Tobacco, Taxes and Unintended Consequences

Disclaimer – this post does not endorse, support or in anyway promote that tobacco is good for you.  I'm commenting on incentives not smoking.  

Program Design is Hard

A well designed program takes into account what the company wants, what the company needs and probably most importantly, what the participant will do when the program operates.  It may seem simple, but only through years of experience can you really know what will work.  And only through knowing the audience and the business for which the program will support, will you know what "could" happen and how to avoid the dreaded "unintended consequences."

I've posted numerous times about unintended consequences, and will continue to do so.  Highlighting what can go wrong is one of the very visible ways in which I can communicate the importance of professionally designed programs and convince companies to do the due diligence and hire a professional instead of pulling some intern out of marketing to design the program.

When Was the Last Time You Saw Someone Smoking a Pipe?

Pipe smoking (the legal kind – not the Olympic swimmer kind) is pretty rare these days.  The government thought so too.  So imagine their surprise when they noticed a big increase in pipe tobacco production.  From an article on yahoo - 

"Daniel Morris, who tracks tobacco production data at the Oregon Department of Health, thought he had made a mistake when he saw April's figures. Pipe tobacco production had more than doubled in a single month. After years of producing about 270,000 pounds per month, companies put more than 566,000 pounds of pipe tobacco on the market in April.

Morris called the federal Alcohol and Tobacco Tax and Trade Bureau, which collects the data.

There was no mistake.

Over the next several months, the numbers climbed higher. In August, the most recent data available, pipe tobacco reached 1.7 million pounds, enough to roll more than 42 million packs of cigarettes."

What happened?  

Simple – unintended consequences and a lack of understanding of the business you're trying to impact.

In the spring President Obama signed a law expanding children's health insurance and he slapped tobacco companies with huge tax increases to pay for it.  Taxes on roll-your-own cigarettes went from $1.10 to $24.78 a pound.  

Taxes are in effect, a "reverse incentive" – punishing behavior by increasing the "cost" of doing that behavior.  Give people rewards for doing something, they typically will do it.  Punish people for doing something they typically will change their behavior to avoid the punishment.  Companies are no different.

When faced with what amounted to a  2,152% increase in taxes on roll-your own tobacco (a pretty big punishment – and no, I didn't misplace the decimal) companies adapted. 

They reinvented their roll-your-own tobacco brands as pipe tobacco. 

TomAto – ToMAHto

Normally, pipe tobacco is too course and moist to be rolled – but it doesn't have to be.  With changes in production, pipe tobacco can be made in a way that allows it be rolled and smoked.  Remarketing their "old" line of roll-your-own tobacco as pipe tobacco, companies can take advantage of lower taxes on pipe tobacco – $2.83 per pound – 1/10th of the taxes on roll-your-own.

Kevin Altman, who represents a handful of small companies with the Council of Independent Tobacco Manufacturers of America, is quoted in the article as saying:

"Many times our government passes things without first taking an extra few days to say, 'What are the unintended consequences?'" Altman said. "That's what happened here."

I won't go into all the other ways our lawmakers miss the boat on unintended consequences – suffice to say I won't be lacking for future examples – but I leave you with this… 

When designing a program to influence behavior, make sure you understand the business you're impacting.  Without thinking through the ways in which the program can produce unintended consequences you can end up with a real problem – just ask the President.