Tobacco Companies Seek To Reduce Settlement Payments

Large tobacco companies that make annual payments to states under the 1998 national tobacco settlement maintain that they can reduce their payments by $1.2 billion this year, and state governments "addicted to billions in revenue from" the settlement "have begun to worry that they will have to cut back" on health care and other programs, the Wall Street Journal reports.

Philip Morris USA and other large tobacco companies to date have paid states $41.1 billion of the $206 billion settlement, which requires the companies to make payments for at least 25 years, with a $6.5 billion payment this year. According to the Journal, large tobacco companies maintain that they can reduce their payments in the event their "collective market share drops below certain thresholds" under a provision included in the settlement over concerns "they would lose market share to smaller upstart cigarette makers that they expected to come into the market."

Large tobacco companies maintain that their collective market share decreased from 99.6% in 1997 to 92% in 2003 because smaller companies "aren't subject to the marketing limits and cost burdens of the settlement" and "can sell cigarettes at lower prices," the Journal reports.

However, states maintain that the decrease in market share resulted in large part from increased online cigarette purchases and higher demand for generic cigarettes. In addition, states maintain that they have enacted laws to require smaller tobacco companies to make payments in escrow accounts -- refundable after 25 years -- to ensure a fair market.

An independent arbiter on March 1 found that provisions in the settlement significantly contributed to the decrease in market share held by large tobacco companies, and states have until March 13 to submit arguments to the arbiter.

According to the Journal, a "loss of revenue could be bad news for many states that have come to count on the billions flowing from the tobacco companies," which have "helped finance health care programs, education and public works," as well as operational costs.

Joy Johnson Wilson, director of the health committee at the National Conference of State Legislatures, said, "It's important money -- and it's perpetual money -- and at this point, it is part of states' ongoing budgets. A major reduction would require some juggling" (O'Connell, Wall Street Journal, 3/8).