Tobacco deal yet to clear the air

Windfall is doing little to combat smoking

November 27, 2003|By Myron Levin | Myron Levin,LOS ANGELES TIMES

Five years ago, it seemed some of the smoke was beginning to clear in the tobacco wars.

A landmark legal settlement forged by the four top cigarette makers and state attorneys general snuffed out the companies' worst litigation nightmare. State treasuries were assured of a windfall of $246 billion, a chunk of which would go to helping smokers quit and stopping kids from starting. Both sides could see themselves as winners.

Nothing turned out quite as expected. States didn't live up to pledges to invest settlement payments in aggressive anti-smoking campaigns.

Smoking rates have fallen, particularly among teen-agers, but the credit goes as much to bans on public smoking and sharp increases in cigarettes taxes. States have become so dependent on those taxes, and on settlement payments, that their financial interests and those of the industry are in some ways intertwined.

And tobacco's Big Four have increased spending on advertising and promotions - one thing most people figured the settlement was sure to diminish - in part to combat discounters that have picked up market share.

In the end, the settlement was "certainly not the breakthrough agreement that we hoped it would be," said Rep. Henry A. Waxman, the California Democrat who is a leading critic of the tobacco industry. Instead of "a major plus ... it's turned out to be a minor plus."

Announced in November 1998, the deal required cigarette makers to pay an estimated $206 billion over the next 25 years to 46 states in exchange for the states' dropping lawsuits filed to recoup smoking-related medical costs. Separate pacts with Mississippi, Florida, Texas and Minnesota raised the tab to $246 billion.

Swiftly, the four majors - Altria Group Inc.'s Philip Morris USA, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co. - raised prices by at least 35 cents a pack to meet their payment obligations. They knew higher prices would weaken sales but reasoned that states, for a while at least, wouldn't target smokers for more revenue.

"Our hope had been that with the significant amount of [settlement] revenues ... there wouldn't be the perceived need by the states to raise excise taxes," said Steve Parrish, executive vice president for corporate affairs at Altria.

But the economy swooned, tax receipts plunged, and the states came back for another fix. In fact, states have raised cigarette taxes since the settlement more sharply and more often than ever before.

In 2002 and 2003, 39 states increased cigarette taxes, according to Merrill Lynch & Co. On average, state taxes have nearly doubled since the settlement, to 73 cents a pack. Sixteen states, including Maryland, charge $1 or more.

Now, between settlement payments from the industry and taxes collected on smokers, states are pulling in about $19.4 billion a year from cigarette sales, according to an estimate by the Campaign for Tobacco-Free Kids. States' financial interests and those of the companies have converged to a degree no one anticipated.

"There's no doubt that the largest financial stakeholder in the industry is our state governments," said Tommy Payne, executive vice president for external affairs at R.J. Reynolds. "Some would say that whole issue has a fair amount of irony associated with it."

Recently, many states have taken steps to preserve the cash flow by running interference for the industry in ways that would have been unthinkable not long ago.

Although the settlement resolved the huge state lawsuits, it did not eliminate individual and class action lawsuits by smokers.

The companies face the risk of damage awards so great that the mere act of posting a bond to protect their assets while they appeal a case could be financially devastating - to the companies and to the states to which the companies owe so much money.

So lawmakers in about 25 states have enacted caps on appeal bonds (typically of $25 million to $100 million) no matter how big the judgment. In Illinois, which has no bond cap, attorneys general lined up last spring to back Philip Morris' bid for a reduced appeal bond after it suffered a $10.1 billion loss in a class action case.

More than 30 attorneys general signed an amicus brief warning of dire budgetary harm should the company file for bankruptcy protection and delay payments to the states.

Since the settlement, the average price of a premium brand, such as Marlboro, has nearly doubled to more than $3.40 a pack, providing an opening to discount manufacturers.

In 1990, the Big Four had a combined share of about 97 percent. Today more than 120 producers, domestic and foreign, are selling cigarettes in the U.S. market.

Discount brands - such as Bailey's, Double Diamond and Scenic 101 - go for more than $1 a pack less than the premium price. And the market share of the big companies has slipped to between 87 percent and 89 percent.

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