The States' Tobacco Addiction
-- Philip Morris recently got the Illinois Supreme Court to overturn
a gigantic judgment against it in a suit that had originated in
a place -- Madison County, Ill. -- few could locate on a map.
The court's ruling resulted in this Wall Street Journal
headline: ``Tobacco-Revenue Munis Get a Lift.'' This episode illuminates
American governance today.
is America's largest maker of cigarettes, a product legal to use
but problematic to merchandize legally. Cigarettes are stigmatized
by common sense and all state governments. But because those governments
are increasingly addicted to cigarette tax revenues, the governments
must be careful not to make cigarettes so expensive they do not
County, located along a bend in the Mississippi River near St.
Louis, elects its judges, some of them very friendly to plaintiffs'
lawyers who prosper from class-action lawsuits. In 2003, a county
court held that Philip Morris deceived 1.14 million current and
former Illinois smokers into believing that cigarettes labeled
``light'' and ``low tar'' are safer than regular cigarettes. Without
blaming Philip Morris for any illnesses, the purchasers of these
products accused the company of fraud. A Madison County judge
exuberantly awarded them $10.1 billion in compensation. The 0.1
was a nice touch, suggesting -- speaking of fraud -- scientific
Federal Trade Commission has ratified the use of the light and
low-tar labels, and Illinois law sensibly says that companies
cannot be penalized for conduct authorized by a regulatory body.
So the Illinois Supreme Court, in a 4-2 ruling, vacated the $10.1
billion judgment. Two of the four justices in the majority also
argued that the judgment should be overturned because the plaintiffs
had not demonstrated that they had been harmed by Philip Morris'
actions. That principle could spoil the fun of the asbestos litigation
racket, in which some plaintiffs collect even though they have
no symptoms of any ailments associated with exposure to asbestos.
Supreme Court's ruling stimulated the market for ``tobacco-revenue
munis.'' Those are municipal bonds backed by tobacco revenue streams
resulting from a real fraud -- the Master Settlement Agreement.
In 1998, 46 states conspired to seize $246 billion from companies
that sell products made from a commodity -- tobacco -- the cultivation
of which was then subsidized by the federal government. Tobacco
subsidies totaled $528 million from 2000 through 2004; then the
government paid $10.1 billion -- that number again -- to terminate
the tobacco quota system.
MSA, the states are scheduled to get their portions of the pot
over many years. But deferral of gratification is un-American,
so some states, eager to get their loot, have ``securitized''
their expected portions. Securitization involves selling bonds
backed by the anticipated revenues.
is a deal struck between the state attorneys general and trial
lawyers. For the latter, it was a financial windfall, netting
about $13 billion in fees that sometimes amounted to tens of thousands
of dollars per hour of work. For the former, it was a political
windfall, enabling their states to finance this and that with
billions paid by smokers, who are disproportionately low-income
rests on the fraudulent claim that smoking costs the states huge
sums, principally because of health care costs. Actually, smoking
makes money for governments, for two reasons. Cigarettes are the
world's most heavily taxed consumer product (state taxes range
from 5 cents to $2.46 per pack; the federal tax is 39 cents).
And many smokers die prematurely from smoking-related illnesses,
curtailing their receipt of entitlements for the elderly.
one problem with the states' plans to divvy up the money extorted
from the tobacco industry: The MSA may be declared unconstitutional.
The U.S. Constitution says (Article I, Section 10): ``No state
shall, without the consent of Congress, ... enter into any agreement
or compact with another state.'' A federal district court is being
asked to declare that 46 states have done just that.
ability to continue treating the tobacco industry as a ``budgetary
Alaska'' -- the last frontier for exploitation -- depends on brisk
sales of cigarettes far into the future. So all 50 states, which
in 2004 reaped $12.3 billion in cigarette taxes, have an incentive
to carefully calibrate these taxes so as to maximize revenues.
They want high taxes, but not high enough to cause large numbers
of smokers to quit the habit that is so lucrative to states.
The state governments seem to be calibrating cleverly: The adult
smoking rate has not fallen much recently. So we have here a rarity
-- a government success story. Of sorts.
2005, Washington Post Writers Group