Verdict saves tobacco companies

Posted: Jul 26, 2000 12:00 AM
On July 14, a Florida jury levied a $145 billion punitive damage penalty on the tobacco companies for injuries caused by cigarettes. Coming on top of assessments already made against the tobacco companies, one would have thought that such a verdict would be devastating to the business of tobacco. In fact, the verdict was viewed positively by some analysts as virtually guaranteeing the tobacco industry's survival. As the Wall Street Journal reported on July 17: "The state settlements ... have proven an ironic boon to the (tobacco) industry titans. To protect the billions of settlement dollars now coursing into state coffers, state politicians, (such as those in Florida) are laboring to ensure that cigarette manufacturers continue producing healthy profits. 'There is no doubt in my mind that a number of states want to ensure that this money continues to come in for whatever purpose they deem to use it,' says Attorney General Christine Gregoire of Washington state." Florida itself is a good example. Long one of the most anti-tobacco states, it rigged its laws so as to make it almost impossible for the tobacco companies to defend themselves. But as it became clear that the size and number of awards against the tobacco companies were threatening survival of the industry -- and hence the flow of money -- Florida relented, passing new legislation that sharply eased the burden on tobacco companies. The Journal reports that Florida's Democratic Attorney General Bob Butterworth, an anti-tobacco zealot, supported the changes because he "was persuaded by the argument that Florida had to shield the industry to secure the Sunshine State's multibillion-dollar slice of the settlement pie." In short, we are seeing the transformation of the campaign against Big Tobacco from one aimed at stamping out tobacco use for good, into one in which the government has essentially become its partner. And in order to make sure that government gets its share of the profits, it must protect its partner from threats to its survival. One can safely predict that during the next recession, when tobacco consumption falls, and along with it the government's revenue, we will see an easing of constraints on tobacco advertising, distribution and use in order to increase consumption and government revenue. This prediction can be made with confidence because that is the history of tobacco regulation. This is documented in an excellent new book, "Cigarette Wars: The Triumph of 'The Little White Slaver'" by Cassandra Tate (Oxford University Press). The author tells us that in the early part of this century, anti-tobacco zealotry was every bit as great as it is today. Between 1890 and 1930, fifteen states went so far as to ban the sale, manufacture, possession, and/or use of cigarettes. Some 22 other states seriously considered similar legislation. Many municipalities also passed anti-cigarette legislation, banning advertising, prohibiting smoking near schools, and making it illegal for women to smoke in public. Groups like the Anti-Cigarette League of America lobbied extensively for anti-tobacco legislation. Long before the Surgeon General's warning label was attached to cigarette packs, such groups urged that the word "poison" appear on each pack above a skull and crossbones. Says Ms. Tate, "In promoting their cause, the first generation of anti-cigarette crusaders articulated virtually every issue that is still being debated about smoking today." But within a few years, the anti-cigarette crusade collapsed. Ironically, Prohibition was a major factor. When the production and sale of alcohol became illegal in 1920, a major source of government revenue -- alcohol taxes -- dried up. With taxes on tobacco being the government's second largest revenue source after Prohibition took effect, politicians raised taxes and eased restrictions on tobacco to make up the lost revenue. Interestingly, anti-tobacco groups initially opposed new taxes on cigarettes. They took the view that cigarettes were not legitimate articles of commerce. By taxing them, therefore, governments in effect sanctioned and even endorsed their use. Eventually, revenue was also a major consideration in the repeal of Prohibition. When the Great Depression hit in 1929, government revenues collapsed. Desperate to lay their hands on new revenue, alcohol was quickly legalized once again so that it could be taxed. As economists Donald Boudreaux and A.C. Pritchard wrote in the Arizona Law Review in 1994, "popular sentiment for repeal was less important in propelling the Twenty-first Amendment than was Congress's desire for increased revenues." Writing in the Columbia Journal of Law and Social Problems in 1996, legal scholar Jendi Reiter came to a similar conclusion: "When the public and medical profession began to turn against tobacco and alcohol, paternalistic policies took center stage. Yet, whenever such motives did enter into tax policy, the measures so inspired were quickly co-opted by revenue considerations, which often frustrated the initial sumptuary rationale by making the economy more dependent on the despised product." Even in a worst case scenario for the tobacco companies, where penalties became so severe that they went bankrupt, it would not lead to the abolition of cigarettes. In a bankruptcy, ownership of company assets will simply shift from the current shareholders to the government, lawyers and plaintiffs. If they are ever going to get any money they will have to keep the companies going. Years ago, when the anti-cigarette hysteria was just getting started, Nobel Prize-winning economist Gary Becker warned the zealots against using taxes to penalize tobacco companies and reduce consumption. "The conflict between tax revenue and consumption reduction may seriously affect government policies toward smoking," he wrote. "If the feds get hooked on the revenue generated by smoking taxes, Congress may hesitate to impose severe regulatory restrictions on smoking." The Florida case may ultimately mark the beginning of the end of the war against Big Tobacco.