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-12- AUG 1 2 1897 BUSINESS WEEK / AUGUST 25. 1997 News: Analysis & Commentary S3113y m? SMOKE AND MIRRORS? If the tobacco settlement becomes « law, taxpayers could be the big losers •' « * & • f £ — . J. >**•' « • *i «*i T he best place to glimpse the fu- anced-budget agreement signed into ture of the proposed $368.5 bil- law on Aug. 5, the companies got a lion tobacco settlement could be $50 billion windfall. That's the amount Pascagoula. Miss. That's where new cigarette taxes will raise, and «i| years of legal battles paid off for the budget agreement says tobacco tobacco's adversaries on July 15: $170 can deduct that amount from what million was deposited in Pascagouia's it will owe if the settlement becomes SouthTrust Bank, the first installment in law. That provision followed a 6- II Mississippi's $3 billion settlement with month period in which tobacco com- the industry. panies gave nearly $2 million in Now the question is: What should unregulated "soft money" to national Mississippi, the first state to settle with political parties, according to Common the tobacco industry do with the money? FATAL FLAW. The answer will echo around the nation, if Congress adopts the global tobacco settlement reached Cause. About $1.6 million went to Re- publicans. Philip Morris Cos. led the pack, giving $794,500—$673,700 of it to Republicans. J". 2 3 for the nation's I by 40 state attorneys general and the Worse, critics say as much as one- health. Mississippi tobacco industry on June 20. The agree- third of the money in the settlement Attorney General ment will likely undergo extensive re- won't come from the tobacco industry at Michael Moore, vision. But using the present settlement all: Some $140 billion could come out of the prime mover as a framework, a growing chorus of the pockets of U. S. taxpayers. That's behind the deal, critics is starting to follow the money— because the agreement says all pay- has called it "the and they're finding a fatal flaw. Thanks ments "shall be deemed ordinary and most historic pub- to vague wording in the settlement, necessary business expenses"—meaning lic-health achieve- much of the money could be misspent, they are tax deductible. So the industry ment in histo- they say, doing little to meet the deal's will get a tax break equal to about one- ry." Moore later supposed goals: to improve public health third of what it pays, or roughly $140 broke ranks to and compensate tobacco victims. Now billion. 'This settlement represents the settle—but it's those critics are worrying that what biggest single subsidy of the tobacco not clear he will achieve much for first looked like a landmark public-health industry ever," says Stanton A. Giants, public health. 'There are those achievement could become a public-pol- a professor in the cardiology depart- who say the whole purpose of the icy nightmare. ment at the University of California at suit was to repay the Mississippi Already, tobacco has quietly won an San Francisco. taxpayer." says State Senator extremely lucrative prize: In the bal- The pact is being sold as a victory Dick Hall, chairman of the Mis- .Contf< FOLLOW THE MONEY $25 BILLION $4 BILLION Tobacco's $368.5 billion pre imseii sottk-miMit vum tlte PUBLIC HEALTH A YEAR FOR TRUST FUND TOBACCO VICTIMS states is to be distributed t" wet mis. stau* coffers ami Details of how victims will Decisions about how this such things as antismokintf '"impawns and research, in will be used for tobacco- be compensated and what » varying amounts from year < year. But it s not clear the related research have not yet the money can be used for settlement's goals will be met. been made are still unclear £1 -13- AUG 1 2 1987 ID y a i n i d AUGUST 21--. i r J 9 / sissippi Senate appropriations and additional money for other tobacco- committee. control programs. But Robin Hobart. The issue is so politicized that co-director of Americans for Nonsmok- Hall cant even move the money ers' Rights in Berkeley, Calif., says it's from Pascagoula to Jackson, the not enough. "The $200 million we now state capitaL "The attorney gen- spend for tobacco control is just a drop eral is from Pascagoula, and the in the bucket." lead attorney, Dickie Scruggs, is The ads contemplated in the settle- from Pascagoula, and I guess they ment may also be vulnerable to an in- just wanted it down there," he dustry attack In Massachusetts, which says. When the money reaches has an ad program like California's, the Jackson, he fears that 'It will industry has lobbied to cut funds for be a feeding frenzy." And as the ads and has even threatened to sue Mississippi goes, so may go the state for defamation, says Gregory m- m the nation. Tobacco isn't winning every Connolly, who oversees the Massachu- setts Tobacco Control Program. "If you battle. On Aug. 6, a Florida court think the industry is going to sit back ifl • : i ^ ordered the release of key industry documents. But the industry's loss- es are few and far between. Even and let opponents run aggressive anti- smoking ads without fighting back, you're crazy." the deal's defenders are con- MAJOft m o u r n . The settlement does /w cerned tobacco is winning too much. "A lot of issues still have its defenders, of course. One is at- torney John P. Coale, who represents haven't been settled. This is smokers in 26 state class actions. He all very murky," says William notes that the deal could overwhelm the * • D. Novelli, president of the U.S. tort system. Tort payouts now total National Center for Ibbacco- about $3 billion annually, he says. The ..• Hiti • Free Kids, who helped negotiate settlement could dump $5 billion into the the deal He believes the deal's prob- system—dwarfing all other cases. Coale, lems will ultimately be solved. a lead negotiator in the agreement, State officials even disagree about doesn't know how the money will be whether their share should be used divvied up. But he's confident it will go to for public health. Some, such as "the things that everyone agrees on... in New York Attorney General Den- the end the country gets helped." nis Vacco, argue that states should But not everyone agrees. A major be able to use their awards on problem with the agreement is that anything they like. Others, such Congress has control over how much as Minnesota Attorney General Hubert the tobacco industry should pay. And H. Humphrey III, a critic, believe the Congress has proved remarkably inef- money must be "used for the public fective at taking any punitive action health and notfixingpotholes," says his against the industry. Besides, congres- spokeswoman. Holly Ziemer. sional paralysis was precisely what the There are other controversies. The agreement was supposed to surmount. settlement allocates about $1 bil- That's why the state attorneys general lion, for example, to antismoking took matters into their own hands. Now efforts. But the funding may not that their deal has moved to Congress, be effective, critics say. According to tobacco has already won a $50 billion one proposal, much of it "would go prize in the congressional halls and to pharmaceutical companies and the cloakrooms it knows so well. That little medical industry" for free chest X- victory is a warning sign that, settle- rays and free nicotine patches for ment or no, the tobacco industry wont smokers who want to quit, says fade quietly away. William Godshall, executive director By Paul Raeburn in New York, with of SmokeFree Pennsylvania. John Carey and Susan Garland in The agreement provides for $500 Washington. Amy Barrett in Philadel- million for an antismoking ad campaign phia, and Mike France in New York $1 BILLION •SHOO MILLION S-'H) MILLION I I P TO $15 BILLION A YEAR FOR TOBACCO A YEAR FOR FEDERAL A YEAR FOR THE GRAND TOTAL CESSATION PROGRAMS HEALTH AGENCIES ANnSMOKlNG ADS States would get the balance Could be gobbled up by the Unclear how this money Far too little to establish of the annual payments and pharmaceutical industry with would be spent and who effective programs like those be free to use the money for little ultimate effect on would make the actual now operating in California anything from public health smoking rates spending decisions and Massachusetts to potholes * r • -14- AW \imi Economic Viewpoint BY ROBERT KUTTNER WHY CONGRESS SHOULD STUB OUT THE TOBACCO DEAL W hen tobacco executives, state attor- neys general, and public-health ad- vocates announced their 25-year deal on June 20, it seemed an extraordinary coup. The industry gave up a $368.5 billion The $5 billion annual cap on claims, com- bined with a $1 million ceiling on individual suits, means as few as 5,000 claimants a year could collect. Several arcane provisions would discourage litigation. For example, a special pot for victim compensation and antismoking panel of three federal judges would have to education. It got a cap on liability and a delay approve access to documents that the indus- in nicotine regulation. Tobacco stocks rallied. try claims are privileged. Litigation would But the settlement is backfiring on the in- have to pass through the eye of this needle. dustry, as well it should. Private deals such as* The deal also bans most class actions. this are a bad way to set regulatory policy. SACKED TENETS. As the antitobacco side took The costs of smoking-related illness were $38 a closer look at the details, one supporter af- billion in 1995 alone, while the deal covers ter another has defected. Apart from its de- only about $8 billion a year, adjusted for in- tails, the deal was dubious all along on two flation, according to recent Senate testimony key grounds of process. The parties got to- by Jeffrey E. Harris, a physician and econo- gether, in secret negotiations, to settle a ma- mist at Massachusetts General Hospital and jor issue of public-health policy. Congress, a Massachusetts Institute of Technology. To- bystander, was supposed to sign on the dotted BAD ODOR: bacco came to the table only because tort lit- igation against tobacco was at last making line. This was not exactly what the framers of the Constitution had in mind, nor is it the role The parties headway. It was the litigation that uncov- ered the most damaging documents on what Congress fancies for itself. The deal mocks one of the sacred tenets of law and economic met in secret the industry knew and what it concealed. Courtroom sympathy is shifting dramatically theory, which holds that private parties, on their own, will reach efficient bargains. In to settle a to plaintiffs. Only last week, a Florida trial judge ruled that the industry's favorite de- this case, the absent party was the public, and the deal reached precludes the future major issue of fense—that the public was well aware of the hazards of smoking—could not be used in use of the common law for future redress. Second, it is bizarre to design a product-li- public-health that state's Medicaid reimbursement suit. The more headway made by litigation, the ability cap for one industry. The Supreme Court recently threw out the proposed mass policy-not less reason antismoking advocates have to settle. After all, the industry exists to sell settlement of asbestos claims, on the grounds that one group of negotiator could not prop- erly abrogate the rights of those not at the quite what the cigarettes. The more insulated the industry is from litigation and regulation, the more to- table. And if the tobacco industry, of all in- bacco it will sell. The industry has a long dustries, gets a cap on product liability, why framersofthe history of turning "constraints" to its advan- shouldn't more deserving groups, such as auto tage. Package warnings, hailed as a public- makers or toy manufacturers, get one, too? Constitution health advance in the 1960s, became the basis Others in the business community are in a for defeating lawsuits. The ban on TV ads quandary. Should they support their tobacco had in mind spurred a generation of tobacco-sponsored events and product-placement strategies. brethren, hoping the pact will set a precedent for similar product-liability agreements? Or Ptn, DREAM. The deal, of course, requires should they shun this deal because its obvious ratification by Congress, since only Congress failings are giving anticorporate Naderism a can delay or hobble the Food & Drug Ad- boost? Business would be wise to treat Big ministration's efforts to gain authority to reg- Tobacco like, well... like a cancer. ulate tobacco as a drug, and only Congress This deal is billed as the best trade-off ob- can change the product-liability rules. The tainable, but a regulated industry should not industry thought state attorneys general and be given a veto over the acceptable terms public-health advocates would troop to Capitol of regulation. Many of the public-health pro- Hill to bless the deal—a pipe dream. The visions of the deal that step up antismoking proposal smoked out much tougher opposi- campaigns and restrict tobacco marketing are tion by former Republican health appointees admirable. They should be enacted—and pri- C. Everett Koop and David A. Kessler, as vate antitobacco litigation should continue. In Robert Kuttner ts co-editor of The American Prospect ana autnor of The well as new demands from mainstream health a few years, we can revisit a settlement with End of tn$$ez-Fatre organizations and the Administration. a deservedly weaker tobacco industry. T116941427 -15- AUG 1 2 1997 BUSINESS WEEK MONDAY AUGUST 18/ 25. 1997 Letter From North rarolina foreign growers can't match the quality EDITED BY SANDRA DALLAS \w£-u of the bright leaf grown in North Car- olina or the rich burley from the Vir- ginia and Kentucky foothills, he says. There's also concern about what the agreement will do to the complex price- TOBACCO COUNTRY FACES support system that keeps auction prices high. Under one of two surviving New Deal-era agriculture-support pro- LIFE AFTER TOBACCO grams (the other is for peanuts), fann- ers are allotted a certain number of acres, usually 50, for tobacco. The al- lotments, which are enforced by the fed- eral government, can be rented. The program started in 1938, when tobacco was a penny a pound, partly to squelch any attempts by cigarette makers to snatch up foreclosed farms and monop- *' r"- olize tobacco growing, Last year, tobac- co was $1.92 per pound. "The tobacco program tends to preserve small farms," says Blake Brown, a professor of agri- cultural economics at North Carolina OH*»P—r»riJ State University in Raleigh. But if the support program becomes a victim of political fights expected over the proposed tobacco deal* prices could drop by as much as 50c, driving many of those small farmers out of business. As a large farmer, Griffin probably could hang on, though his income would drop. BOO WASTE. Griffin's greatest uncer- tainty, however, is what would happen if the settlement becomes a first step in banning tobacco outright. The Tbbacco Belt's sandy, loamy soil, along with the T he breeze that blows in from the stand of loblolly pines is hot, so there's no relief from the blazing Carolina sun. Steve Griffin bends over LOOKING FOR ANSWERS The proposed $368 billion deal may change, says farmer Griffin, hot humid climate, is perfect for grow- ing tobacco. But it can't grow much else. There's cotton, but North Carolina farmers who have switched find that one of the chest-high tobacco plants "but in any event, it's bad for us. their quality cant compete with cotton stretching in straight rows in his dry The question is just how bad" from Texas, the country's biggest grow- field. He looks at the flowering top, er. And while Griffin plants 100 acres of touches a silky green leaf. "NahV' he than all hia other products combined— cotton—the same acreage as tobacco— says, "too early. Maybe next week, if cotton, peanuts, oats, com, soybeans, he makes only a traction as much from we get some rain." timber, and wheat. "The deal may iU Another possibility is livestock, es- It's a critical time for Griffin's 100- change, but in any event, it's bad for ua. pecially hogs. Since 1990, hog farms acre tobacco crop. Spring was cool and The question is just how bad" he says. have made their mark on the North wet on his 1,025-acre family farm in Cigarette manufacture* have a cush- Carolina landscape. But hog waste has this Big Swamp community six miles ion in robust demand overseas, notably north of the small town of Washington, in Europe and Southeast Asia, which on the eastern edge of North Caroli- counters flat domestic consumption. And na's tobacco belt Then suddenly, sum- promising new markets are opening up mer's heat steamed in. Tobacco is a in Russia, China, and Vietnam as smok- hardy plant that can take climatic ex- ers switch from heavy-tasting local tremes. But these days, it's the political brands to America's milder cigarettes. winds that threaten North Carolina's So tobacco companies are churning out tobacco crop. Growers have battled anti- more cigarettes than ever before. smoking forces for decades, but now, But that's little comfort for. growers with the proposed S368 billion settle* such as Griffin. They face strong com- ment between state attorneys general petition from farmers in BnuriC Zim- and cigarette makers, they're asking babwe, and China. Griffin fumes that if themselves if this is the end for them. the tobacco deal kills U.S. demand by What's at stake for Griffin, 44, is making cigarettes too expensive, U.S. two-thirds of his $750,000 annual gross cigarette makers, left with only overseas ftmsif income. In a good year, his 100-acre to- smokers, will shift wholesale to buying h**.m .«a-.1 bacco quota brings in $500,000, more foreign tobaccos. It won't matter that Cent'fl PAGE A16 / FRIDAY. AUGUST 15,1997 * gfrc IPogftmgton gimeg BRUCE BARTLETT WILLIAM RUSHER W Back home explaining the 'dream deal' ith Congress in recess, representatives and sen- ators of both parties have fanned out across the country singing the praises of the tax and budget package signed into have actually heard some usually law by President Clinton last week. sensible conservatives advocating However, they are likely to find that course. But the last time they average Americans far less enthu- tried that it was a public relations siastic about the deal that House disaster, and it would be again. Budget Committee Chairman John Instead, the Republican con- Kasich called "a dream come true." gressional leaders labored long and In fact, the more they explain the hard, and finally won agreement details of the legislation to their con- on some extremely important mea- stituents, the more likely members sures. There will be spending cuts of Congress are tofindsupport for totaling S263 billion, albeit mostly their efforts evaporating. in the "out years." Beginning much lb start, the tax cut is minuscule sooner, there will be some major tax and targeted so most Americans cuts, totaling $152 billion over five will see no reduction in their taxes years. Among these will be a lower at all. Virtually all of the tax relief capital gains tax and a $500 per is aimed at children, in the form of child tax credit for families with a S500 credit and tax cuts for edu- school-age children — the latter cation expenses. Together, these targeted directly at the middle class provisions accountfor82 percent of by the Republicans, even though the total tax cut. Thus, anyone with- the Democrats managed to extend out children under the age of 17 or it downward. Finally, the Republi- in college is basically out of luck. cans imposed at least the concept of But even if you have children of the desirability of balancing the the right age, you may still miss budget, which will henceforth be a out. That is because there are truism in congressional debates. income limits on the availability of Not a single one of these things— the child credit and education pro- not the spending cuts, not the tax visions. Couplesfilingjointly lose cuts, not a balanced budget, not the child credit at an income of even last year's welfare reform — - SI 10,000, single heads of house- would have been accomplished if holds lose the credit at S75,000, and the Democrats had controlled Con- couples filing separately lose the gress: They had 40 yean, and blew credit at SS5,00Q. Income limits for them all. These are Republican the education incentives are even lower, with eligibility phasing out at an income of just $40,000. Offsetting all of mis will be high- er taxesforairline tickets, for smok- ers and for many businesses. Overcoming the odds goals, and only their wide popular- ity dragged President Clinton and most congressional Democrats, kicking and screaming, to the point C Ironically, with all the talk of tax Indeed, much of the cigarette tax ount me among those who cuts, the effect of tmpoauig phase- increase will fall on people with consider the budget deal as, We have a Democratic of supporting them. outs is to raise marginal tax rates for incomes too low to qualify for the on balance, a good thing. Not surprisingly, public approval many taxpayers. The child credit is child credit And the higher taxes on I am under no illusions president, and the of Congress has promptly risen to reduced by $50 for each $1,000 of airline tickets will fall dispropor- about the phoniness of large parts country will keep on the highest levels in many years, income above the cap. This is equiv- tionately on those flying in economy of it. Most of the big spending cuts and it is widely conceded that the alent to a marginal tax rate increase of 5 percent on the range of income class or on discount airlines. are "backloaded" to take place in Finally, Congress was forced to future years when President Clin- paying the pricefor Republicans have probably nailed down continued control of both between $75,000 and $85,000fora add more than $100 billion in new ton and many of the present mem- thatfact until and Houses in the 1998 elections. True. single parent with one child. More children, and thus a larger credit, spending to the budget in order to bers of Congress have left town, buy Bill Clinton's signature on the and can be overturned by whomev- unless he is replaced by Mr. Clinton's approval rating is also sky-high, but that is because he increase the amount of income sub- tax cut. The spending increases i er is running the countrymen. The a Republican, signed on to the above-mentioned ject to the higher de facto tax rate. include $24 billion for a new health assumptions about the economy's Republican objectives. And *Ib be sure, the capital gains tax cut insurance program for children and future performance (and hence remember that the GOP will never to 20 percent will help some taxpay- $15.5 billion in additional welfare about tax revenues) are ludicrous- face Bill Clinton in another election; ers. However, most middle-income benefits. As a consequence, the fed- ly optimistic; thefirstdownturn will We have a Democratic president, his popularity is simply irrelevant. taxpayers with capital have it main- eral budget deficit next year actu- invalidate them, and with them the and the country will keep on paying save to the extent that he can trans- ly tied up in their homes or retire- ally will be higher than it would best hope of actually balancing the the price for that fact until and fer it to Al Gore. ment accounts like 401 (k) plans. have been without the budget deal. budget in 2002. unless he is replaced by a Republi- Sure, the budget deal leaves They probably were not going to pay Meanwhile, the balanced budget in Worst of all, Mr. Clinton man- can. Not a single dime can be spent much to be desired. And the Repub- taxes on the sale of their bouse any- the year 2002 that everyone is so teen aged to shoehorn into the budget or cut, not a single tax can be raised licans must continue to hold the way, and most retirement accounts on celebrating is critically dependent large new expenditures for educa- or lowered, without his consent — Democrats' feet to thefire,calling are already tax-free. So they will ben- on $97 billion in spending cuts that do tion and various other pet projects unless Congress overrides his veto, for more cuts in both spending and efit very littlefromthis provision. not take eflfect until matyear. Tfet politi- of his, and to dizninish (though by which is usually out of the question. taxes next year, and the year after Individual retirement accounts cians continue to wonder why voters no means eliminate) the impact of Faced with this disagreeable fact, that But pending the election of a were also expanded, but as in the have become cynical and apathetic. last year's welfare reform bill. many conservatives simply aban- Republican president, this is a case of the child credit there is an But as Sheridan Whiteside said don rationality. They talk about major step forward. income test that will prevent many in'The Man Who Came to Dinner** "forcing'' Mr. Clinton to do this or taxpayers from taking advantage of Bruce Bartlctt is a senior fellow when he belched loudly at the din- that, when they have no such power. it. Estate and gift taxes are reduced with the National Center for Policy ner table and the woman next to Congress can. to be sure, shut down William A. Rusher is a national' but at such a slow rate it will barely Analysis and a contributing writer him looked horrified, "What did you the government again unless the ly syndicated columnist. compensateforinflation. for The Washington Times. expect, madam—chimes?" president agrees to its terms, and I Tl 16941429 us Pi TooAy 0/15/97 HA President right to protect people from smokers The comments by Sen. Frank Lauten- Recently I went to Miami International berg, D-N.J., supporting President Clinton Airport to pick up a friend. For more than in taking the first step to make buildings half an hour 1 searched for my friend at smoke-free, including entranceways, are exits from the terminal. The air outside right on target ("Smoke has no boundary/' the building was polluted with smoke. Opposing View, Debate, Aug. 8). Smokers should not be allowed near the USA TODAY says making some outdoor entrances. Little glass cubicles should be areas smoke-free is not justified ("New built where they can wait to be met smoking bans reach beyond science, fair- Families eating out should not be forced ness," Our View). To the contrary, it is to deal with smokers. Smokers should go very justified. outside and confine their lethal activity to For instance, if one sells at a stadium or themselves. They should not inflict them- has season tickets to a sports event, in- selves on their families, people with whom doors or outdoors, it is annoying and un- they work, people who enjoy the same healthy to be near smokers. Serious medi- sport or outdoor activity, and certainly not cal and possibly Iife4hreatening problems children. can result Children must be taught the dangers of If you play golf with others who are smoking and not see it as an enjoyable ao smokers, serious medical problems can re- tivity. suit Just because you are outdoors doesn't Rita Zemlocak, president mean you are not exposed to secondhand Group Against Smoker's Pollution (GASP) smoke and are out of harm's way. Miami, Fla.
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