Tobacco Profits


A few years ago, the Florida legislature passed a law that authorized the state to sue cigarette manufacturers for the cost of treating smoking-related illness under Medicaid. The law lightened the state's burden of proof and stripped the tobacco companies of their strongest defenses.

In essence, Florida's politicians said, "We're going to sue you, and we're going to win." Facing a rigged game, the industry ultimately agreed to pay the state $13 billion over 25 years.

To guard that bag of loot, Florida legislators are once again considering changing the rules of tobacco litigation. This time, however, they want to make it harder for plaintiffs to collect big awards.

The legislators are nervously watching Engle v. R.J. Reynolds, a class action by Florida smokers. A jury recently awarded the three lead plaintiffs in that case $12.7 million in compensatory damages, and punitive damages could run to the tens of billions.

It has suddenly occurred to Florida's anti-tobacco crusaders that the industry's resources are finite. Even if the cigarette companies ultimately prevail in Engle, posting an appeal bond equal to the amount of the award plus 20 percent could seriously impair their ability to continue subsidizing politicians' favorite projects.

That's why Florida legislators are thinking about limiting the size of the appeal bond and the amount of punitive damages the companies would have to pay each year. Florida Attorney General Bob Butterworth, who led the state's attack on the Merchants of Death, recently suggested protecting them by delaying punitive damages until compensatory damages have been assessed for each of the estimated 500,000 smokers in the Engle class.

Butterworth is not alone in his newfound concern for the cigarette makers. Officials in other states have publicly worried about the impact of lawsuits like Engle on the tobacco money streaming into their coffers.

Under settlements reached in 1997 and 1998, the states are scheduled to receive $246 billion from the tobacco companies during the next couple of decades. By and large, this money is not going back to the taxpayers on whose behalf the states supposedly sued.

Instead, politicians are using the windfall for anything that strikes their fancy, and each of those projects has constituents who expect the money to keep rolling in. In states where some of the tobacco money is being used for anti-smoking programs, the beneficiaries include activists, researchers, and propagandists who have dedicated their careers to fighting the cigarette industry. Now they have a financial stake in its continued health.

This sort of dilemma is not new. King James I, who in 1604 wrote one of the first anti-smoking polemics, nevertheless welcomed the revenue generated by tobacco grown in Virginia.

Two and a half centuries later, Napoleon III was urged to ban tobacco. He is said to have remarked, "This vice brings in 100 million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue."

Today's politicians, who rail against tobacco even while profiting from it, are not quite as candid as the emperor, and their take is a lot bigger. In the United States, in fact, the government makes more money from the cigarette business than the tobacco companies do.

A 1999 New York Times estimate put Philip Morris's profit on a pack of Marlboros at 28 cents. As of December, according to a calculation by Philip Morris, the average state cigarette tax, weighted by sales, was 40 cents a pack, on top of a 34-cent federal tax (scheduled to hit 39 cents in 2002).

The idea of raising cigarette taxes to pay for new programs seems to be catching on, with a 50-cent hike in California for "early childhood development" last year and a 55-cent hike in New York for health insurance this year. Throw in the proceeds from the state litigation and whatever the feds get from the lawsuit they've filed, and it's clear that the government is fast reducing Philip Morris et al. to the status of bit players in the tobacco trade.

To be sure, there's an important moral distinction here. Tobacco companies and politicians both take money from smokers, but politicians do it by force, through taxes and the higher prices that result from litigation. By contrast, tobacco companies have to give smokers something for their money.