Q A’S REGARDING THE FEDERAL TOBACCO LAWSUIT On September 22 1999 the U S Department of Justice filed a federal lawsuit against the cigarette companies to recover billions o by tvr74609


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									                   Q & A’S REGARDING THE FEDERAL TOBACCO LAWSUIT

On September 22, 1999, the U.S. Department of Justice filed a federal lawsuit against the cigarette
companies to recover billions of dollars in U.S. government health care costs caused by the
companies’ decades-long history of fraud, deceit and other intentional misdeeds.

The cigarette companies say that the federal government has no legal or factual grounds for
bringing this lawsuit. Are they telling the truth? NO.

•   After the federal lawsuit was filed, the cigarette companies immediately stated that it was
    entirely without merit and filed several motions to dismiss the lawsuit for failing to state a
    legitimate legal claim. But on September 28, 2000, Judge Gladys Kessler rejected this
    cigarette company argument. The judge ruled that, while the federal government could not
    pursue its claims against the cigarette companies based on the Medical Care Recovery Act or
    the Medicare Secondary Payer provisions, it could still proceed to seek extensive damages and
    injunctive relief from the cigarette companies through its RICO claims. As the judge stated in
    the Memorandum Opinion, "RICO provides both legal and equitable remedies. Plaintiffs may
    seek treble damages -- that is, three times the value of the damages inflicted on them by a
    defendant's unlawful racketeering activity. . . . In addition, the Court may in its discretion order
    equitable remedies, "including but not limited to" restricting defendants from taking future
    actions and even dissolving or restructuring the enterprise."

•   More generally, the federal lawsuit is simply a matter of enforcing existing laws, protecting the
    public treasury, and not letting the cigarette companies off the hook for decades of lying,
    misleading the public, failing to develop safer cigarettes, and illegally marketing their products
    to kids. These wrongful acts increased the number of people who have become smokers and
    reduced the number who quit or cut back – thereby boosting the cigarette companies’ profits
    while increasing federal health care costs.

•   The federal lawsuit’s claims parallel those made by the states in their successful tobacco
    lawsuits – and are actually stronger because federal law explicitly provides the U.S.
    Government with additional legal authority to bring independent causes of action against the
    cigarette companies. The validity of the claims against the cigarette companies is firmly
    established by the fact that the state tobacco lawsuits were successfully going to trial and the
    cigarette companies agreed to spend billions of dollars to settle them.

•   Internal industry documents revealed through the state tobacco lawsuits clearly establish that
    the cigarette companies have done everything the federal lawsuit claims.

•   Despite rigorous cigarette company defense efforts, a Florida court considering a class action
    lawsuit against the cigarette companies recently found that smoking causes cancer, heart
    disease, and a laundry list of other health problems, and that the cigarette companies:
    − sold defective and unreasonably dangerous cigarettes;
    − made false statements of material fact in order to mislead smokers;
    − withheld material facts regarding the health effects and addictive nature of cigarettes;
    − conspired together to misrepresent smoking health and addiction information so that
        smokers and the public would rely on that information to their detriment;
    − sold cigarettes that did not comply with the companies’ statements about them;

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                                                                      Federal Tobacco Lawsuit Q & A’s / 2

    −   failed to exercise a reasonable degree of care in their manufacturing and marketing;
    −   engaged in extreme, outrageous, and reckless conduct; and
    −   should be subject to claims for punitive as well as compensatory damages.
    There is no reason to believe that a federal court would find otherwise.

•   If the federal government did not have valid legal claims for damages supporting by extensive
    evidence, the cigarette companies would not be working so hard trying to convince the White
    House and Congress to block the Department of Justice from prosecuting the lawsuit.

How can the federal government try to blame the cigarette companies for the government’s
smoking-related health costs when the federal government and everyone else has known
that smoking is harmful for a long time?

•   What the government or the public did or did not know is irrelevant to two major charges
    against the cigarette companies: 1) that they increased federal health care costs by
    intentionally marketing their product to kids (illegal customers); and 2) that they increased
    federal health care costs by failing to fulfill their responsibilities as manufacturers to develop a
    safer product.

•   What the federal government did or did not know about harms caused by smoking is not really
    relevant to any of the federal claims against the cigarette companies. What matters is whether
    the government has had to pay the smoking-caused health care costs of thousands of people
    who would not have started smoking cigarettes or would have quit smoking or cut back more if
    the cigarette companies had not said that smoking was not harmful, had not withheld
    information about the health problems caused by smoking and the addictiveness of cigarettes,
    had not attacked research that found that smoking was harmful and addictive, and had not
    intentionally marketed their products to children.

•   Since many of the major health care problems relating to smoking do not fully appear until 10
    or 20 years after a person begins smoking, what people now know about smoking is not a key
    issue in the federal lawsuit. The key question pertaining to knowledge about smoking is what
    those people receiving federally funded treatment for smoking-caused health problems knew
    when they first began to smoke and became addicted many years ago.

•   The vast majority of smokers become addicted before they reach the legal age for buying
    cigarettes; and young kids who start smoking cannot be held legally responsible for not
    exercising adult standards of care or for not having an adults understanding of the associated
    risks and harms.

•   Because of all the attention smoking and anti-smoking efforts have received in recent years,
    we often overestimate not only how much people knew about harm from smoking ten or twenty
    years ago but even overestimate how much people know today. For example, recent surveys
    show that most teens still do not realize how harmful or addictive cigarettes are (many think,
    for example, that they can smoke for a while and then quit without suffering any harm
    whatsoever). Remarkably, many adult smokers are also similarly ignorant. Years ago, the
    situation was much worse, with many more adult smokers thinking that smoking was neither
    harmful or addictive or not being sure. Much of this historical and continued ignorance about
    harms caused by smoking is the direct result of the cigarette companies withholding scientific
    research and other information, making false statements, attacking those who said cigarettes
    were harmful or addictive, and otherwise intentionally trying to mislead the public.
                                                                    Federal Tobacco Lawsuit Q & A’s / 3

•   An example: internal cigarette company documents show that the companies have had
    research that indicated cigarettes and nicotine are addictive since the early 1960s. But they did
    not share that information with the government or the public. Consequently, the 1964 U.S.
    Surgeon General’s report that first stated that smoking is harmful did not say that smoking was
    addictive. To this date, most of the cigarette companies continue to claim that cigarettes and
    nicotine are not addictive, and even continue to express doubt over whether smoking causes
    cancer. The cigarette companies’ research and internal documents that show that they have
    known otherwise for decades only became public in the last few years because of the various
    lawsuits brought against the companies by the states and others. Because the cigarette
    companies withheld their information about the addictiveness of smoking and aggressively
    attacked research that suggested otherwise, the Surgeon General did not release a report
    stating that smoking and nicotine are addictive until 1988 – a quarter of a century after the
    cigarette companies first had that information but failed to disclose it.

Isn’t this lawsuit politically motivated?    NO.

•   When some person or business causes serious harm by breaking the law, they can and should
    be held accountable, and there should be no exceptions. There is nothing political about that.

•   The federal lawsuit is simply a matter of enforcing the law, protecting the public treasury, and
    not letting the cigarette companies off the hook for decades of lying, misleading the public and
    the government, illegally marketing their products to kids, failing to develop safer cigarettes,
    and other misdeeds and statutory violations.

•   While the federal tobacco lawsuit is based on established law and fact, much of the opposition
    to the federal lawsuit against the cigarette companies is politically motivated. Most notably,
    many of the most vocal and persistent opponents of the federal lawsuit in Congress are the
    largest recipients of cigarette company political contributions. Their opposition to the federal
    lawsuit has little or nothing to do with whether the federal government has valid claims against
    the cigarette companies and is fulfilling its obligation to enforce federal laws that Congress has
    passed and protect the public treasury. Instead, their opposition is based primarily on a desire
    to protect the cigarette companies from being held responsible for their past misdeeds and
    illegal acts.

•   Another source of opposition to the lawsuit comes from members of the business community
    that fear that a successful federal lawsuit against the cigarette companies will prompt similar
    federal government lawsuits against other industries or groups of businesses. This concern
    has nothing to do with the firm legal and factual basis that exists for bringing the federal
    tobacco lawsuit.

Is the federal government more likely to go after other less-blameworthy industries or
groups of businesses if the federal tobacco lawsuit is successful? NO.

•   No other U.S. industry or group of businesses has been as persistently and intentionally
    deceitful, fraudulent, and irresponsible as the cigarette companies or caused anywhere near as
    much personal and economic harm. The cigarette industry and its product are unique.

•   No other U.S. industry sells such an inherently harmful and powerfully addictive product that
    cannot be used in a safe and reasonable manner. Guns and alcoholic beverages, for example,
    can be used safely. But it is impossible for consumers to smoke cigarettes without being
    harmed and without running enormous additional health risks.
                                                                    Federal Tobacco Lawsuit Q & A’s / 4

•   If any other U.S. companies ever do intentionally act as irresponsibly and illegally as the
    cigarette companies have and cause as much unnecessary harm and suffering as the cigarette
    companies have, they should be held fully accountable, as well -- not only by the federal and
    state governments but by consumers.

•   The state and federal tobacco lawsuits have had to overcome enormous political, legal, and
    evidentiary hurdles, and many still lie in front of the federal lawsuit. Any attempt by the U.S.
    government to bring a similar lawsuit against any other industry or group of companies would
    face these same major obstacles, which makes any similar federal lawsuits against non-
    tobacco companies highly unlikely, if not impossible.

•   Most of the big lawsuits against businesses or industries are brought by private plaintiff’s
    lawyers working on a contingency fee basis, which gives them a significant percentage of the
    total recovery obtained by the lawsuit, either by final court judgment or settlement. It is the
    prospect of multimillion-dollar contingent fees that provide incentives for these kinds of big
    lawsuits against entire industries or groups of businesses. But all federal lawsuits are
    conducted primarily, if not exclusively, by U.S. Department of Justice lawyers working on
    salary; and the federal government has historically been quite cautious about bringing any new
    large-scale lawsuits. As with the federal tobacco lawsuit, it is unlikely that the Department of
    Justice would bring any innovative new cases against entire industries or groups of business
    until private or state lawsuits had firmly established their legal and factual basis.

If the federal lawsuit is not politically motivated, why did the federal government wait so
long to file it?

•   The McCain bill that was considered and rejected by the U.S. Senate in the Summer of 1998
    would have waived all U.S. government legal claims against the tobacco companies in return
    for various payments from the companies and other concessions. Until that legislation failed
    and it became clear that Congress was not going to bring up new comprehensive tobacco
    legislation, there was no reason for the Department of Justice to even consider bringing a
    federal lawsuit against the tobacco companies. Once the states settled their lawsuits
    separately from any supportive federal legislation – and Congress made it clear that it had no
    plans to reconsider comprehensive tobacco legislation – the federal government quickly
    decided to file a federal tobacco lawsuit. In fact, the President first announced that he had
    instructed the Department of Justice to develop a plan for protecting the federal government’s
    legal rights and recovering the damages caused to the U.S. government by the cigarette
    companies in his January 1999 State of the Union Address – only one and one-half months
    after the multistate settlement agreement was announced.

Why didn’t the federal government negotiate a settlement with the cigarette companies
rather than file a lawsuit?

•   The federal government did try to settle its claims against the cigarette companies through the
    comprehensive tobacco legislation (the McCain Bill) considered by the Senate in the Spring of
    1998. Unfortunately, the cigarette companies withdrew their support for that legislation after
    initially supporting it, and began aggressively opposing it through intensive lobbying and
    massive advertising expenditures. Because of the cigarette companies’ opposition, the
    tobacco legislation and the underlying settlement of all federal claims against the companies
    did not pass.

•   The cigarette companies have showed no interest in negotiating any settlement with the federal
    government since they killed the McCain bill. Instead, they have settled only the parallel claims
                                                                     Federal Tobacco Lawsuit Q & A’s / 5

    brought against them by the states. Clearly, the cigarette companies hoped that their political
    pressure and influence would block any federal lawsuit – thereby saving them from having to
    make any reparations to the federal government for the billions of dollars in harm they have
    caused through their wrongdoing.

•   The cigarette companies attempts to block a federal lawsuit almost worked – and still continue.
    So far, Congress has failed to provide the Department of Justice (DOJ) with any new funding to
    support the federal lawsuit. Consequently, DOJ has been forced to develop and pursue the
    lawsuit on a shoestring budget out of its general funds and contributions from other agencies
    that could share in any recovery. Whether Congress will provide the modest funding DOJ has
    requested to prosecute its lawsuit now that the court has rejected the cigarette companies'
    arguments that the case has no legal merit still remains to be seen.

Wouldn’t Congressional legislation to regulate cigarette marketing and increase federal
cigarette revenues be preferable to a federal tobacco lawsuit. PERHAPS.

•   New legislation could produce the same kinds of monetary compensation and marketing
    restrictions that the tobacco lawsuit is likely to produce -- without all the delay and cost of a
    federal lawsuit. But in June 1998 Congress failed to pass legislation that would have done just
    that (and made the federal lawsuit moot), and the Congress has shown absolutely no
    inclination to address the tobacco issue since then.

•   It is possible that the federal tobacco lawsuit might finally prompt Congress to address the
    tobacco issue in a comprehensive and responsible way. But the cigarette companies multi-
    million-dollar expenditures on direct Congressional lobbying, campaign contributions, soft
    money donations, and related public relations efforts have created enormous obstacles to any
    constructive Congressional action to prevent and reduce future smoking, much less to obtain
    any reasonable federal compensation for past U.S. Government costs caused by the cigarette
    companies’ misdeeds.

•   Even if possible, legislated tobacco tax increases and tobacco marketing restrictions would fail
    to establish that the cigarette company has acted wrongfully and illegally for decades --
    something that the industry still refuses to admit, despite overwhelming uncontradicted and
    incontrovertible evidence. In that regard, legislated remedies cannot do the job of using the
    courts to remedy legal wrongs.

Isn’t the federal government simply using its enormous power to pick on the cigarette
companies and force them to settle the case? NO.

•   The federal government has a legitimate case against the cigarette companies and is simply
    fulfilling its duties to U.S. taxpayers by trying to recover wrongful cigarette company profits and
    those federal costs specifically caused by decades of cigarette company wrongdoing.

•   The U.S. Department of Justice does not have the money or manpower to intimidate or
    overpower the cigarette company defendants in the federal tobacco lawsuit. The entire 1999
    budget for DOJ’s Civil Division, which is in charge of the federal tobacco lawsuit, is $139
    million, and only $1.9 million of that was allocated to the tobacco lawsuit. For 2000, DOJ is
    allocating $13.6 million to support the lawsuit, with most of that funding contributed by the
    Departments of Defense, Veterans Affairs, and Health and Human Services (the three federal
    agencies who bear the largest tobacco-caused costs).
                                                                      Federal Tobacco Lawsuit Q & A’s / 6

•   In contrast, the Philip Morris cigarette company, alone, gathered more than $47 billion in
    tobacco revenues in 1999 (roughly twice the overall budget for the entire Department of
    Justice), and cleared more than $9 billion in tobacco profits. Including all of its other products,
    Philip Morris had total revenues of almost $80 billion with profits or almost $15 billion.

•   By using just a small fraction of their combined tobacco profits to defend against the federal
    lawsuit, the cigarette companies could easily spend $10 to $50 dollars for every one dollar
    spent by the Department of Justice on the case.

•   Some further examples of the enormous political and economic power of the cigarette company
    − They currently spend more than $8.2 billion per year to market and promote cigarettes in
       the United States;
    − Philip Morris, alone, is spending more than $100 million per year to rehabilitate its corporate
       image with the U.S. public;
    − To defeat comprehensive tobacco legislation in the U.S. Congress in 1998 (the McCain
       bill), the companies spent more than $75 million on lobbying and media campaigns;
    − To try to defeat Proposition 10 in California (which raised state cigarette taxes by 50 cents a
       pack) the cigarette companies spent more than $30 million;
    − Every year, the cigarette companies direct millions of dollars to U.S. Senators and
       Representatives and their political parties both through direct campaign contributions and
       soft money donations.

•   In 1998, Geoffrey Bible, the Chairman and CEO of Philip Morris, received salary, stock options,
    and bonuses from the company totaling $24 million – which is $4 million more than the amount
    the Department of Justice hopes to be able to spend on the federal tobacco lawsuit. And in
    1999, he received a big raise.

•   No matter how you look at it, the Department of Justice is seriously out-gunned by the cigarette
    companies. The only reason it has a chance of winning the federal lawsuit is that it has the law
    and the evidence on its side.

Won’t the federal tobacco lawsuit cost a lot of money?          NO.

•   The Department of Justice has been funding its tobacco lawsuit efforts entirely out of its regular
    funding and through contributions by the affected agencies. In FY 2001, total expenditures are
    expected to total about $26 million (DOJ's total budget for 2001 is more than $23 billion).

•   $26 million is an extremely small amount when compared to the billions of dollars per year the
    federal government is likely to recover from the cigarette companies.

•   $26 million also amounts to only a small fraction of what the cigarette companies are likely to
    spend to fight the lawsuit in the courts (not to mention the large amounts they are spending for
    public relations and lobbying efforts to try to convince Congress to block or inadequately fund
    the federal lawsuit).

•   $26 million per year is also much less than the states legal costs in their tobacco lawsuits. For
    example, California, by itself, budgeted more than $13 million per year for its lawsuit; and the
    federal lawsuit is much more extensive.
                                                                     Federal Tobacco Lawsuit Q & A’s / 7

Won’t lawyers be the main beneficiaries of the federal tobacco lawsuit?            NO.

•   None of the funds being used to support the federal lawsuit will go to enrich any lawyers.

•   The vast majority of the work on this case for the federal government will be done by
    Department of Justice attorneys who will only receive their normal government salaries.

•   Lawyers who worked on a contingent fee basis for the states will receive billions of dollars from
    the state tobacco settlements. But, unlike the states, the Department of Justice will not enter
    into any contingent fee arrangements with any outside lawyers to help with the case. Any non-
    government lawyers working on the case will either be paid as consultants at standard
    government rates or hired as government lawyers at government salaries.

Haven’t the cigarette companies actually reduced federal government health care costs
because smokers die earlier? NO.

•   The cost of treating smokers health problems are much higher than the health costs of
    nonsmokers, despite the fact that smokers die sooner. Research studies indicate that over a
    lifetime, each smoker will, on average, incur at least $12,000 more in health care costs than
    nonsmokers, despite dying sooner.

•   By looking at non-health expenditures – most notably Social Security payments and veterans
    benefits – some studies have found a net savings to the federal government from smoking
    because smokers die earlier. But these studies ignore a range of additional smoking-caused
    costs, such as lost work productivity-- and related lost payroll and business taxes -- from
    smoking-caused health problems on the job, work absences, and early retirement or job
    termination. They also often fail to account for the federal health care and other costs caused
    by secondhand smoke – including the large costs (often covered by Medicaid) caused by
    pregnant mothers smoking or being exposed to secondhand smoke, which results in a number
    of costly health problems, including low birth-weight babies, complicated pregnancies, and
    serious health and developmental problems among exposed offspring after birth and
    throughout their lives. They also do not account for such federal costs as increased Social
    Security Survivors Insurance (SSSI) payments to kids and spouses of those who die from
    smoking, which totals in the billions each year.

•   In any case, the relevant federal and state laws do not allow the cigarette companies to use the
    fact that their product kills people, or any alleged cigarette-death savings, as either a defense in
    the federal tobacco lawsuit or as a way to mitigate or reduce their damages payments.

Doesn’t the federal Government already get more money from the cigarette companies than
it spends to treat smoking-caused health problems? NO.

•   The federal government currently spends more than $35 billion per year to treat smoking-
    caused health problems. As noted above, there are also other substantial federal costs caused
    by smoking, such as more than $2 billion per year in increased SSSI payments to surviving
    spouses and children of those who die prematurely from smoking.

•   The U.S. government receives approximately $6 billion per year from federal cigarette taxes,
    but these funds come from smokers who pay the federal tax on each pack of cigarettes – not
    from the cigarette companies or their profits.
                                                                     Federal Tobacco Lawsuit Q & A’s / 8

•   The federal government also receives federal corporate tax payments from the cigarette
    companies, but these payments directly parallel those paid by other corporations that do not
    sell inherently deadly products that increase federal costs and do not have such a long,
    consistent history of illegal and wrongful acts.

If successful, won’t this lawsuit bankrupt the cigarette companies?           NO.

•   The cigarette companies’ have enormous financial resources, including the ability to simply
    raise their cigarette prices in order to obtain any funds they might be required to pay because
    of the federal lawsuit. Although raising prices will reduce the amount of cigarettes the
    companies sell, the addictive power of cigarettes will ensure that they would still raise much
    more money from the price increases than they would lose from reduced sales. To cover their
    state lawsuit settlements, for example, the cigarette companies have simply raised their
    cigarette prices, and they are enjoying much larger revenues despite reduced sales. In fact,
    the cigarette companies have raised their prices by so much more than the amount needed to
    cover their settlement costs that they are receiving an addition $9 billion per year in additional
    new revenues, as well.

Won’t the cigarette price increases caused by a successful federal tobacco lawsuit be the
same as a regressive tax increase? No.

•   Cigarette price hikes will place no new financial burdens of any kind on the more than 75
    percent of U.S. adults who neither smoke cigarettes nor buy them.

•   A tax is a mandatory payment required by the government. But smokers can reduce or
    eliminate any financial burden from cigarette price increases by quitting, cutting back, or even
    switching to cheaper cigarettes. Although quitting or cutting back is difficult because of the
    addictive power of nicotine, it is well-established that higher cigarette prices do prompt smokers
    to quit or cut back – and work even more powerfully to reduce smoking among kids and among
    adults with low incomes.

•   Smokers who quit or cut back because of any price increases caused by the federal lawsuit
    would not only save money by spending less on cigarettes but also improve their health and
    reduce their health costs. Health expenditures caused by smoking total over $80 billion per
    year, with billions being paid directly by smokers, either through direct health care payments or
    increased health insurance premiums.

•   Because low-income communities bear a disproportionately high share of the health problems,
    human suffering, and economic costs caused by smoking – and because low-income smokers
    are most likely to quit or cut back in response to cigarette price increases – low income
    communities will disproportionately benefit from the cigarette price increases and consumption
    declines caused by a successful federal tobacco lawsuit.

•   If the federal tobacco lawsuit is successful, all U.S. taxpayers, including those who continue to
    smoke, will benefit because the lawsuit will bring billions of dollars of cigarette company
    damages payments into the federal treasury. These funds will, at a minimum, reduce the need
    for future tax increases or cuts to federal programs, and some of the funds could end up being
    used to cut everybody’s federal taxes.

•   It is likely that a significant portion of any funds recovered by the federal tobacco lawsuit would
    be used to help people quit smoking, which would help even more smokers escape all the
    financial burdens associated with buying and smoking cigarettes. In fact, the federal lawsuit
                                                                    Federal Tobacco Lawsuit Q & A’s / 9

    explicitly asks the court to require that the cigarette companies not only pay damages directly
    into the federal treasury but also finance new national programs to help smokers quit and
    otherwise prevent and reduce tobacco use.

•   Any cigarette price increases caused by the federal lawsuit would further benefit every single
    U.S. taxpayer, including those who continue to smoke, because the cigarette price hikes will
    reduce smoking rates, thereby reducing government costs caused by tobacco use. Right now,
    federal and state taxpayers pay more than $40 billion every year to cover government costs
    caused by smoking. Smoking declines caused by the federal lawsuit would reduce this
    tobacco-tax burden.

•   In numerous polls, low-income persons have strongly supported efforts to prevent and reduce
    smoking by raising cigarette prices.

Will the federal lawsuit reduce smoking in the United States?         YES.

•   One of the enormous benefits from the federal tobacco lawsuit is that it could reduce smoking
    by adults and children throughout the United States, thereby dramatically improving public
    health and saving hundreds of thousands of lives and billions of dollars.

•   If the federal tobacco lawsuit is successful, the cigarette companies will have to make large
    damages or settlement payments to the U.S. Government. The cigarette companies would
    likely increase their cigarette prices to obtain the revenues necessary to make these payments,
    and those price hikes would, in turn, reduce smoking levels throughout the country. For every
    10 percent increase in cigarette prices, smoking consumption drops by about four percent, with
    an even sharper decline among kids.

•   The federal tobacco lawsuit asks the court to require that the cigarette companies provide
    funding for new programs to prevent and reduce smoking to help compensate for some of the
    enormous amount of additional smoking and related damage they have caused by their
    misdeeds and illegal acts.

•   It is likely that the federal government would invest some of the funds it recovers from the
    federal lawsuit in additional new programs to prevent and reduce tobacco use throughout the

•   If current trends continue, roughly five million kids today will eventually die from smoking-
    caused disease. A successful federal tobacco lawsuit would sharply reduce that number.

Will the smoking reductions caused by the federal tobacco lawsuit reduce the states’
tobacco settlement receipts and state cigarette tax revenues? ONLY IF THE LAWSUIT

Any reduced cigarette consumption caused by the federal tobacco lawsuit would both reduce state
cigarette tax revenues (because fewer packs of cigarettes would be sold) and reduce the cigarette
companies’ settlement payments to the states (which are adjusted downward if total U.S.
consumption declines). But:

•   Any future reductions in cigarette consumption caused by the federal lawsuit that would
    significantly reduce state settlement or cigarette tax revenues would also produce enormous
    offsetting cost savings and other benefits to the states – including saved lives, improved public
    health, and reduced smoking-caused health expenditures and other smoking-caused costs
                                                                        Federal Tobacco Lawsuit Q & A’s / 10

        paid for by state governments. Currently, the states currently spend roughly $7 billion per year
        just on the state share of smoking-caused Medicaid costs, but that state government cost
        would go down if cigarette consumption declines. States that invest significant amounts of
        their own settlement or tobacco tax revenues to prevent and reduce tobacco use will accrue
        considerably more of these savings than states that do not.

•       Because of the addictive power of cigarettes, any reductions in state tobacco settlement and
        cigarette tax receipts caused by the federal lawsuit are likely to be gradual and should not
        interfere with state efforts to budget their revenues prudently and effectively. These reductions
        would not create any sudden budget shortfalls, especially since state governments typically
        budget on a year-to-year basis. In addition, once the terms of the final court ruling on the
        federal tobacco legislation, or its settlement, were made public, states could quickly make
        adjustments for the expected impact on consumption and state settlement and tax revenues.

    •    Most states do not realize that their scheduled settlement payments are already adjusted
         upward by a minimum of three percent per year to account for inflation. These upward
         adjustments would largely offset any reductions to the settlement payment amounts caused
         by consumption declines. For example, the multistate settlement agreement states that the
         cigarette companies will pay the states more than $200 billion through the year 2025, subject
         to adjustments, and the inflation adjustment will automatically increase that amount to at least
         $300 billion before any downward consumption adjustment are made.

•       States that wish to compensate for any lost revenues caused by a successful federal tobacco
        lawsuit could simply increase their state tobacco tax rates. This strategy would especially
        make sense in those states with tobacco tax rates that remain far below the national average of
        about 43 cents per pack.

If the federal tobacco lawsuit is successful, will it trigger the federal offset provision in the
state tobacco settlements, thereby reducing state settlement receipts? NO.

The federal offset provision in the settlement agreement provides that the cigarette companies
tobacco settlement payments to the states will be reduced on a dollar-for-dollar basis if any new
funds the federal government obtains from the cigarette companies through federal legislation
passed by Congress and signed into law by the President on or before November 30, 2002 are
made available to the states for unrestricted, public health, or tobacco control purposes.

•       A judgement against the cigarette companies in the courts would not trigger the federal offset
        provision in the state settlement agreements (and is not scheduled to occur until 2003, at the
        earliest, anyway). The only way the federal tobacco lawsuit could trigger the federal offset
        provision is if it were somehow settled through new federal legislation (enacted by November
        30, 2002) that called for new payments from the cigarette companies. But the state tobacco
        settlements did not require any new state legislation, and it is unlikely that a settlement of the
        federal lawsuit would require any new federal legislation.

•       Even if the federal lawsuit were settled through federal legislation enacted by November 30,
        2002, it is unlikely that the federal government would make any of the cigarette company
        payments available to the states in such a way as to reduce the cigarette companies’
        settlement payments to the states. To avoid triggering the provision, Congress and the
        President could simply wait until after the deadline to enact the settling legislation, or Congress
        could either earmark any settlement funds directed to the states for specific purposes other
        than tobacco control or public health, or simply not give any of the federal recovery to the
                                                                   Federal Tobacco Lawsuit Q & A’s / 11

    states at all (with any new federal funds directed to the states coming from other sources of
    federal funds).

Won’t the federal tobacco lawsuit hurt U.S. tobacco growers and U.S. cigarette factory
workers? No.

Although smoking reductions caused by the federal tobacco lawsuit would, to a lesser extent,
reduce the demand for American-made cigarettes and U.S. tobacco leaf, the direct benefits to U.S
tobacco growers and cigarette factory workers should substantially outweigh any indirect harm
they might incur because of reduced demand. In addition, U.S. growers and cigarette factory
workers would also enjoy all of the other benefits that will come to all U.S. residents and taxpayers
if the federal lawsuit is successful.

•   A coalition of more than 80 key public health groups, children’s organizations, tobacco grower
    cooperatives, farming groups, and others have signed a “Core Principles” document and
    formally pledged to do all they can to ensure that any funds obtained by the federal government
    from the cigarette companies will be used not only to reduce youth smoking but also to assist
    tobacco growers, cigarette industry workers, and tobacco-dependent communities.

•   Although U.S. smoking declines caused by the federal lawsuit could reduce the overall demand
    for U.S. tobacco leaf, smoking by Americans makes up only about 40 percent of the total
    demand for U.S. tobacco, which is also used for exported cigarettes and exported as leaf. In
    other words, the federal lawsuit would have no impact at all on 60 percent of the overall
    demand for U.S. tobacco, and would have only a relatively small and gradual impact on the
    other 40 percent. Similarly, U.S. smoking declines will have no effect on the roughly 30 percent
    of all U.S. cigarette production dedicated to producing cigarettes to be exported overseas.

•   The U.S. cigarette companies like to blame their reduced demand for U.S. tobacco on declines
    in U.S. smoking levels. But from 1995 to 1998, U.S. cigarette consumption declined by only
    three and one-half percent, while the U.S. cigarette companies reduced their purchases of U.S.
    tobacco production by more than 26 percent, or more than seven times as much.

•   The main reason that the cigarette companies have cut their purchases of U.S. leaf is because
    they have: 1) substantially increased the amount of foreign-grown (instead of U.S.) tobacco
    they use in American-made cigarettes; and 2) dramatically increased their overseas production
    of cigarettes to serve their foreign markets, instead of relying on U.S. cigarette exports (which
    use much more U.S. leaf than foreign-made U.S. brands). In addition, the U.S. cigarette
    companies have invested enormous amounts of money to improve the quantity and quality of
    cigarette tobaccos grown by foreign farmers, thereby creating and subsidizing brand new
    foreign competition for U.S. tobacco growers – and sharply reducing U.S. tobacco leaf exports.

•   Similarly, U.S. cigarette factory workers have been losing their jobs primarily because the U.S.
    companies have been shifting their manufacturing overseas instead of exporting American-
    made cigarettes – not because of U.S. smoking declines. Recently, U.S. production of
    cigarettes for export has declined much more sharply than production for domestic sales (even
    though the companies’ overall foreign sales have increased). Since 1982, the number of
    persons employed in U.S. cigarette manufacturing declined by more than 45 percent (to about
    30,000 or less) but total U.S. cigarette production is still higher than it was in 1982.
                                                  The National Center for Tobacco-Free Kids, July 15, 2001

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