States Accused of Hypocrisy in Spending Big Tobacco Bucks

CNSNEWS.com ^ | 1/29/03 | Robert B. Bluey

[kattracks]

Editor's Note: This is the second of a three-part series examining the current difficulties facing Big Tobacco and the cigarette-buying public.)

(CNSNews.com) - States will collect more than $20 billion from tobacco companies and smokers this year, yet little of that money will go to prevent youth smoking as was originally intended.

The money technically does not have to be spent on tobacco prevention programs, but when 46 state attorneys general reached a settlement with Big Tobacco in 1998, they indicated that is were it would go.

In that time, youth smoking rates have declined, according to estimates from tobacco companies and anti-smoking groups, but an average of 430,000 people still die each year from tobacco-related causes.

This year states will take in $8.7 billion from the tobacco settlement, while the other $11.6 billion will be generated from excise taxes on cigarettes. Most of the taxes were implemented because of budget shortfalls and will be used to shore up deficits, not help people quit smoking or prevent kids from starting in the first place.

Anti-smoking groups have expressed their displeasure over these spending prerogatives and have a surprising ally in their campaign: Big Tobacco.

A Different Approach

Since signing the Master Settlement Agreement in 1998 with 46 states, tobacco companies have changed their tune about the dangers of smoking.

It was in the late 1990s when Big Tobacco decided it was time to put an end to lawsuits brought by state attorneys general. The settlement they reached, known as the MSA, cost the tobacco industry $206 billion over 25 years. Four other states -- Florida, Minnesota, Mississippi and Texas -- had previously reached settlements for $40 billion.

Besides forking over the $246 billion, Big Tobacco acknowledged the harm caused by smoking cigarettes -- a departure from years earlier when tobacco company officials swore before Congress that they did not believe the nicotine in cigarettes was addictive.

More than four years after the November 1998 settlement, the companies now tout their sense of responsibility as much as their profitability.

"Being successful goes hand in hand with being responsible," said Jaime Drogin, spokeswoman for Philip Morris USA, the domestic tobacco division of the newly named parent organization, Altria Group, Inc.

"We're being successful at being responsible," Drogin said. "It's important that just as we talk about the success in terms of dollars and cents that we also talk about the success in terms of overall corporate responsibility."

Like Philip Morris, its chief competitors R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp. have change their operations to reflect a different marketplace -- one that is more skeptical of Big Tobacco.

The decision by the tobacco companies to change their image was spurred on by the settlement, which required states to place a top executive in charge of youth smoking prevention, among other things, said Lyndon Haviland, chief operating officer at the American Legacy Foundation, an anti-smoking group.

But cigarettes remain addictive, Haviland warned. She cited figures showing that 70 percent of the 46 million smokers in the United States want to quit, but need an extra boost. That is where she said state tobacco prevention programs come in.

"There's no way to address the fact that more than 430,000 people die each year in the United States from tobacco-related illnesses. It's the single largest preventable cause of death in this country. It's a public health tragedy and it's an epidemic. For states not to address that, they are causing additional expenses, and frankly, tearing families apart."

The American Legacy Foundation was born as a result of the settlement. It serves as an educational organization that is best known for the "truth" commercials that have aired on television over the last few years.

But the foundation also faces some daunting challenges ahead. This spring it will receive its last $300 million payment from Big Tobacco, based on a provision in the MSA.

The group will not disappear, though. It has several allies in the anti-smoking movement that advocate prevention and cessation programs, including the Campaign for Tobacco-Free Kids, American Lung Association, American Cancer Society and American Heart Association.

Even Big Tobacco claims to be an ally when it comes to children.

"At the end of the day, Philip Morris shares a common goal with all these organizations to prevent youth smoking," Drogin said. "While we recognize there may be some skepticism about our efforts, we hope over the long term that we'll be judged by the effectiveness of our efforts. It's really our hope that all of the groups that share this goal will be able to work together."

States Accused of Hypocrisy

At the time of the tobacco settlement in 1998, state attorneys general claimed the rising cost of tobacco-related health problems forced them to sue for damages. They used the occasion to also vow to spend money to prevent children from smoking and help adults kick the habit.

Most states spend at least some money -- although only a sliver of their tobacco-generated revenue -- on programs or initiatives proven to reduce smoking.

But three states, Michigan, Missouri and Tennessee, as well as the District of Columbia, will not spend a penny on tobacco prevention this year, according to the Campaign for Tobacco-Free Kids. Others have locked up or securitized the money to be used in the future, the report stated.

Geralyn Lasher, spokeswoman for the Michigan Department of Community Health, called
the report "simply untrue." She said the state had tobacco prevention programs in place before the settlement, and currently uses revenue generated from cigarette taxes and the MSA to fund them.

The Campaign for Tobacco-Free Kids, working in conjunction with other anti-smoking groups, issues updates twice a year on the status of tobacco prevention programs. In the report released last week, the campaign saved its harshest criticism for two states that had long championed tobacco prevention initiatives.

Those states, California and Massachusetts, are also facing some of the biggest budget deficits.

Before their programs were cut, California spent $134.5 million on prevention, while Massachusetts dedicated $48 million. This year, California has cut its spending back to $88.3 million, while Massachusetts slashed its funding by 90 percent to $4.8 million.

Deborah Klein Walker, an associate commissioner for the Massachusetts Department of Public Health, said legislators needed to make cuts last year and one of them happened to be smoking prevention programs.

Cassandra Welch, director of field advocacy for the American Lung Association, said it was disappointing that states, which originally led the way in tobacco prevention, are now cutting back. By taking that route, she said, the financial burden will worsen in the future.

"We believe this is short-sighted fiscal thinking on the part of the states," she said. "Tobacco prevention programs have proven to be successful -- not only protecting the health of people, but also by saving states money."

The tactics used by the anti-smoking groups and Big Tobacco in their unusual alliance have also come under fire.

An international smokers' rights group called FORCES has attempted to render the MSA invalid. The group has filed a federal lawsuit that is pending before the U.S. Court of Appeals for the Ninth Circuit.

Enoch Ludlow, president of FORCES USA, faulted Big Tobacco for entering into the agreement. His main contention is the disproportionate impact the settlement has had on smokers. He said states have used it to advance their cause against Big Tobacco, even though the tobacco companies have simply passed the costs associated with the settlement on to their smoking customers.

"Each time the attorneys general get up and say they are kicking the tobacco industry in the teeth, they are lying," Ludlow said. "It was definitely a mutual agreement between the 50 attorneys general and the tobacco industry that completely bypassed any legislative process, and that's pretty dangerous."

Nevertheless, R.J. Reynolds spokesman John Singleton said tobacco companies remain committed to spending money on youth prevention programs.

"We would like to see that money being spent on tobacco control as opposed to the ways it's being spent, which in numerous ways has nothing to do with tobacco control," he said.

Tomorrow: Big Tobacco took a big financial hit in 2002, and the tough times could last well into 2003.

Part One: Hostility from States, Smokers Clouds Big Tobacco's Future

E-mail a news tip to Robert B. Bluey.

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[kattracks]

ping

[Leisler]

R.J. Reynolds, the Smith & Wesson of tobacco.

[Leisler]

Hostility from States, Smokers Clouds Big Tobacco's Future
By Robert B. Bluey
CNSNews.com Staff Writer
January 28, 2003

(Editor's Note: This is the first of a three-part series examining the current difficulties facing Big Tobacco and the cigarette-buying public.)

(CNSNews.com)- When activity began Monday on Wall Street, a major name was noticeably absent from the Dow Jones Industrial Average.

Philip Morris, which had celebrated its centennial anniversary in 2002, had changed its name to Altria -- to reflect "the fact that we are no longer the same company we once were structurally, culturally or behaviorally," according to a statement.

Despite the new name (Altria maintains the stock ticker symbol of MO), America's leading cigarette manufacturer is still confronted with old problems -- lawsuits from individual smokers, rising taxes that make cigarettes more expensive and a growing trend of no-smoking ordinances that prohibit smokers from lighting up in their favorite places.

But not all smokers are rallying to Altria's defense. Already under constant assault from anti-smoking groups, Big Tobacco is also taking it on the chin from some of its most loyal customers.

"Big Tobacco is in partnership with the government, and they're not going to oppose any government initiative unless it affects their bottom line," said Enoch Ludlow, president of FORCES USA, an international group that fights for smokers' rights.

Settlement Ended Lawsuits but Angered Smokers

Altria's bottom line and that of its chief competitors was affected by the 1998 Master Settlement Agreement, in which the companies agreed to pay $246 billion over 25 years to the 50 states as reimbursement for the states' tobacco-related medical expenses. In exchange, state attorneys general dropped class-action lawsuits against Big Tobacco.

"It was politically expedient for Big Tobacco," Ludlow said, "and it certainly has helped them maintain their monopoly."

Barbara Aucoin, president of the FORCES Massachusetts chapter, said Big Tobacco is not suffering from the settlement, smokers are.

"Smokers are paying 100 percent of the Master Settlement Agreement through higher cigarette prices," she said. "Manufacturers haven't lost a penny, so of course, they stay profitable."

Big Tobacco will shell out $8.7 billion to the states in 2003 related to the tobacco settlement, but the extent of the damage to the companies' balance sheets will be brought into sharper focus this week when Altria and R.J. Reynolds Tobacco Holdings release their 2002 earnings reports.

The companies have already warned their investors about the current challenges, which include rising tobacco taxes, a growing number of cheap domestic and imported cigarettes, emergence of a black market, counterfeit products and competitors that are not complying with the Master Settlement Agreement.

Michael E. Szymanczyk, chairman and chief executive officer of Philip Morris USA, a division of the newly named parent corporation, addressed those difficulties at Morgan Stanley's Global Consumer Conference in November. At the time, the company retreated from revenue projections it had set for 2003.

Financial analysts interviewed by CNSNews.com said Philip Morris USA was dragging down Altria, which also owns the nation's second biggest food company, Kraft Foods. But the analysts were split over whether the tobacco division could rebound.

"I see it as a slow, painful death over the next 30 years," said Sandy Sanders, a tobacco analyst for Evergreen Investments. "This whole industry is facing the same problems. I don't think there's much growth in tobacco."

In the long run, Sanders said Philip Morris USA was in "serious trouble," especially if the thousands of lawsuits pending in courts across the country result in guilty verdicts against the company. The plaintiffs in those cases started smoking prior to the 1998 settlement and therefore are not subject to its provisions.

The company has "massive cash flow," about $4 billion by Sanders' estimates, which might make it easier to shoulder a $20 million verdict. But if those lawsuits start adding up, the cost could start to run into the billions, and then Philip Morris USA would face a daunting challenge, Davenport & Co. analyst Ann Gurkin said.

Gurkin said Altria is not a stock to run out and buy, but she was not ready to proclaim the end of the tobacco division. She said profits would be hard to come by in the short term but predicted a brighter outlook on the horizon.

"Given the weak economy, more consumers are trading down to lower-priced cigarettes," Gurkin said. "The whole industry, not just Philip Morris, needs to right that price gap. When it becomes more in line, these companies will once again grow their margins of profit for their tobacco businesses."

Tobacco's Healthy Contribution to Government Coffers

State and local governments expect to collect $11.6 billion in tobacco taxes in 2003, a cost picked up by smokers.

Twenty-one states and the District of Columbia raised their cigarette excise taxes in 2002, hiking the national average from 44 cents a pack in 2001 to 65 cents a pack by the end of last year, prompting some smokers to abandon their favorite brands like Marlboro.

"Smokers are starting to go to other brands, and that's going to continue," Ludlow said. "Philip Morris will slowly start losing its share, but it's hard to know exactly how it's going to play out."

Smokers in New York City now pay $7.50 for a pack of cigarettes, thanks to a $3 hike in state and city taxes. They have also been told that even bars and restaurants are off limits for smoking, and more ordinances could soon follow.

Some anti-smoking advocates have even taken their campaign to Southern states like Georgia, Kentucky, North Carolina and Virginia, where taxes remain low and smoking bans are few and far between.

Even with the challenges ahead, some observers think Big Tobacco will be able to survive for years to come.

"This is a product that is addicting. People can't easily give it up," said Mary Aronson, a tobacco litigation and policy analyst with Aronson Washington Research.

"Maybe some people will quit, or some people will attempt to quit when there's a price increase, but eventually, a large number of them accommodate to the price increases," she added. "It's just something a lot of people can't live without."

Tomorrow: States are expected to collect more than $20 billion in tobacco-generated revenue in 2003, but much of the money intended to fund tobacco prevention programs is being spent for other deficit-reduction purposes instead.

[KS Flyover]

[gunnedah]

This is just another way of raising taxes and when it comes to politics,most politicans are very inventive at it.
Regardless of how one looks at it this it is nothing short of stealing and elected officials from top to bottom do it daily.
Our constitution calls for the government to provide certain things but the one thing they dont provide is leadership.
They are all like CEOs who pad the books and the only way to stop them is to cut off the cash flow.It is amazing to me how many of our elected officials feel like all money belongs to them and they give us our allowance. That is why we should not allow government so much control. America is fast becoming Socialist and headed toward a dictatorship.
I need to insert this here to show the difference between the average persons world and Hollywood and Washingtons. Just saw on the news thet Michael Eisner CEO for ABC got a 5 Million dollar bonus for his companies stock dropping 34%.This should explain to all of us that government and big business rewards ineptness.
Take all the tax cuts and parts of the Presidents speech and dissect them according to what the Democrats say and you will see how phony the Democrats are.
It doesnt take a genius to tell me the Democrats think government should own everythying and disperse it the way they see fit.
The one thing that shows me more about the Democrat Leadership than anything else is look at those they choose to lead.
Kennedy sitting there last night sleeping through the speech.Look at Pelosi and Daschles eyes when they speak at times and check out the difference from time to time, they are both on something and I am not joking. Daschle on FOX News this morning looked almost human and most of the time he is wild eyed and so is Pelosi. I have been around people on drugs in my past career and both of these people are on something a lot when they are in front of the cameras.
The difference between Bush and the Democrats I find is Bush comes closer to acting human and real and I believe this is what Hollywood has against him. They want America to live in their dreamworld and not face facts.Bush connects with me even though I disagree on some of his policies.

[metesky]

R.J. Reynolds, the Smith & Wesson of tobacco.

R.J. Reynolds, the Benidict Arnold of tobacco.

[tdadams]

little of that money will go to prevent youth smoking as was originally intended promised.

I'm a believer in in clear and precise language, so I've modified the line to be more accurate.

I don't think the states every truly intended tobacco money to go toward anti-smoking efforts. They simply wanted to extort money from an industry with deep pockets in order to pad their own gluttonous budgets.

[Wolfie]

Its a great new revenue stream. Doesn't make sense to lower the intake by trying to reduce smoking. I say spend it as they please, and hopefully lower other taxes in the process.

[Just another Joe]

But cigarettes remain addictive, Haviland warned. She cited figures showing that 70 percent of the 46 million smokers in the United States want to quit, but need an extra boost. That is where she said state tobacco prevention programs come in.

"There's no way to address the fact that more than 430,000 people die each year in the United States from tobacco-related illnesses.

Still using the same old BS numbers.
They're still lying and waiting for it to be taken as true because they've said it so much.

[Max McGarrity]

Wonder if the actual figures on just how much all levels of government extort through these exorbitant taxes are available anywhere. For instance, here in Kookiefornia, the 50 cents a pack Robber Reiner gets (about $700 million a year) is not considered a "tax" when they toss around the numbers, but it sure as hell acts like one.

[Madame Dufarge]

"The whole industry, not just Philip Morris, needs to right that price gap. When it becomes more in line, these companies will once again grow their margins of profit for their tobacco businesses."

Well, my permanent case of Irish Alzheimer's prevents me from ever helping them "grow their margins of profit" again.

My good friends, the Ojibwa Tribe of New York, have my lifelong loyalty.

In the long run, Sanders said Philip Morris USA was in "serious trouble," especially if the thousands of lawsuits pending in courts across the country result in guilty verdicts against the company.

Music to my ears. Let them reap what they've sown.

[Madame Dufarge]

Philip Morris, which had celebrated its centennial anniversary in 2002, had changed its name to Altria -- to reflect "the fact that we are no longer the same company we once were structurally, culturally or behaviorally," according to a statement.

Weasels. They're everywhere.

[lockjaw02]

"Its a great new revenue stream. Doesn't make sense to lower the intake by trying to reduce smoking. I say spend it as they please, and hopefully lower other taxes in the process.

Dream on. When Bush promised to lower the Federal taxes on citizens in his State of the Union Address, he did that to specifically appease the states so they can up their tax bites and balance their budgets.