01 Jul 1999 A Federal Tobacco Lawsuit: Bad Economics, Bad Law and Bad Governing

The way some politicians go on about tobacco, you’d never know that it is government’s fine coffers that profit the most from cigarettes.

Has any politician ever mentioned that government rakes in 53 cents per pack of cigarettes sold1 while tobacco companies make about 28 cents?2

The 53 cents, by the way, doesn’t include the money from the unprecedented $246 billion tobacco companies agreed to give the states. If you don’t think that adds a pretty penny to the government’s take, you’re, well, smoking something.

It can’t even be said that cigarette companies profit more than government when the government’s health and welfare costs caused by tobacco use are factored in. That’s because smokers have an 18 to 36 percent chance of dying sooner than they would if they didn’t smoke,3 so smokers, speaking generally, are likely to live long enough to pay bundles of taxes but not long enough to use nursing home facilities or all their Social Security and Medicare benefits.

Nationally, government saves 32 cents for every pack of cigarettes sold, not counting cigarette tax revenue. When taxes are included, says Professor W. Kip Viscusi, the former director of Harvard Law School’s Program on Empirical Legal Studies, every pack of cigarettes sold in this country saves society 85 cents.

You wouldn’t guess this when you hear that President Clinton has ordered Janet Reno to sue tobacco companies to recover revenue the federal government supposedly has lost because of tobacco.

Right now the U.S. Senate is gearing up for a big floor fight over this tobacco lawsuit.

You see, last year Janet Reno openly stated that the law doesn’t provide grounds for this lawsuit. But President Clinton’s most recent State of the Union address fell right in the middle of his Senate impeachment trial, and he was looking for applause lines. Polls say tobacco companies are unpopular, so Clinton announced a suit against tobacco companies. So, ever the loyal soldier, Janet Reno dutifully asked Congress for an additional $20 million in the Justice Department’s budget so she can spend it suing tobacco companies.

That’s where the Senate’s big floor fight comes in.

Senator Judd Gregg (R-NH), who chairs the subcommittee with jurisdiction over Reno’s budget, took the $20 million out of Reno’s budget. Gregg, who has had some very harsh words for tobacco companies and who last year pushed through an amendment to anti-smoking legislation to penalize tobacco companies even more, explained that the Justice Department’s legal division is currently too overworked.4 The Justice Department is already facing a $1.3 billion cut from its fiscal year 1999 18.3 billion so the government can keep spending below the balanced budget caps.5

Now several senators, led by Richard Durbin (D-IL) and Bob Graham (D-FL)6, are publicly vowing to fight for the $20 million when the joint appropriations bill for the State, Commerce and Justice Departments is voted on this summer. Expect a lot of august senatorial rhetoric when this happens, but don’t expect any of these senators to admit that the federal government makes a net profit from tobacco.

Another issue these senators won’t touch is who pays if they succeed. When tobacco companies settle a lawsuit, they raise the price of cigarettes. The Congressional Joint Committee on Taxation says 53 percent of all federal cigarette taxes are paid by people making under $30,000 per year, and only seven percent by people making over $75,000.

I bet most of the politicians who want the Justice Department to spend $20 million or so annually in tax dollars suing tobacco companies also give heartfelt speeches about their commitment to reducing economic pressures on the poor and middle class.

This federal tobacco lawsuit seems to be designed more to make politicians look good than to benefit the health of smokers or the pocketbooks of taxpayers.

A new Virginia Tech study even shows that cigarette companies are actually making more money as a result of the states’ lawsuits. Tobacco companies raised the price of cigarettes an average of 45 cents per pack to pay for the $246 billion settlement. Virginia Tech researchers say this price increase is enough to increase the tobacco companies’ profits because the percentage increase in price is larger than the percentage decrease in cigarettes sold because of the price increase. Virginia Tech says that the people who are hurt by the tobacco lawsuits are tobacco farmers, not manufacturers.7

A federal tobacco lawsuit is probably the silliest tobacco policy our government could have. The case will probably lose on the legal merits, thus flushing away $20-plus million in tax dollars. In the unlikely event that the government wins, it will simply cause higher cigarette prices, a result that could be achieved far more surely and easily by raising tobacco taxes.

President Clinton will say a federal lawsuit is necessary because Congress didn’t pass a tobacco tax increase last year. What he won’t add is that he didn’t try very hard to get them to.

No, that would have been too much trouble. It is far easier for the President to bypass Congress and try to raise taxes through a lawsuit.

Just as King George found the Continental Congress to be a nuisance, so too does President Clinton see Congress as a nuisance. Someone should tell him what happened to King George.

Amy Ridenour is president of The National Center for Public Policy Research. Comments may be sent to [email protected].

Footnotes1 Doug Bandow, “Lying About the Public Good,” Investor’s Business Daily, April 26, 1999 and W. Kip. Viscusi, “From Cash Crop to Cash Cow, How Tobacco Profits State Governments,” Regulation, Summer 1997.

2 Andy Newman, “The Economics of Cigarettes: Smoke One for the Tax Man,” New York Times Magazine, 1999.

3 Viscusi.

4 Gil Klein, “Senator Shifts on Tobacco Suits, N.H.’s Gregg Explains Move as Cost-Related,” Media General News Service, June 28, 1999.

5 Sam Skolnik, “Capitol Hill Smoke Out? Move by Senate Republicans Threatens Reno’s Tobacco Suit,” Legal Times, July 5, 1999, p. 1.

6 Skolnik.

7 “Harm to Tobacco Farmers Foreseen,” Washington Post, July 5, 1999, p. B3.