States tackle deep discount cigarettes: cheap cigarettes have undercut the major tobacco companies and their ability to make payments to states under the master tobacco settlement agreement.
This is not good news for states relying on tobacco settlement money from the major manufacturers. The settlement allows cigarette companies to reduce payments if they lose market share.
Payments to states fell to 85 percent of the projected total in 2001 and to 81 percent in 2002, partially due to the encroachment of these "fourth tier" and "taste-a-like" brands.
Off brands such as Cowboy, Santelmos, Lobos, Durants and Marathons undercut the prices of major brands, such as Winston or Marlboro. This was partially because their manufacturers didn't participate in the lawsuits filed to recoup taxpayer money spent treating tobacco-related illnesses. When those settlements were reached, major brand prices increased 40 cents a pack or $4 a carton. Cigarette makers who didn't participate immediately gained a substantial price advantage.
But the tobacco settlements do require off-brand manufacturers to pay into escrow accounts in each state where their products are sold. The escrow payments offset some of the price advantage and establish funds that can be used to cover settlement costs should someone sue them in the future.
Many makers, however, have exploited a number of loopholes to avoid payments or remove escrow contributions soon after deposit. One method of setting the per pack contribution to a state escrow fund is based on previous year's sales. Some manufacturers have dodged this by changing the names of their brands every year, says Wade Hope, an attorney with the Alabama Department of Revenue. The National Association of Attorneys General estimates that states lost $450 million from the $5.2 billion payment for April 2003.
Policymakers are taking steps to make sure manufacturers of discount cigarettes follow the law.
Thirty-five states have set up directories of cigarette brands approved for sale. Only cigarettes whose manufacturers are legally making settlement payments or putting money into an escrow account are listed. Brands skirting the requirements are considered contraband, cannot be sold and can be confiscated.
Eighteen states have passed laws designed to increase the cost of the off-brand cigarettes and close loopholes in escrow account requirements. Alabama, for one, has added $3.90 per carton that cigarette companies must put in escrow for future health-related judgements.
Minnesota used a 35 cents a pack tax to increase the cost of cigarettes produced by manufacturers who have not entered into a settlement agreement with the state. The fee will be used to offset health-related costs of cigarettes and to prevent the sale of low priced brands that encourage smoking by minors.
An amendment to state statutes that corrects language allowing nonparticipating manufacturers to obtain a release on their escrow deposits has been adopted by 15 states.
Lawmakers hope the price increases in the cheaper brands will increase market share of name brands. That will increase settlement amounts those companies pay or at least stop the erosion of payments. And theoretically it will lead to a decrease in smoking, since higher prices have been tied to decreases in demand.
LOST REVENUE Estimated reduction in tobacco settlement payments caused by increased sales of off-brands. State Amount in millions Alabama $7.2 Alaska 1.5 Arizona 6.6 Arkansas 3.7 California 57.4 Colorado 6.2 Connecticut 8.4 Delaware 1.8 Georgia 11.0 Hawaii 2.7 Idaho 1.6 Illinois 20.9 Indiana 9.2 Iowa 3.9 Kansas 3.8 Kentucky 7.9 Louisana 10.1 Maine 3.5 Maryland 10.2 Massachusetts 18.2 Michigan 19.6 Missouri 10.2 Montana 1.9 Nebraska 2.7 Nevada 2.7 New Hampshire 3.0 New Jersey 17.4 New Mexico 2.7 New York 57.5 North Carolina 10.5 North Dakota 1.6 Ohio 22.7 Oklahoma 4.7 Oregon 5.2 Pennsylvania 25.9 Rhode Island 3.2 South Carolina 5.3 South Dakota 1.6 Tennessee 11.0 Utah 2.0 Vermont 1.9 Virginia 9.2 Washington 2.2 West Virginia 4.0 Wisconsin 9.3 Wyoming 1.1
RELATED ARTICLE: States list cigarettes approved for sale.
Thirty-five states have set up directories of cigarette brands approved for sale. Only manufacturers who are legally making settlement payments or putting money into an escrow account get their cigarettes on the list. Brands skirting the requirements are considered contraband and cannot be sold.
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|Date:||Jan 1, 2004|
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