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The Big (Tobacco-Related) Threat to Missouri's Budget You've Probably Never Heard Of

Categories: Politics
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Missouri's "coddling" of generic ciggie brands, Koster says, puts us in "terrible peril"
Is anybody in America more hospitable to small tobacco companies than the Show-Me State?

Not only do we levy the lowest cigarette tax in the entire nation (a paltry 17 cents per pack).  Our legislature is the only one that forces Big Tobacco to cough up payments for smoking-related health costs but still lets generic cigarette brands off the hook. 

In so doing, we've frustrated Big Tobacco to the point that they're now dragging us into legal proceedings to "claw back" their payments, which could eventually total $1 billion, according to Attorney General Chris Koster. Arbitration begins in just a few weeks.

And if $1 billion liability doesn't sound like a big deal to you (because our state spends about $24 billion a year), we invite you to imagine wiping out all the operating budgets of the following entities for one year: the General Assembly, the Judiciary, the Department of Agriculture, the Department of Conservation, the Department of Natural Resources and the Department of Economic Development.

"Simply put," wrote Koster in a January letter to lawmakers, "the General Assembly's inaction over the last decade has placed our state in terrible and unnecessary peril."

The trouble began over a decade ago with the so-called "Master Settlement Agreement" (or the "MSA," as folks call it).

In the nineties, Missouri and 45 other states sued tobacco companies. They wanted money to help treat people with diseases caused by ciggies and chaw. The parties struck a deal in 1998: Big Tobacco would teach citizens about smoking's ills, halt all advertising to kids and pay some hospital bills (to the tune, in Missouri, of about $150 million each year).

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Attorney General Chris Koster
But not all cigarette-makers agreed to this. Some of the smaller ones refused. And their refusal gave them a competitive advantage, not to mention the ability to blacken lungs with impunity.

In response, the 46 states agreed in the MSA to enact "escrow statutes," which basically required the generic brands to set aside money in third-party accounts, in case of future lawsuits.

At last! The states had finally secured funds to treat tobacco-related illnesses from the entire tobacco industry! Right?

Wrong. There was a loophole for the little guys, Koster explains.  The language of the escrow statutes allowed generic brands to concentrate their sales in just a few states -- Missouri among them -- and retrieve their escrow payments every year.

Legislatures in every MSA state figured this out and closed their loopholes -- except Missouri's legislature, which to this day, Koster says, "stands alone in its coddling" of the generic brands.  

Thus, small tobacco companies now sell a large portion of their smokes in Missouri, set aside some $45,000 in escrow each year (in case they're sued for sickening Missourians), but then get it right back.

Of course, losing a mere $45,000 to them isn't the problem. The problem is that now, big tobacco firms want their money back, too.

Big Tobacco is accusing our state of violating the MSA by not enforcing our escrow statute on their smaller competitors. They want a refund for only those MSA payments they made in 2004, Koster writes, which would total more than $100,000. But if they win arbitration -- expected to finish by July -- RJ Reynolds et al will "surely" sue for all the years up until now. And that, friends, could total more than $1 billion.

Worse still, the "dire" situation caused by "legislative inaction" cannot be fixed, Koster concludes. It's too late. We can, however, cover our rear-ends going forward -- as every other state in the MSA has done.

But has anybody in Jefferson City even bothered to try?

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State Senator Kurt Schaefer is trying to close the loophole
Senator Kurt Schaefer (R) has taken up the mantle this session. It's too early to tell what will happen, though if history is a guide, the answer is: Nothing.

Last session, Representative John Diehl (R) filed a bill to close the loophole, but after it passed through two different committees, it was laid over. We'd like to ask him why, but he hasn't responded to repeated phone calls from Daily RFT.

Senator Mike Parson  (R) proposed his own identical bill in 2011 as well. His didn't make it very far either.  A committee hearing was canceled in April, then again in June.

Curiously, within three months, Parson's campaign had received $4,500 in contributions from at least two self-proclaimed opponents of the measure: Cheyenne and Xcaliber, both small tobacco companies.

Were these contributions a thank-you to Parson for not pushing too hard? Or a thank-you in advance for not pushing ever again? Or none of the above? We don't know, because Parson wouldn't call us back, either. (Though if he does, we'll update this post.)

Maybe we shouldn't single out Parson. At least he tried. Why are the Republicans the only ones attempting to remedy this alarming situation? Where have the Democrats been on this?

Since 2002, Governor Jay Nixon (as Attorney General) and his successor Koster have asked the General Assembly on multiple occasions to fix the mess once and for all. Daily RFT asked Koster via e-mail: Why have our lawmakers failed to act?  

Citing the upcoming arbitration, Koster's spokesperson declined to answer that question.

Gee whiz. Hundreds of millions in liability stacking up and nobody wants to talk about it.

Must be nice to be a small tobacco company operating in Missouri.

Smoke if you got 'em! (They're cheap around here.)
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12 comments
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Rjlancaster3
Rjlancaster3

Nick - you say "But if they win arbitration -- expected to finish by July -- ".  How do we find out the status of this arbitration, for MO and other states fighting the same fight?

Danieljoeoconnor
Danieljoeoconnor

it's a good question why aren't the dems  closing the loopholes on tobacco.  i suggest you follow the money.

Kosterwatch
Kosterwatch like.author.displayName 1 Like

The problem isn't the small cigarette manufacturers, it's the big companies that agreed to pay the state that have been withholding payments because they have lost market share. The big companies pricing for profit strategies keep pricing their cigarettes out of the market, but the MSA allows them to claim a refund. Problem is the big companies have to prove they have lost market share to the small cigarette mfr's and that the state hasn't enforced the price fixing mechanism known as the escrow statute.

Missouri and the other 45 states that the big companies owe over a billion dollars too are in arbitration over the payments because they agreed to arbitration when they signed the settlement. It's easy for Koster to blame the small cigarette companies, but the fact is that 45 other states passed laws to close the so-called loop-hole, but they're in arbitration too.

The MSA is nothing more than a cartel between the states, who get money from the big companies cigarettes sales, and the big companies, who get protection via state laws from price competition. Where is it written that if my competitor breaks the law I have to pay a fine? That's the MSA. The big cigarette companies knowing lied about the science of smoking and advertised cigarettes directly to kds, Joe Camel, Nascar, etc. The small companies, most of which started business after the settlement, have never lied or misrepresented the health effects of smoking, but are required to jump through a bunch of hoops imposed by state laws to hinder their ability to compete with the big companies.

Koster has been reduced to the big companies lap dog and he brings this issue up because if he loses money in arbitration it will be because he didn't enforce the law and he is looking for someone to blame. Had Missouri followed the other state and passed the law he wants prices in Missouri would be higher, but he'd still be in arbitration. Wonder who he'd blame then... Jay Nixon? 

Nick Phillips
Nick Phillips

Hey Kosterwatch -- I understand your points, and I'm looking into the matter. Stay tuned for a possible follow-up. Thanks for commenting!

smokefree1988
smokefree1988

Missouri has the eleventh-highest smoking rate in the nation. Nearly 21 percent of adults and more than 18 percent of high school students in Missouri smoke.

If you are a legislator you should also be aware that studies have clearly shown that if you raise the price of tobacco products the number of smokers (especially teens) and the smoking consumption rate will go down. This is not a hypothesis but proven across the country.

And the best way to increase the price of tobacco products is to raise the cigarette tax. 

So, how is Missouri doing in this capacity? As the writer states Missouri has THE LOWEST CIGARETTE TAX RATE IN THE ENTIRE COUNRTY. The Missouri Tigers may have been ranked #3 in the nation this year but when it comes to showing a concern for tobacco use for the state it is ranked #50! As the slogan for the Mets used to be, "you can only go up."

Tobacco use also creates a significant economic burden in Missouri. Approximately $2 billion is spent every year in Missouri to treat smoking-related illnesses. It's time that the state legislators take their heads out from under the sand and raise the tobacco tax on all tobacco products sold in Missouri.

mntvernon
mntvernon

 Thank you very much, Mr. Tobacco control freak.I betcha Ms Mott Oxford and Ms Mary Still (Sen. Shafers opponent in the upcoming Nov. election) are real proud of your repetition of their blather.Only if you'd have read Mr. Phillips article you would heve understood this was an issue of where little tobacco, who weren't suckered in by the 1998 MSA agreement, gets a legal refund of their escrow payments while the signatories must prop up the states budget.The escrow payments were supposed to relieve the signatories of getting sued by the state via the MSA deal with the devil. The money was supposed to be on hand in case others sued but juries are not as stupid as St. Louis Univ. and SSM found out: http://www.stltoday.com/news/l...Other states, like California are finding out the 'free money' cornucopia: http://www.utsandiego.com/news...wasn't as sweet as they thought when they did a JG Wentworth.Not to worry though, despite excise taxes of $.17 here and $4.25 in NY, the Fed excise of $1.01, along with the stealth MSA tax, the tobacco companies are the darlings of portfolio investment managers:http://finance.yahoo.com/news/...So if you want to spout off about the abuses and costs of smoking with the only solution of increasing the state excise tax, you're nothing more than a panhandler. If you want to be believable then put forth a proposal as this WA dentist:http://mynorthwest.com/76/5891...

Danieljoeoconnor
Danieljoeoconnor

great article.   it's weird that cannabis helps to cure cancer and it's illegal.  tobacco ?  well, one of my uncle's died from lung cancer 15 years, another cousin died..... both smoked over a pack a day. make tobacco  companies AND the backers pay ,pay, pay.

Tony Palazzolo
Tony Palazzolo like.author.displayName 1 Like

Its a good article. The MSA is a farce to begin with.  Yes its not a healthy habit, yes it causes disease and death.  However it does not cost the state more.  Perfect people with perfect habits get sick and die.  Other states have similar issues.  The MSA payout is based on cigarettes sales.  In some states sales are lower then predicted and their predicted payouts are lower (partly from lower smoking rates, partly from buying from lower tax states).  Those states are in a bind becaue they borrowed against future MSA payouts. 

Danieljoeoconnor
Danieljoeoconnor

don't be an idiot. would you like your little kid to grow up sucking proven cancer causing tobacco?

Tony Palazzolo
Tony Palazzolo like.author.displayName 1 Like

Interesting reply, I'm not sure how you came to your rather strong conclusion based on my comments.  Apparently it was strong enough to call me an idiot.  Lets look at this in a logical manner. 

I of course did not say I want my child to smoke cigarettes.  I said that the MSA was a farce.  The goverment took money from a legitmate industry based on an emotional arguement that smoking cost the public money. 

Now I am not disputing that smoking is unhealthy.  It in fact does cause illness.  I dispute that it cost society, government or public money.  Yes smokers get sick, but so do non-smokers.  There is one fact that can't be disputed.  If smoking did not exist, 100% of people would die.  There are at least two studies that quantified cost to society of smoking.  The result was that they do not cost more.  They die sooner and of different illnesses.  They pay more in taxes and they collect less in Social Security. 

If they can do this to the tobacco industry why not other industries.  Why not alcohol? Why not fast food? 

Danieljoeoconnor
Danieljoeoconnor

oh i get it ! so it's okay if people not in your family smoke, get cancer and die early cause then they won't collect social security and the gov will save money?   well funk you you funking @hole!  you don't want your own kid to smoke but some other kid sure it'll save the tax payers money.   republicans and people with that attitude is  what is wrong with the world.

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