Feb 24 2014, 9:05pm CST | by Forbes
The state attorneys general who negotiated Master Settlement Agreement with the tobacco industry took care of themselves, the leading cigarette manufacturers and the private attorneys who contributed so generously to their campaigns with the $200 billion pact. But they left a rather large loophole that Democratic leaders in Congress want to close: E-cigarettes.
Representatives Henry Waxman of California and Peter Welch of Vermont, along with Sen. Tom Harkin of Iowa, have sent letters to the AGs in their respective states asking them to fold e-cigarettes into the MSA as a way of keeping the electronic devices out of the hands of children. The letter focuses on the restrictions on advertising and marketing that the big tobacco companies agreed to under the settlement.
“Inclusion of these products in the definition of cigarette is consistent with the MSA’s overarching goal of protecting America’s youth from the harms of tobacco use,” the legislators say.
Not mentioned are the other overarching goals of the settlement: Money, and protecting the cartel enjoyed by Philip Morris and other large cigarette manufacturers.
E-cigarettes present a problem for states that have grown addicted to the additional cash thrown off by the MSA, on top of their already steep taxes on cigarettes. The payments under the MSA are for all intents and purposes an excise tax, except they were negotiated with the leading companies, supposedly as retribution for their fraudulent marketing practices and the costs smoking imposed on the states.The problem with that approach — and one good reason why taxation should be left to elected representatives — was that new cigarette companies could enter the business unburdened by the MSA payments and steal market share from the incumbents.
To fix that, the AGs “negotiated” similar terms on behalf of all future entrants into the cigarette business. But either by design or incompetence, they left a major loophole: The agreement covers “any product that contains nicotine, is intended to be burned or heated,” but also contains “tobacco, in any form, that is functional in the product.” E-cigs heat nicotine, but don’t contain tobacco. In fact one e-cig, Greensmart, has avoided the largely similar language in Minnesota’s excise tax on e-cigs because it derives its nicotine from eggplants.
The Waxman letter hasn’t gotten much press and perhaps their plea will go unanswered. (One journal that did pick up on it is Grant’s Interest Rate Observer, which noted it could be bullish for state bonds backed by MSA tobacco revenue.)
“The industry doesn’t understand it enough to be upset about it, but I’m concerned,” said Miguel Martin, a former Altria executive who now runs e-cig maker LOGIC Technology. “I think people are looking for revenue.”
While the AGs wrote in marketing and advertising restrictions and some of them attempted to steer the money to pet causes, most of the money ended up in state coffers. And the states did what states normally do, selling $34 billion worth of bonds backed by the new streams of revenue so they could spend it up front. As Grant’s notes, cigarette shipments fell 4.6% in 2013, continuing a long-term slide and casting doubt upon the cigarette companies’ willingness or ability to continue increasing their payments by 3% a year, as spelled out in the MSA (“Never mind TIPS: Here are truly inflation-protected securities,” Grants says.)
Folding e-cigs into the deal might relieve some of that pressure, although it might also stretch the law past the breaking point. The original settlement was based upon the idea that states were losing money because of smoking-related illness — on balance, after throwing in tax revenue, a dubious proposition — and that the existing companies had committed fraud.
The e-cig companies couldn’t have participated in that fraud because they didn’t exist. The current version, which vaporizes nicotine using tiny lithium batteries, was patented by a Chinese pharmacist in 2003. There is also no evidence e-cigs cause lung cancer or other diseases associated with the tar in burning tobacco.
“This is a product that didn’t even exist at the time of the MSA,” said W. Kip Viscusi, a professor at Vanderbilt Law School and author of Smoke-Filled Rooms: A Post-Mortem on the Tobacco Deal. To the extent that the MSA was designed to compensate for the harm done by cigarettes, e-cigs certainly were not responsible for that.”
Another big question is whether private attorneys, most of them big Democratic Party contributors, who are still earning hundreds of millions of dollars in fees from the MSA would get a bump in revenue if the new products were added to the deal. The terms of their fee agreement were kept secret, as a deal between them and the tobacco industry. It would be interesting to know if they exempted themselves from e-cigs.
Martin of LOGIC Technology said the industry is hoping it can avoid piecemeal state-level regulation and taxation. The leading manufacturers are hoping the Food and Drug Administration soon announces regulations that apply to all companies. Minnesota was the first state to tax e-cigs, meanwhile, but since they are widely available on the Internet and there are no legal restrictions on interstate shipments, that law “is a joke,” he said.
“If you’re going to go state by state all you’re going to do is create a massive gray market or punish retailers, who are the best people to age-verify,” he said.
Source: Forbes Business
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