CHAPTER 7
ECONOMICS OF ALCOHOL AND TOBACCO

The alcohol and tobacco industries play large roles in the American economy. Both industries not only provide jobs and income for those involved in growing, manufacturing, and selling these products, they also contribute significant tax revenues to the federal, state, and local governments.

U.S. ALCOHOL SALES AND CONSUMPTION

According to the Economic Research Service of the United States Department of Agriculture, retail sales of alcoholic beverages totaled approximately $115.9 billion in 2003, up from $102.4 billion in 2000. Beer sales make up the greatest proportion of retail sales of alcoholic beverages, distilled spirits (gin, scotch, vodka, etc.) make up the second-greatest proportion, and wine is third.

Distilled Spirits Sales and Consumption

In 2004 the distilled spirits industry saw its seventh consecutive year of growth, with total consumption climbing 4.1% to just under 165.7 million nine-liter cases. Per capita consumption stood at 1.32 gallons in 2003 (the most recent year available). This figure was down from two gallons in the late 1970s, but up slightly from the 1.2 gallons consumed per person per year in 1997-1998.

Beer Sales and Consumption

The beer industry reached 197.2 million barrels in 2002, up 0.7% from 2001. It was also the seventh year of growth for the industry, according to alcoholic beverage analysts Adams Beverage Group (Modern Brewery Age, March 10, 2003). According to the Economic Research Service, per capita consumption fell almost steadily through the 1980s and early 1990s. Beer consumption was 24.6 gallons per person in 1981 and 21.6 gallons per person in 2003, a figure that remained relatively constant during the late 1990s and early 2000s. Although per capita consumption fell between 1981 and 2003, gross consumption rose as the population rose. International brands have played a significant role in the industry's growth. The import sector has grown steadily over the last fifteen or so years, according to the Beer Institute.

There were an estimated eighteen hundred domestic brewers in the United States in 2001, seven times the number in 1990, according to the Beer Institute. Microbreweries and brewpubs account for this increase. Anheuser-Busch, Inc., the top brewer in the country, controlled 51.6% of industry production in 2002, according to Beverage Marketing Corporation. Miller Brewing Company was next (19.7%), followed by Adolph Coors (11.5%), Modelo (4.2%), and Pabst Brewing (4.0%).

Wine Sales and Consumption

Statistics gathered by the Wine Institute show that wine sales in the United States grew 4%, to 668 million gallons in 2004. A total of 595 million gallons of wine were sold in the United States in 2002, for a retail sales value of $21.1 billion, up from $19.8 billion in 2001. Nonetheless, the Economic Research Service notes that per capita consumption of wine was at its peak of 2.4 gallons a year in the mid-1980s before beginning a slow decline to 1.7 gallons per capita in the early to mid-1990s. The per capita consumption rate in 2003 was 2.2 gallons per person, having risen close to that peak consumption.

The California wine industry accounted for 64% of U.S. production in 2004, according to the Wine Institute. Red wines held a 40.5% market share in 2004, white wines a 40.4% share, and blush wines a 19.1% share. Chardonnay was the leading varietal wine (a wine produced from a single variety of grape) followed by Merlot.

HOW MUCH DO INDIVIDUALS AND FAMILIES
SPEND ON ALCOHOL?

The U.S. Bureau of Labor Statistics reported in Consumer Expenditures in 2002 (published 2004) that the average American family spent $376 on alcoholic

beverages in 2002, up from $349 in 2001 and $372 in 2000. This figure represents 0.9% of the average annual expenditures for the American family. This percentage has remained relatively stable since 1993.

The amount spent on alcohol varied in 2002, depending on the characteristics of the household. On average, single parents with at least one child under age eighteen spent only $146 on alcoholic beverages in 2002, or about 0.5% of their average annual expenditures. Married couples with no children spent $479 (up from $388 in 1999), which was 1% of their average annual expenditures. The percentage other groups spent on alcohol varied within the 0.5 to 1% range, except for the "single person and other consumer units" group. This group spent the largest proportion of their average annual expenditures on alcohol: nearly 1.2%.

U.S. TOBACCO PRODUCTION
AND CONSUMPTION

Farming Trends

Sparked by the invention of the cigarette-making machine, which made cigarettes cheaper and faster to manufacture, tobacco production in the United States grew from about three hundred million pounds in the mid-1860s to over a billion pounds by 1909. By the mid-1940s tobacco production topped two billion pounds as cigarette consumption continued to grow.

During the 1960s changes in tobacco preparation and the introduction of new machinery increased the amount of tobacco production per acre, although the number of tobacco farms dropped from about 512,000 in 1954 to approximately 89,706 in 1997. After 1998, acreage devoted to tobacco and the value of production began to decline steadily. The number of acres used to grow tobacco fell from 1.5 million in 1954 to 717,620 in 1998 to 416,210 in 2003. The 2003 harvest produced 831.2 million pounds of tobacco, valued at about $1.6 billion, down from a recent high of $3.2 billion in 1997. (See Table 7.1.)

In 2003 North Carolina led in tobacco production, followed by Kentucky, Tennessee, South Carolina, Georgia, and Virginia. (See Table 7.2.) Tobacco plays a major role in the agricultural economies of the leading half-dozen tobacco-producing states.

Every five years, the U.S. Bureau of the Census performs a census of farming and agriculture. In 2002 (the most recent year available) the national average value of tobacco sold per farm was $28,420, down from $32,700 in 1997.

Value and Income

In 2002 tobacco crops had a value of approximately $1.7 billion in cash receipts. (See Table 7.3.) Preliminary U.S. Department of Agriculture (USDA) figures about the 2002 tobacco crop indicate it represented 0.90% of all cash receipts from crops and 1.75% of all farm commodities.

Tobacco is a very labor-intensive crop to produce. Brazilian researchers estimate that it takes up to three thousand person-hours per year to grow one hectare of tobacco. (A hectare is about 2.5 acres.) Vegetables, by comparison, take about one-tenth the labor to grow. Although tobacco pays more per hectare than any other commonly grown farm crop, more than half of tobacco growers cannot earn enough as tobacco farmers due to high costs for labor. They must also work at other jobs to support themselves and their families.

Manufacturing

The Economic Research Service of the USDA estimates that in 2004 American factories produced

495 billion cigarettes, of which 125 billion were shipped to other countries. (See Table 7.4.) This is down from a peak output of 754.5 billion cigarettes produced by American factories in 1996. Exports were high that year as well: 243.9 billion cigarettes.

Tobacco Consumption

Cigarette smoking in the United States has been dropping almost every year since 1963, when per capita consumption reached a record high of 4,345 cigarettes. Preliminary USDA figures estimated the 2004 per capita cigarette consumption of the population eighteen years old and older at 1,791 cigarettes. (See Table 7.5.)

Per capita consumption of all tobacco products generally decreased during the period shown in Table 7.5, from 4.67 pounds in 1995 to 3.89 pounds in 2004. Per capita consumption of large cigars by males, however, increased during the period, jumping from nearly 27.5 large cigars and cigarillos (small cigars) per adult male in 1995 to slightly over 37.5 in 2004. The highest consumption was

in 2001, at slightly more than 40.5 large cigars and cigarillos per adult male.

Consumer Spending on Tobacco

Americans spent an estimated $86.6 billion on tobacco products in 2003, the second-highest amount in the past decade and a 77% increase over 1993 spending. (See Table 7.6.) The majority (94% or $81 billion) was spent on cigarettes. This was slightly less than 1% of all disposable personal income. Although consumption of cigarettes has declined over the past few years, expenditures (after adjustment for inflation) have increased due to increasing cigarette prices.

The U.S. Bureau of Labor Statistics, in Consumer Expenditures in 2002 (published in 2004), reported that the average American family spent $320 on tobacco products and supplies in 2002. In 2000 the average spent was $319 and, in 2001, $308.

Exports

In 2004, 125 billion cigarettes were exported to well over one hundred countries. From 1996 to 2004, cigarette exports fell by about 120 billion pieces. (See Table 7.4.) Most of the cigarettes exported went to Japan (54.9 billion), Iran (13.4 billion), and Saudi Arabia (8.3 billion). Other major importers of American cigarettes were Israel (3.9 billion), Lebanon (3 billion), Kuwait (1.5 billion), Hong Kong (1.4 billion), the United Arab Emirates (1.4 billion), and Taiwan (1.2 billion). (See Table 7.7.) Many of the importers in these countries then export these cigarettes to other countries.

Imports

According to the Tobacco Situation and Outlook Yearbook, published by the U.S. Department of Agriculture's Economic Research Service in December 2004, the United States imported 638.2 million pounds of unmanufactured tobacco in 2003, up from the 516.8 million pounds imported in 2001.

WORLD TOBACCO MARKETS

The U.S. Department of Agriculture estimated the world production of tobacco in 2003 at 6.57 million metric tons (a metric ton equals one thousand kilograms or 2,204.62 pounds), down from 6.98 million in 2002 but up from 6.45 million in 2001. China produced nearly 40% (about 2.62 million metric tons). Other leading tobacco producers included India (660,000 metric tons), Brazil (636,700 metric tons), the United States (403,518 metric tons), Turkey (171,314 metric tons), and Indonesia (158,900 metric tons). (See Table 7.8.)

The Tobacco Atlas, published by the World Health Organization (WHO) in 2002, notes that each year more than five trillion cigarettes are manufactured. China is the largest manufacturer, followed by the United States. Nearly two million people are employed in the industry worldwide. Philip Morris is the largest transnational tobacco firm, with $47.1 billion in sales and more than 16% of the global tobacco market in 1999. Marlboro is the most popular cigarette brand, selling 350 billion units in 1999, according to the WHO.

In August 2003 Reuters news service reported that 80% of smokers live in the developing world. Indeed, Vincent Coppola cited a statistic from a 2001 WHO report that in a survey of sixty-eight countries, up to one-quarter of children ages eleven to fifteen had been handed free cigarettes by marketers (Vincent Coppola. "Smoked Out," Adweek, May 6, 2002). Figures from the Campaign for Tobacco-Free Kids show how lucrative overseas markets can be for cigarette makers. In 1998 Philip Morris made a profit of $5 billion selling cigarettes overseas. In the United States its profits totaled $1.5 billion.

On February 27, 2005, the world's first tobacco control treaty, the World Health Organization Framework Convention on Tobacco Control (WHO FCTC), became binding international law with ratification by fifty-seven

countries, including Canada. The United States had signed the measure but had not ratified it (become bound by it) as of mid-2005. The goal of the WHO FCTC is to improve global health by reducing tobacco consumption by setting international standards on tobacco price and tax increases, tobacco advertising and sponsorship, labeling, illicit trade, and secondhand smoke.

ALCOHOL AND TOBACCO ADVERTISING

Alcohol Advertising

The Center for Science in the Public Interest (CSPI), a nonprofit health-advocacy organization based in Washington, D.C., estimated in 2001 that the alcohol industry spends nearly $3 billion a year on marketing and promotion. In 2003 alcohol advertising expenditures accounted for approximately $1.7 billion of marketing and promotion expenses.

According to data from Adams Business Media available through the CSPI Alcohol Policies Project, the beer industry spent approximately $1.2 billion in 2002 on advertising, up from $799.7 million in 1999. The liquor industry spent $408.1 million, up from $321.4 million in 1999. The wine industry spent $122.4 million, up from $120.5 million in 1995.

The beer industry focuses most of its advertising dollars on television, the wine industry focuses primarily on both print media (magazines, newspapers, and bill-boards) and television. Traditionally the liquor industry has focused its advertising primarily on print media, but spending on television and radio advertising rose substantially between 1999 and 2002. This dramatic increase is largely the result of the liquor industry's decision to lift its self-imposed ban on radio and television advertising.

LIFTING THE BAN.

The distilled spirits industry, in a self-imposed ban, had not advertised on television and radio for fifty years. In November 1996, however, the Distilled Spirits Council of the United States (DISCUS) announced that it had revised its advertising code and lifted the voluntary ban. DISCUS president and CEO Fred A. Meister said, "The absence of spirits from television and radio has contributed to the mistaken perception that spirits are somehow harder or worse than beer or wine and thus deserving of harsher social, political, and legal treatment." Meister continued, "Distilled spirits advertisement will continue to be responsible, dignified, and tasteful messages for adults and will avoid targeting those under the legal purchase age, regardless of the medium."

In 2001 NBC became the first broadcaster to end the ban on hard liquor advertising. It offered some restrictions: the ads would run only after 9 p.m. and only on programs where at least 85% of viewers are at least

twenty-one years of age. Four months of ads promoting responsible drinking would precede the regular liquor spots. The broadcaster's decision was met with nearly universal derision, and a short time later NBC returned to its ban on hard liquor advertisements.

REACTIONS TO LIFTING THE BAN.

President Bill Clinton called the decision to end the fifty-year-old ban on alcohol advertising a "simply irresponsible move" that would make the job of rearing children harder. In April 1997 he called for an inquiry by the Federal

Communications Commission (FCC) into the impact of lifting the ban.

In 1998, prompted by a congressional order, the Federal Trade Commission (FTC) investigated whether the alcohol industry was doing enough to discourage ads that appeal to underage drinkers. In a report to Congress in September 1999, the FTC called for beer, wine, and liquor companies to do more to ensure that minors do not see their advertisements. The FTC recommended that ads for alcoholic beverages should not be shown in theaters with movies rated PG or PG-13, on TV programs aimed at similar audiences, or on college campuses. Additionally, the FTC called for the formation of independent review boards to handle complaints from consumers and competitors about alcohol advertisements. The industry imposed self-regulated guidelines requiring that at least 50% of the audience for alcohol ads consist of adult consumers.

In September 2003 the FTC followed up on the recommendations issued in 1999 by surveying alcohol companies to see if they had followed the self-imposed guidelines and the recommendations offered by the FTC

in 1999. Their report Alcohol Marketing and Advertising: A Report to Congress also investigated whether flavored malt beverages (FMBs or "alcopops" such as "hard lemonade") and advertising for them were targeted to an underage audience. The FTC found that in 99% of cases the self-imposed guideline of reaching a 50% adult audience had been followed. It also found that the alcohol industry was doing a better job of external review and that FMBs were not targeted specifically at underage consumers and advertising for them was following the guidelines set. The industry also promised to improve the self-imposed guidelines by reaching a 70% adult audience in the future. The FTC recommended that the industry be more careful about content that could be seen as appealing to underage drinkers.

In spite of the high marks given to alcohol industry advertising by the FTC, a survey commissioned by the CSPI, conducted by the Global Strategy Group and released on July 16, 2002, determined that teens are getting substantial exposure to advertisements for alcopops. These drinks carry the brand names of hard liquors, such as Bacardi and Smirnoff. The CSPI study found that 77% of teens watch television after 9 p.m. on school nights, which is a time during which the liquor industry advertises. Public-health advocates suggest that advertising these sweet drinks on television is a "back-door" method by which liquor companies can promote their names to adolescent audiences on network television. In addition, they see alcopops as a way in which the alcohol industry encourages young people who are unaccustomed to the taste of hard liquor to drink.

PUBLIC SUPPORT FOR RESTRICTIONS ON ALCOHOL ADVERTISING.

In neither the 1999 nor the 2003 report (the most recent at this writing) did the FTC recommend government regulation of alcohol advertising. Proponents of alcohol advertising restrictions, however, believe that industry self-regulation has failed and should be replaced by stricter government regulations. Critics state that even reaching a 30 to 50% underage audience is detrimental to children and teens.

The Youth Access to Alcohol Survey (Alcohol Epidemiology Program, University of Minnesota, December 2002; the most recent at this writing), released by the Robert Wood Johnson Foundation, found that Americans are very concerned about underage drinking and support restrictions on alcohol advertising. More than two-thirds (67.2%) either strongly or somewhat favored a ban on hard liquor advertising on television in 2001. (See Figure 7.1.) A smaller percentage of those surveyed (58.9%) either strongly or somewhat supported bans on beer and wine advertising on television. (See Figure 7.2.) Sixty-two percent favored bans on the use of sports teams and athletes as symbols in advertising and promotions of alcoholic beverages. (See Figure 7.3.)

IS THERE A LINK?

It is unclear whether exposure to alcohol advertising will predispose young people to drink. Both the Federal Trade Commission and the Department of Health and Human Services have released statements claiming there is no research suggesting a significant relationship between alcohol consumption and advertising. Recent studies (Casswell and Zhang 1998; Grube and Wallack 1994; Wylliet et al. 1998) are careful to state that alcohol advertisements may influence the decisions made about drinking by young men and women.

Using advertising industry databases and methods, the Center on Alcohol Marketing and Youth (CAMY) at Georgetown University has documented that young people (ages twelve to twenty) were exposed to more alcohol advertisements in magazines than adults from 2001 to 2003: 52% more for beer and ale and 33% more for distilled spirits in 2001; 57% more for beer and ale and 23% more for distilled spirits in 2002; and 49% more for beer and ale and 20% more for distilled spirits in 2003. They were also sixty times more likely to see a commercial for alcohol than an advertisement for responsible drinking.

According to the CSPI, children frequently exposed to television beer ads can usually match brand names and beer slogans. The Budweiser frogs were part of a popular ad campaign launched in 1995, prompting Mothers against Drunk Driving president Karolyn Nunnallee to remark that "Alcohol marketers are bombarding our children with characters that look like they belong on Saturday morning cartoons, and it's absurd to think these don't affect our young people."

Children were nearly as familiar with the "Bud-weis-er" slogan as they were with Bugs Bunny's famous "What's Up Doc?" greeting. In 1996 the Budweiser ads were among children's favorite advertisements. (Children, Health and Advertising, Issue Briefs, Studio City, CA: Mediascope Press, 2000). The Budweiser ads were initially launched during the Super Bowl, home to more than a few liquor advertisements. Often these ads receive more attention than the game, leading CAMY's executive director to refer to them as the "Ad Bowl" of the "Super Bowl" ("Alcohol Commercials Bowl Over Responsibility Ads," US Newswire, February 3, 2003).

The Centers for Disease Control and Prevention (CDC) has expressed concern that alcohol ads placed in convenience stores, small groceries, and gas stations could increase underage drinking. These ads are often of "high intensity" and placed at a child's eye level. Particularly troubling is that CDC officials report that 75% of teenagers shop at convenience stores or gas stations weekly.

Tobacco Advertising

According to the FTC's Cigarette Report for 2002, which was issued in 2004, cigarette sales fell 5.5% over the previous year, to 376.4 billion cigarettes. Advertising expenditures in 2002 increased 11% from 2001, to approximately $12.5 billion, the most ever reported to the Federal Trade Commission. As expenditures increased, however, per capita cigarette consumption continued to drop. (See Figure 7.4).

The tobacco industry is forbidden by law to advertise on radio and television. Where do the industry's advertising dollars go? The largest share (about $7.9 billion) of the approximately $12.5 billion spent in 2002 was used for price discounts, which are paid to cigarette retailers or wholesalers to discount the price of the cigarettes to the consumer. Another approximate $2.5 billion was spent on sampling distribution—giving free cigarettes to the public. Slightly more than $1 billion was spent on giving bonus cigarettes with purchases, and about $1.3 billion was used for retailer promotional allowances, which pays them for stocking, shelving, and displaying cigarettes.

In 2001 the FTC required for the first time that cigarette makers report how much they spent on advertisements intended to reduce smoking among teenagers and adults. Cigarette makers spent $79.4 million on such advertisements in 2001 and $74.2 million in 2002 (which was not part of the $12.5 billion in advertising spending).

In the past, cigarette advertisements in magazines were usually full-page and full-color productions showing glamorous, sophisticated people or rugged, outdoor types, depending on the market toward which the advertisement was targeted. New Food and Drug Administration (FDA) rules that were to become effective in August 1996 would have permitted just black and white, text-only advertising. However, lawsuits were filed against the FDA, contending, among other challenges, that these advertising restrictions violated the First Amendment protection of free commercial speech.

In March 2000 the Supreme Court ruled that federal health authorities, such as the FDA, have no power to regulate the manufacture and sale of cigarettes. A few days after the ruling was announced, President Bill Clinton urged Congress to give the FDA the authority to regulate tobacco advertising and tighten legislation regarding tobacco purchases by children under eighteen. In 2001 a bipartisan coalition renewed the effort to grant the Food and Drug Administration authority to regulate tobacco, reintroducing a bill that would let the FDA restrict tobacco advertising that targets children. The proposed legislation is called the Kids Deserve Freedom from Tobacco Act of 2001 (KIDS Act). The bill was referred to the Senate Committee on Health, Education, Labor, and Pensions, where it remained. On March 22, 2005, Senators Olympia Snowe, Michael DeWine, and Edward Kennedy introduced a refashioned bill: the Family Smoking Prevention and Public Health Protection Act, which would give the FDA the authority to regulate the marketing and manufacture of tobacco products in an effort to curb youth smoking.

ADVERTISING TARGETED AT WOMEN.

Women did not generally smoke—at least not in public—before World War I (1914-18). Just after the war, Lorillard began using images of women to advertise its Murad and Helman brands. During the 1920s Marlboro advertised in fashion magazines, and Lucky Strike encouraged women to "Reach for a Lucky Instead of a Sweet," implying that they could stay slim by smoking. Other ads focused on women's struggle to gain voting rights, encouraging women to express their desire for liberation by smoking.

In the late 1960s Philip Morris introduced its successful Virginia Slims brand. Its "You've Come a Long Way, Baby" campaign implied that smoking cigarettes was as much a part of women's rights as equal pay. John P. Pierce et al., in "Smoking Initiation by Adolescent Girls, 1944 through 1988" (Journal of the American Medical Association, February 23, 1994), found that "In girls younger than eighteen years, smoking initiation increased abruptly around 1967, when tobacco advertising aimed at selling specific brands to women was introduced. This increase was particularly marked in those females who never attended college. Initiation rates for females younger than eighteen years peaked around 1973, at about the same time sales of these brands peaked."

The controversial Virginia Slims campaigns continued. In 1991 the company launched the "Find Your Voice" campaign, showing beautiful women from around the world. The campaign, according to many critics, was about linking smoking to being attractive and empowered. A 2000 study by the Harvard School of Public Health noted that women in lead or supporting roles in films were more likely than their male counterparts to be depicted smoking. In 2001 cigarette ads appeared that targeted African-American women and implied that smoking makes women attractive, sexy, and the center of attention.

ADVERTISING TARGETED AT TEENAGERS.

Critics of tobacco advertising have frequently cited the cartoon character Joe Camel, which RJ Reynolds used to advertise its Camel brand of cigarettes, as an example of advertising targeted to children and teenagers. Results of a study reported in 1991 in the Journal of the American Medical Association noted that young people had been strongly influenced by the Joe Camel campaign. Among children, Joe Camel was as easily recognized as Mickey Mouse. Between 1987, when the campaign began, and 1993, the percentage of Camel smokers under the age of eighteen increased from 3% to 16%.

The RJ Reynolds Tobacco Company responded with a November 1993 survey indicating that Joe Camel was no more recognizable to teenagers than any other advertising character. Furthermore, the survey showed that recognition of Joe Camel did not necessarily influence teenagers to start smoking. The tobacco industry maintains that it has no desire to see teenagers smoking. According to the industry, peer pressure, not advertising, is the major factor that leads young people to smoke. The tobacco industry claims that its advertising is designed to attract the 60% of smokers who change their brand of cigarettes at some time during their lifetime.

Nevertheless, the Federal Trade Commission (FTC) officially issued an administrative complaint in May 1997. The FTC charged that the Joe Camel advertising campaign violated federal fair trade laws by promoting a lethal and addictive product to children and adolescents who could not legally purchase or use it. In 1997 the RJ Reynolds Tobacco Company agreed to eliminate Joe Camel and other cartoon characters from its advertisements and packaging.

THE PRISON MARKET.

The prison population has long represented a large and lucrative population for cigarette manufacturers. Many wardens passed out free cigarettes to prisoners. According to a Wall Street Journal article (Vanessa O'Connell, "Bans on Smoking in Prison Shrink a Coveted Market," August 27, 2003), inmates in the Menard Correctional Center in Illinois produced inexpensive cigarettes from the 1940s through the 1990s. The cigarettes were sold to the prisoners; the funds were then used to support prison programs. The Lorillard Tobacco Co. sponsored programs such as "Play Ball with Newport." Under this program, prison officials bundled together empty Newport pack wrappers to trade in for sports equipment or board games. They also offered the "Great Newport Sneaker Deal," in which three hundred to four hundred empty packs could be traded in for hightop sneakers.

Prisons have been a successful market for cigarette firms. As Mark Smith, a spokesman for Brown & Williamson, said in the Wall Street Journal article, "when smokers are either bored or under stress they might use more tobacco."

According to the article, roughly 70 to 80% of the prison population is thought to smoke regularly. A store in a large prison may generate $500,000 annually in cigarette sales (cigarettes can have markups as high as 60%, representing significant profits for a prison store).

BILLBOARD ADVERTISING.

On April 23, 1999, all tobacco billboards in the United States had to come down as part of the settlement between the tobacco industry and state attorneys general in forty-six states. The tobacco companies accepted the FDA's authority to regulate tobacco products and restrict their advertising. However, the outdoor advertising ban applied only to signs larger than fourteen square feet. Retailers put up smaller cigarette signs in front of their stores, "right at the kids' eye level," noted William Godshall, executive director of Smokefree Pennsylvania.

In 1998 a federal judge struck down New York City's Youth Protection against Tobacco Advertising and Promotion Act. This law prohibited tobacco advertisements on doors and awnings and in windows. The judge ruled that only the federal government (via the enactment of laws by Congress) could address public health concerns by imposing restrictions on tobacco advertising. Additionally, other court decisions in 1997, 1998, and 2000 ruled that the FDA did not have the authority to regulate tobacco products, which invalidated all of the FDA's 1996 regulations.

A number of cities and states then implemented restrictions on alcohol and tobacco billboard advertising. For example, the Los Angeles city council and the state of Massachusetts voted to ban tobacco and alcohol billboards and other outdoor advertising from locations within one thousand feet of parks, schools, and residential areas. The tobacco industry challenged the Massachusetts ban based on the right to free speech. In January 2001 the U.S. Supreme Court agreed to hear this case, and in June 2001 ruled that efforts to ban tobacco advertising near playgrounds and schools violate federal law and free speech rights. The Court added that cities and states may not add restrictions to the federal law that bans cigarette advertising on television and requires warning labels on packages. Only Congress has the power to amend federal law.