Sue the Ones You Love (tobacco)

...Bottom line: The industry's shareholders long ago were reduced to the role of cutouts, allowed to keep collecting a small piece of the pie so politicians can go on posing as scourges of "Big Tobacco" even as government has become, effectively, the "beneficial owner" of the major tobacco companies....

New York State has a court fight on its hands over its punitive exactions from such companies, which were not party to any lawsuit and never did anything wrong. Georgia has cracked down too, whacking innocent brands for benefit of local employer Brown & Williamson. And the state of Wisconsin even sent a letter demanding settlement payments from the London-based trade magazine "Tobacco World."

It may quack like a tax, but the 46-state settlement was never enacted by a legislature so the beneficiaries would become just another "unsecured creditor" in any tobacco bankruptcy. That's the best reason not to take the current federal lawsuit seriously....

So what exactly is the purpose of the federal suit? Justice insists tobacco companies are continuing with their deception and skullduggery, and thus have to be brought to heel. The claim is a cosmetic necessity under RICO, which aims at continuing criminal enterprises, but makes no sense. The industry's marketing practices are now dictated by its settlement with the states....

Revenuers, after all, have imbibed a great deal of free-lunchism from the Campaign for Tobacco-Free Kids, which shouts in one of its press releases: "Raising State Tobacco Taxes Always Increases State Revenues." Ditto the World Bank, which officially estimates that a 10% tax hike causes only a 4% decline in consumption....

[G]overnments have learned to be calculating exploiters of the "inelastic" demand of addicted cigarette smokers.

Still, the Laffer Curve tells us that you can't raise taxes forever and expect to get more money....

This offers an interesting investing angle to the political/legal future of the country. There are several new smaller cigarette companies formed since the tobacco settlement, and therefor not a part of it. (They did not exist and did not take part in the 'misdeeds' that the big cigarette companies were supposedly being 'punished' for.)

Given that they do not have the burdensome payments, they should clean house in free competition. This is where the political angle comes in. The big tobacco companies are trying hard to get the government to either force these new smaller companies into also having to make opressive payments to the government or to somehow protect them from the competition by other means. Many states have already created 'minimum' cigarette prices to prevent these upstarts from undercutting the big players on price. Even still, some of these companies use the money the big companies have to pay to the gov't to purchase the 'best' lots of tobacco....selling at the same price, they can afford to spend more on quality.

If the government does not violate the property rights of these new companies they will very likely continue to grow and expand quickly and profitably...they will be a great investment because their major competitors are hobbled. However, if the government tobacco crusaders manage to legally force them into also making oppressive payments for research they did not conduct, or to somehow otherwise cripple them at the behest of big tobacco, they will be an investment loser. Keep in mind that the government has a vested interest in keeping the ones making those massive payments to them around. The small new companies have a decisive advantage in the marketplace. The major risks are predominantly legal.

For the record...I have not invested although I thought about it. My money is on government finding a way to bleed these entreprenuers too.

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