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Fiscal
Nicotine
Like
other states, Virginia is addicted to revenues from
the tobacco settlement. That gives the Commonwealth
a stake in the health of cigarette manufacturers.
A
press release last week from Virginia Attorney
General Jerry Kilgore’s office highlighted the
Commonwealth’s financial dependence on a dubious
arrangement between America’s largest cigarette
manufacturers and each of the states. Kilgore
announced the “good news” that the largest of
the cigarette makers, Philip Morris, would not be
filing for bankruptcy protection and would pay its
annual installment of billions of dollars to the
states, including $53 million due to Virginia.
After four states
separately settled claims against Philip Morris and
other cigarette makers in 1998 in return for
promises by those companies to make huge annual
payments to each of those states forever, the state
attorneys general of the remaining states quickly
jumped into the fray. A complex settlement agreement
was signed by the attorney general of each of the
remaining 46 states and by the major cigarette
makers.
The settlement
appeared to guarantee each state a constant source
of revenue at a time when state budgets were about
to feel the effect of an economic downturn. An
estimated $2.6 billion every year was to be paid by
the largest cigarette makers to a fund to be
allocated to the 46 states. The four states that had
previously entered separate settlements with
cigarette makers also receive millions of dollars
annually.
Governors and state
legislators promptly spent this “found money.”
It was all too delicious. Billions of extra dollars
without a tax increase!
Every state has
come to depend on its cigarette settlement payments.
Without these payments, additional budget cuts or
tax increases will be needed.
Many elected
officials now realize that there was a downside to
this arrangement. It quickly became obvious that
states had assumed an interest in keeping these
major cigarette makers financially healthy. Because
payments to the states are tied directly to the
number of cigarettes these companies sell, the
states lose money when the companies sell fewer
cigarettes.
Another problem is
that settling companies could not make the promised
payments if other, non-settling cigarette makers
could sell their products at much lower prices. To
solve that problem, the states dutifully enacted
statutes forcing these competitors to make
equivalent payments, thus preventing them from
undercutting the major companies’ prices.
Yet another problem
— and one that the recent $10.1 billion judgment
in Illinois against Philip Morris dramatized — is
that the settlements between the states and the
major cigarette makers necessarily assumed that
other claimants, such as individual smokers and the
United States Government, would never obtain huge
judgments against one or more of these companies.
The U.S. Justice
Department is currently suing these same major
cigarette makers for $289 billion. Other private
claims are yet to be litigated. If either the
Justice Department or any other claimant gets a
judgment or settlement of even a fraction of that
amount, the sweet deal between the states and these
companies will unravel.
There is yet
another problem. These settlements involved what
amounts to a punishing tax increase on one
relatively small and unpopular group of people —
smokers. Unfortunately, many of these smokers are
addicted to nicotine and can’t seem to quit
despite highly advertised new products and
aggressive cessation programs.
As if this
weren’t enough, these same unfortunates have been
hit with local cigarette tax hikes and will be
forced to pay even higher state cigarette taxes next
year if Governor Mark Warner and some in the General
Assembly have their way.
--
April 21, 2003
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