an approximate 90 percent
confidence interval and, as such, corresponds to the uncertainty range
of benefits presented in table 51 of this document. The distributions
of costs and benefits, however, are not correlated; in other words, it
may be the case that the actual effects of the rule fall in the high
end of the cost range and the low end of the benefits range, or vice
versa.

[GRAPHIC] [TIFF OMITTED] TR22JN11.021

[GRAPHIC] [TIFF OMITTED] TR22JN11.022

F. Cost-Effectiveness Analysis

    We measure the effectiveness of the final rule as the sum of saved
life-years and QALYs. In order to assess the cost-effectiveness of the
rule, we must adjust the costs to account for effects that are not
captured by life-years or QALYs. As shown in detail in the previous
section, we calculated the first 20 years' costs attributable to the
rule and found present values of $367.6 to $558.4 million (using a 7-
percent discount rate) or $407.3 to $607.4 million (using a 3-percent
discount rate). We add to each total the estimated monetary value of
lost consumer surplus (as discussed in detail in Technical Appendix X5,
this was implicitly netted out of life-years and health improvement
benefits estimates calculated in section XI.D.2.b of this document);
this yields overall costs of $1.46 to $3.70 billion (using a 7-percent
discount rate) or $5.33 to $15.55 billion (using a 3-percent discount
rate). In order to focus on the costs associated with extensions of
quality-adjusted life (see Ref. 103 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 $0.94 to
$3.19 billion (using a 7-percent discount rate) or $4.38 to $14.59
billion (using a 3-percent discount rate).
    Discounting over the same 20-year time period, we calculate that
this rule will lead to 208,535 to 246,137 discounted smoking
preventions or cessations. Similarly, we find that 18,534 to 86,326
discounted QALYs will be saved (this includes both fractional life-
years associated with reduced morbidity and full life-years associated
with reduced premature mortality--both for smokers themselves and for
others caught in the path of cigarette-related fires). This yields a
cost per smoking prevention of $4,530 to $59,287, and a cost per QALY
saved of $50,746 to $172,082. Braithwaite et al. (Ref. 159) find that
preferences in the United States are such that the threshold for cost-
effective interventions is somewhere in the range of $109,000 to
$297,000 per QALY saved.
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G. Distributional Effects

    This final rule will lead to losses to some segments of U.S.
society that will most likely be offset by equal gains to some other
segments of society; as such, these effects do not constitute net
social costs or benefits and have not yet been discussed in detail in
this Analysis of Impacts. In general, sectors affiliated with tobacco
and tobacco products will lose sales revenues as a result of this final
rule. Simultaneously, nontobacco-related industries will gain sales,
because dollars not spent for tobacco products will be spent on other
commodities.
1. Tobacco Manufacturers, Distributors, and Growers
    FDA estimates that implementation of the regulation may reduce the
annual cigarette consumption of U.S. smokers by 30.8 million packs (in
2013) to 40.5 million packs (in 2031). Meanwhile, the FTC (Ref. 143)
reports that, in 2006, 17.5 billion cigarette packs were manufactured
and distributed to consumers. These numbers imply that tobacco
manufacturer revenues will be 0.176 percent lower in the rule's first
year, and 0.231 percent lower in 2031, than they were in 2006. The U.S.
Census Bureau (Ref. 160) reports that tobacco manufacturers' revenues
totaled $41.6 billion in 2006; hence, the rule-induced decrease in
annual tobacco sales will range from approximately $73.1 to $96.2
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. 101) 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 will change cigarettes' market
price.
    We estimate that the tobacco manufacturing, warehousing, and
wholesale trade sectors employ about 74,000 full-time workers (Ref.
148). Under the assumption of constant production-to-employment ratio,
we project that a 0.176 to 0.231 percent reduction in sales will result
in the displacement of 130 to 171 jobs among manufacturers,
warehousers, and wholesalers.
    Effects of the rule will also be observed in the agricultural
sector. According to USDA's 2007 Census of Agriculture (Ref. 161),
there are 16,234 tobacco farms. Upon implementation of the 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 will
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 will offset any
employment losses from reduced spending on tobacco products (Ref. 162).
The major tobacco-growing states, however, will 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 the effects of this final
rule) 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. 122). 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 effects associated with the estimated reduction in tobacco
consumption will be small.
3. Retail Sector
    As will tobacco growers, distributors, and manufacturers, tobacco
retailers will be affected by any decrease in cigarette sales.
Retailers will, however, be in a position to shift shelf space and
promotional activities to nontobacco products, in order to take
advantage of the increase in demand for other products that will be
expected to accompany the decrease in spending on cigarettes. It is
possible that some retailers who rely heavily on cigarette sales may
not be able to fully offset their reduction in cigarette sales with
sales of other products. Other retailers would then experience some of
the gain in sales associated with an increase in demand for other
products. This would be a distributional effect within the retail
sector.
4. Advertising Industry
    The overall impact of the 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 will choose to conduct less
advertising. On the other hand, advertising industry revenue may
increase due to cigarette sellers' need to redesign advertisements to
accommodate new warning labels and to devise new promotional
strategies. In either case, few net social costs or benefits will be
generated. Moreover, the effect on advertising revenue will likely be
relatively small because spending on cigarette advertising has declined
substantially in recent years and is now quite small compared with the
1980s and 1990s (Ref. 143). 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. 143).
5. Excise Tax Revenues
    In 2009, Federal tobacco tax revenues totaled $16.3 billion, while
State and local tobacco tax revenues totaled $16.5 billion (Ref. 163).
This rule will decrease government tobacco tax revenues as fewer
Americans consume cigarettes. Sales tax revenues generated through
tobacco sales will also fall as a result of the rule, but those changes
will be much smaller than the changes in excise tax collections and
have not been quantified by FDA.
    FDA estimates this change in excise tax revenues by multiplying
together the percentage change in smoking rate, whose calculation was
described in section XI.D.1 of this document; the projected population
in a given year (Ref. 130); age-appropriate discounted lifetime
cigarette consumption (in packs) per smoker; and current Federal and
average State tax rates (Refs. 164 and 165). FDA calculates average
consumption for 18- to 23-year-olds using the May 2006, August 2006,
and January 2007 Tobacco Use Supplements to the Current Population
Survey (Ref. 142). Sloan et al. (Ref. 116) report lifetime discounted
consumption for typical 24-year-old smokers.
    FDA estimates that average direct annual rule-induced decreases in
excise tax collections will be approximately $33.4 million for State
governments and $25.7 million for the Federal government. Approximately
25 percent of this reduction may be offset by increased sales of other
taxable goods and services (Ref. 166); thus, the annual reductions in
tax collections will be $25.1 million for State governments and $19.3
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 $454.9 million (present
value with a 7-percent discount rate) to $977.5 million (present value
with a 3-percent discount rate) and to the Federal government of $348.1
million (present value with a 7-percent discount rate) to $749.8
million (present value with a 3-percent discount rate).
    Because we cannot know if nominal cigarette excise taxes actually
will increase at the rate of inflation, we also calculate these
discounted present values for the case in which tax rates remain at
their current nominal levels. In this case, the real tax rate will fall
at the rate of inflation, which we forecast using the difference
between interest rates for standard and inflation-protected long-term
Treasury bills. The U.S. Department of the Treasury (Ref. 167) reports
that, as of February 11, 2011, the composite rate for long-term
standard bills was 4.33 percent, while the composite rate for long-term
inflation-protected bills was 2.00 percent; the difference yields an
inflation forecast of 2.33 percent per year. At this rate of inflation,
the overall rule-induced tax revenue loss to State governments will be
$327.8 to $590.0 million and to the Federal government will be $250.6
to $451.9 million. FDA emphasizes that these estimates would be
altered, possibly a great deal, either by future changes in tax rates
or inaccuracy in the inflation forecast.
    We note that, leaving aside potential deadweight loss, there are
two principal effects of tax reductions: Gains to former payers and
losses to former recipients. Because these transfers exactly offset
each other, there is no net social cost or benefit associated with the
reduction in excise tax collections induced by the rule.
6. Government-Funded Medical Services, Insurance Premiums, and Social
Security
    Sloan et al. (Ref. 116) estimate that smokers use more medical
services over their life cycles than do comparable nonsmokers; in 2000
dollars and discounted at a 3-percent rate, specific net costs are
$3,757 per female 24-year-old smoker and $2,617 per male 24-year-old
smoker. Smokers bear a portion of these net costs themselves, but a
portion equaling $1,726 per female smoker or $1,245 per male smoker is
borne by nonsmokers through increased private insurance premiums or
taxes used to fund government health care programs; hence, a reduction
in the U.S. smoking population will transfer value from smokers (who
receive medical services paid partially by the general public) to
nonsmokers. If nonsmokers' payment portions are adjusted for inflation
and distributed over ages 24 to 100 as described in section XI.D.2.b.iv
of this document (``Medical Services''), given FDA's projected 20-year
reductions in smoking prevalence, this transfer totals $401.7 million.
With a 7-percent discount rate, the total becomes $230.1 million. Sloan
et al. indicate that this reduction will be distributed unequally
across Medicare, Medicaid, and other insurance types. Details appear in
table 22 of this document.
[GRAPHIC] [TIFF OMITTED] TR22JN11.024

    Sloan et al. (Ref. 116, at p. 255) estimate the effect of smoking,
per male and female smoker, on net Social Security, private pension,
and life insurance outlays, as well as on income tax payments. In the
cases of Social Security and private pension outlays, smoking-related
premature mortality causes smokers to collect less from the programs
than they contribute during their lifetimes. Therefore, any rule-
induced reduction in the U.S. smoking population will shift value from
members of the general public who pay Social Security taxes and who
contribute to private pension plans to the individuals who are
dissuaded from smoking by the regulation. A transfer in the opposite
direction--from individuals dissuaded from smoking by the regulation to
the general public--will occur in the realms of life insurance programs
and income taxes.
    Because Sloan et al. only report effects for 24-year-olds, we can
only directly calculate these transfer effects for cohorts who are no
older than 24 during the period from 2012 to 2031. The sum of these
effects appears in the lower bound columns of table 23 of this
document. For the upper bounds, we assume that effects are the same for
smokers aged 25 and above as they are for 24-year-olds. In converting
Sloan et al.'s present values, calculated with a 3-percent discount
rate, to present values calculated with a 7-percent discount rate,
further assumptions are necessary. We calculate the ratios of 7-percent
present values to 3-percent present values for all gross benefits
categories (life-years, health status, medical cost reductions, and
fire loss reductions) and use the lowest and highest ratios for the
lower and upper bounds in table 23. Finally, we note that we update
Sloan et al.'s estimates using the most recent annual GDP deflator
(Ref. 132).

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H. International Effects

    Of the $87.9 billion worth of tobacco products consumed in the
United States in 2009 (Ref. 168), only $156 million consisted of
imported cigarettes, with another $897 million imported as tobacco in a
less-processed state (Refs. 169 and 170). As in the United States,
foreign manufacturers, distributors, and growers of tobacco and tobacco
products will lose revenue as a result of the rule, though their loss
will be a small fraction of the overall revenue loss. As consumers who
would have been smokers purchase other products, there could be a shift
in patterns of international trade, depending on where the preferred
substitute products are made.
    The rule does not apply to cigarettes manufactured for export,
whose value totaled $417 million in 2009 (Ref. 169).

I. Regulatory Alternatives

    We compare the 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. We also describe alternatives associated with
different graphical warnings.
1. 24-Month Compliance Period
    Extension of the compliance period to 24 months reduces the one-
time costs of this rule through three avenues: The number of UPCs that
can be coordinated with a previously scheduled labeling change is
increased, rush charges for the label design and market testing costs
are eliminated, and discarded inventory costs are eliminated.
    Table 24 of this document shows that extending the compliance
period to 24 months would reduce the upfront label change cost by $30
to $53 million, to a total of $242 to $411 million. Table 25 of this
document shows that market testing costs would be reduced by $0.3 to
$1.8 million to a total of $1.2 to $6.4 million.\19\ Extending the
compliance period to 24 months would also delay all costs by about 9
months. We account for this by discounting the present value of costs
an extra 9 months in the summary of alternatives table at the end of
this section.
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    \19\ The increase in the proportion of UPCs that can be
coordinated is also expected to affect the number of brands that are
market tested.

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    Extending the compliance period to 24 months would delay the
accrual of health and fire reduction benefits by 9 months. An
approximation of the effect of this delay may be found by discounting,
at 3- and 7-percent discount rates, the previously calculated total
benefits. As shown in table 26 of this document, FDA finds that a 24-
month compliance period would decrease the present value of benefits by
between $65.4 and $294.6 million.
[GRAPHIC] [TIFF OMITTED] TR22JN11.027

2. 6-Month Compliance Period
    With a 6-month compliance period, the labeling cost model assumes
that there is not enough time for any of the labeling changes to be
coordinated with previously scheduled changes. Also, FDA accepts the
labeling model's assumption of 40 percent rush charges, rather than
assuming 10-percent rush charges as we did with a 15-month compliance
period. The labeling 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, with a 6-month compliance period, 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.

    The model, based on current sales data, estimates the number of
units sold annually to be about 8 billion. Therefore, 4 billion units
would be relabeled with stickers. The per-unit cost for the sticker and
application is between $0.045 and $0.323. Reducing the compliance
period to 6 months would then increase label change costs by $258 to
$1,430 million to a total of $531 to $1,895 million. It would also
increase the market testing costs by $0.6 to $3 million to a total of
$2 to $11 million. Finally, shortening the compliance period to 6
months would move all costs up by about 9 months. We account for this
by compounding the present value of costs 9 months in the summary of
alternatives table at the end of this section.
[GRAPHIC] [TIFF OMITTED] TR22JN11.028

    Reducing the compliance period to 6 months would hasten the accrual
of health and fire reduction benefits by 9 months. An approximation of
the effect of this change in timing may be found by compounding, at 3-
and 7-percent discount rates, the previously calculated total benefits.
As shown in table 29 of this document, FDA finds that a 6-month
compliance period would increase benefits by between $68.8 and $301.2
million.

[GRAPHIC] [TIFF OMITTED] TR22JN11.029

3. Alternative Graphic Images
    A legally available alternative to this rule would be to select a
different set of graphic images. Although we are unable to quantify the
effects of different graphic images, we note that some images may have
a larger impact on smoking rates than other images.
    Another alternative suggested would be to use more than nine
graphic images to accompany the nine statutory warnings. We cannot
assess the effect of additional images on the benefits of the rule but
more images would increase costs. Although not all costs rise in
proportion to the number of graphic images, the materials cost, which
is the largest cost component, would rise in proportion to the number
of images.
4. Summary of Regulatory Alternatives
    Table 30 of this document summarizes the regulatory alternatives
related to the compliance period 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
rule and its regulatory alternatives appear in table 31 of this
document.
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J. Impact on Small Entities

    The Regulatory Flexibility Act requires agencies to prepare a final
regulatory flexibility analysis if a final rule will have a significant
effect on a substantial number of small entities. We expect this 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 Final Regulatory Flexibility Analysis, as
required under the Regulatory Flexibility Act.
1. Description and Number of Affected Small Entities
    The final rule will 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 (Refs. 161 and 171).
    Table 32 of this document 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 employees,
so 20 small cigarette manufacturers will be affected (Refs. 148 and
171).
[GRAPHIC] [TIFF OMITTED] TR22JN11.031

    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 (Refs.
148 and 171). If the size distribution of cigarette importers is
similar to that of all tobacco wholesale trade firms, then 92 percent
of them will 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 33 of this document 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 affected small
entities.
[GRAPHIC] [TIFF OMITTED] TR22JN11.032

    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