Big Tobacco's Bankruptcy Hoax
The tobacco industry's representatives claim that they are walking away from the negotiations over tobacco legislation. Big Tobacco's lobbyists think the best way to generate support for the McCain bill -- a bill which grants the industry a wide array of concessions and protections -- is to pretend to oppose it.The trick won't work.
When Big Tobacco cries that the McCain bill will bankrupt them, they are ignoring some very simple truths:
Don't Believe The Hoax
- Under the McCain Bill, Industry Passes Through Costs -- and May Profit
The McCain bill requires the tobacco industry to pass through the costs of its annual payments. It is consumers who pay the costs, not industry (although resultant sales volume declines may lower the companies' profits).
However, the McCain bill also includes a broad antitrust exemption (Sec. 1161).
In a September 1997 report, the Federal Trade Commission concluded that the antitrust immunity in the June 20 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."
Under the terms of the June 20 settlement, the FTC concluded that "the industry may be able to increase prices and generate substantial profits." The different payment structure of the McCain bill prevents direct application of that conclusion -- but it is clear the antitrust exemption may enable collusive industry pricing practices that would at least diminish any costs imposed by the Act.
- Payments Under the McCain Bill Are Tax Deductible
Payments under the McCain bill are tax deductible (Sec. 405), meaning 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.
- High Estimates of Cost Ignore Discounted Value of Payments
Industry payments under the McCain bill start with an initial $10 billion payment and then rise in five years to $23.6 billion annually. The more than $500 billion figure touted as the cost of the McCain bill does not take into account the time value of money (although an inflation adjustment is included).
- Real Value of Industry Payments: Under $200 Billion
Deducting 40 percent from the McCain bill payments to account for their tax deductibility and discounting the remainder at 10 percent shows the present value of the industry payments to be $150.1 billion. If the discount rate is calculated at 13 percent, the present value is only $111.7 billion. Taking into account the bill's sales adjustment, the cost to industry will fall even further.
- The McCain Bill Shields Big Tobacco's Real Assets
The McCain bill specifies that permissible defendants in tobacco claims are limited to tobacco product manufacturers or a surviving entity established by a tobacco product manufacturer (Sec. 705(b)). "Tobacco product manufacturers" are defined as domestic tobacco manufacturing subsidiaries (Sec. 701(13)). This excludes parent companies and the foreign subsidiaries of Philip Morris and R.J. Reynolds.
With the McCain bill's protections, bankruptcy becomes much more attractive to Philip Morris Companies, Inc., RJR Nabisco Holdings Corp, and the other parent tobacco companies. In the event of bankruptcy, their substantial profits from overseas tobacco sales (more than half of earnings for Philip Morris) and food and other retail sales are shielded from the outstanding liabilities of the domestic tobacco subsidiaries.
Big Tobacco loves the McCain bill. In addition to the benefits it confers through tax deductibility, antitrust immunity and bankruptcy protections, it caps the industry's annual liability -- the tobacco companies' most cherished goal -- and grants substantial preemption of state and local laws.
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 merchants.