Big Tobacco's Ruse

In the two weeks since they announced they are walking away from the negotiations over tobacco legislation, Big Tobacco has taken an unprecedented pounding.
The Clinton administration, members of Congress from both parties and the media have lined up to take potshots at the tobacco industry's shocking display of arrogance -- after all, under the constitution, corporate CEOs do not have a vote in Congress, nor do they share the president's veto power.
It has been the best two weeks Big Tobacco has enjoyed in a long time.
By denouncing legislation introduced by Senator John McCain, R-Arizona, as an extremist, "big government" approach that is likely to bankrupt the industry, the tobacco merchants have succeeded in luring in many into a defense of the McCain bill.
That is exactly what the industry hoped to accomplish. Big Tobacco cannot help but be happy with the McCain bill, which grants the industry a wide array of concessions and protections. But it knows the best way to generate support for the bill is to pretend to oppose it -- an industry endorsement would be the kiss of death for any legislation on Capitol Hill.
Here are some of the reasons why the industry loves the McCain bill:
* A cap on liability: The McCain bill specifies that the tobacco companies cannot pay more than $6.5 billion a year in damages in civil lawsuits. This lets the tobacco companies predict future expenses -- their most cherished goal, because the uncertainty surrounding litigation and the potential of huge punitive damage awards keeps tobacco stock prices depressed.
* Consumers pay, not the companies: The McCain bill requires the companies to make annual payments to the government, and to pass through the costs to consumers. All proposed tobacco legislation would, through "pass throughs" or direct taxes, raise prices for consumers, so this is not unique to the McCain bill. But it does put the lie to the industry's claim that tobacco companies may face bankruptcy under the bill. It is consumers who will pay the costs, not industry (although resultant sales volume declines may lower the companies' profits).
* An exemption from the nation's antitrust laws: The antitrust exemption will permit the companies to collude to raise prices more than required -- meaning the industry may actually profit from the legislation.
In a September 1997 report, the Federal Trade Commission (FTC) concluded that similar antitrust immunity provisions in the June 20, 1997 state attorneys' general deal with the tobacco industry "may permit the industry members to discuss pricing arrangements that reach beyond the amount of a 100 percent 'pass-through' to consumers of the cost of the annual payments."
The FTC concluded that, with the June 20 settlement's antitrust immunity, "the industry may be able to increase prices and generate substantial profits."
* Payments under the McCain bill are tax deductible: That means taxpayers will cover the cost of about 40 percent of the industry's payments -- even though consumers, not the companies, will really be paying the McCain bill's costs. This is an enormous opportunity for company profiteering.
* Big Tobacco's real assets shielded: The McCain bill would permit only domestic tobacco manufacturing subsidiaries to be sued. The parent companies and the foreign subsidiaries of Philip Morris and R.J. Reynolds would be completely protected from litigation. That means tobacco company victims would be denied access to most of the assets and earnings of the tobacco company conglomerates (Philip Morris already earns more than half of its tobacco profits from overseas sales, and the portion is growing).
* Preemption of State Action: The McCain bill would prevent states from enforcing regulations stronger than those in federal legislation through civil suits against the tobacco companies. That would deter states from trying to innovate more effective regulatory measures. Other preemptive provisions in the McCain bill would also undermine community and state campaigns to control the tobacco companies.
Congress, the media and the public shouldn't be fooled by Big Tobacco's ruse. It is time to pass tough tobacco legislation -- without worrying about industry's support, and without providing sweetheart deals to the Tobacco Lords. If Congress cannot pass broad legislation to control the industry, then it should pass more focused legislation -- including, for example, a tax increase, affirmation of Food and Drug Administration authority to regulate tobacco and international measures -- that doesn't confer any special protections and benefits on the Merchants of Death.