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        "Records of the Domestic Policy Council (Clinton Administration)",
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    "ocrText": "05/08/98 15:28 FAX 202 456 5557\nDOMESTIC POLICY COUNCIL\n009\n05/06/98 WED 14:28 FAX 202 6222633\nUSA\nthey have uniformly concluded that there is no appreciable markup.⁵\nState Response to the Settlement\nIt is possible that states may respond to the settlement by raising their excise taxes in an\nattempt to partially recoup lost excise tax revenue. Such a response is consistent with a casual\nreading of the historical record. However, the proposed legislation contemplates a large \"pass\nback\" of settlement receipts to the states that will substantially exceed the lost excise tax\nrevenues. Thus, it is quite possible that states would lower state and local excises in response to\nthis inflow. In our analysis we have assumed that states neither raise nor lower their nominal tax\nrates in response to the settlement.\nYouth Lookback Penalty Payments\nA central issue in examining price effects is whether teenagers will reduce their cigarette\nconsumption sufficiently so that manufacturers can avoid the look-back penalties. It is clear that\nthe combination of anticipated price increases and the tighter restrictions on youth access and\nmarketing will lead to dramatic reductions in youth smoking. However, the many uncertainties\ninvolved in making these predictions underline the importance of incorporating in any legislation\nconcrete targets for reducing youth smoking with significant penalties for missing the reduction\ntargets.\nThe S. 1415 targets call for cutting youth smoking by 15 percent after 3 years, 30 percent\nafter 5 years, 50 percent after 7 years, and 60 percent after 10 years. The S 1415 lookback\npenalties are levied on the basis of the percentage shortfall (non-attainment percentage) from the\ntargeted reduction. The penalties are $80 million for each non-attainment percentage point of S\nor less; an additional $160 million per percentage point greater than 5 but less than 10; and an\nadditional $240 million per percentage point beyond 10. The lookback penalty is capped at $3.5\nbillion per year.\nIn assessing the potential costs of this lookback penalty for the industry over the first five\nyears of the settlement. it is necessary to estimate both the price and non-price impacts of the\n⁵For example, Barnett, P. et al. (1995), \"Oligopoly Structure and the Incidence of\nCigarette Excise Taxes,\" Journal of Public Economics, 57, P. 457-470; Merriman, D. (1994), \"Do\nCigarette Tax Rates Maximize Revenue?,\" Economic Inquiry, 32, 419-428; Sumner, D., \"A\nMeasurement of Monopoly Behavior: An Application to the Cigarette Industry,\" Journal of\nPolitical Economy, 89, 1010-1019. A number of states do have laws which try to limit predatory\npricing by regulating that retailers cannot sell at below cost. But this is irrelevant for the question\nof whether additional federal payments will be marked up at the retail level. So long as there is\nsome markup, there will be no predatory pricing finding - so that these laws provide no reason to\nhold markups constant in percentage terms\n6"
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