01 Oct 1999 Federal Tobacco Lawsuit Could Pave Way for Litigation Tax on Other Industries

The Clinton Administration Justice Department suffered yet another blow to its already sagging credibility September 22 when it announced the filing of a multi-billion dollar civil suit against U.S. tobacco companies.

As with many pronouncements from the Clinton Justice Department, this one requires close scrutiny.

First of all, despite Attorney General Janet Reno’s comments in announcing the suit, the government does not lose money from smoking: it profits from it.

An analysis by Professor W. Kip Viscusi, the former director of Harvard Law School’s Program on Empirical Legal Studies, shows that because smokers have an 18-36 percent chance of dying sooner than they would if they did not smoke, smokers tend to use substantially less Social Security and Medicare benefits and other expensive government programs. This saves the government approximately 32 cents for every pack of cigarettes sold.

In addition to saving 32 cents per pack, says Viscusi, government taxes average 53 cents per pack.1

So government profits 85 cents per pack of cigarettes sold in the United States. This figure, incidentally, does not include the $246 billion tobacco companies agreed to give state governments last year to settle state-initiated lawsuits.

Meanwhile, according to the New York Times, tobacco companies make an average profit of 28 cents per pack.2

Government profits from tobacco more than tobacco companies do.

The federal government’s case is also undermined by the claim that the Medical Care Recovery Act (MCRA) allows the government to recover from responsible parties government expenses incurred supplying medical care to injured servicemen. MCRA was passed before Medicare existed, and, until now, even the government did not assert that it allowed for Medicare reimbursement lawsuits. More to the point, the federal government distributed cigarettes to servicemen for years, stopping only in 1974, a full decade after the Surgeon General warned that tobacco use is dangerous. To this day the government sells cigarettes at substantial discounts at military post exchanges.3 By the twisted logic of this lawsuit, the government should list itself as a co-defendant in its suit.

The government’s lawsuit is motivated by politics. Not for the first time, the Clinton Administration is attempting to use the judicial system as a political tool rather than as an impartial arm of justice.

In 1997, for instance, Attorney General Reno testified before the Senate that the federal government has no legal cause of action to recover Medicare costs from tobacco companies. Two years later, the law is the same, but Reno is nonetheless filing a suit we must suppose she believes the federal government will not win. Reportedly, the White House pressured her to do so.

The end result of this case almost certainly will be that the government will lose and taxpayers will get nothing for the expenditure of their hard-earned dollars, except, perhaps, some favorable publicity for the Clinton Administration, which enjoys portraying itself as a crusader against tobacco companies. Twenty million dollars worth of Justice Department resources that could have been used for the greater good (dare we suggest fighting crime?) will have been wasted.

In the extremely unlikely event that the federal government wins this lawsuit, the public would still be ill-served. If the tobacco companies lose, they’ll raise the price of cigarettes to pay damages. 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. This means that tobacco companies will essentially be reimbursed for any damages by America’s poor and lower-middle class.

Ironically, says a Virginia Tech study, tobacco companies are actually making more money as a result of their settlement of the states’ lawsuits in 1998, despite their $246 billion payout. Tobacco companies raised the price of cigarettes an average of 45 cents per pack to pay for the settlement. Virginia Tech researchers report that this increases 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, in fact, says that the people who are really hurt by tobacco lawsuits are tobacco farmers, not manufacturers.4

You can bet that the Justice Department will not admit that this lawsuit, if it succeeds, will hurt farmers more than tobacco companies. A lot of farmers vote.

After having failed to increase federal tobacco taxes through the democratic process, or even trying very hard to do so, the Clinton Administration has turned from Congress to the courts to try to levy its unpopular tax increase on an American industry. Article I, Section 8 of the Constitution grants to the Congress, not the executive or the courts, the power to raise taxes. But the Administration believes that the Constitution should be ignored when it gets in the way. If President Clinton succeeds in ignoring it here, expect the litigation tax to fall soon on other controversial everyday items like alcohol, snacks, cars and fast food.

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

Footnotes:1 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, February 28, 1999.

3 “Philip Morris Says Lawsuit is ‘Height of Hypocrisy’; Vows Aggressive, Full-Court Defense on Facts, Law,” Business Wire, September 22, 1999.

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