State governments may have picked the wrong time to get into the tobacco business. With cigarette sales at the lowest level since 1951 (when the U.S. population was half what it is now), they are making less money than they expected under the 1998 agreement that settled their lawsuits against the major tobacco companies. In addition to reductions in smoking (spurred in part by the agreement itself, which caused a sharp increase in prices), the states have to contend with Philip Morris et al.'s complaint that they have not done enough to protect the leading cigarette manufacturers from small competitors that are not parties to the settlement. Citing a provision in the deal that allows them to reduce their payments if their combined market share falls below a specified threshold, the big tobacco companies plan to withhold $1.2 billion this year. In their defense, the states say they are doing all they can to screw over smokers and smaller tobacco companies through requirements that jack up prices and discourage competition.
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