Does Tobacco Pay Its Way?

Shifting tactics, the industry asserts that excise taxes offset any health costs to states

Few industries have been more adept than tobacco at snuffing out claims that its products are dangerous. In more than two decades of legal tussles, cigarette makers have racked up an enviable record by insisting on a simple fact: Smokers know the risks associated with smoking and therefore can't argue they innocently used a product, only to learn of its hazards later.

Now, time may be running out on Big Tobacco's favorite arguments. Sworn statements by former Brown & Williamson Tobacco Corp. executive Jeffrey S. Wigand make a strong case that tobacco companies covered up evidence that nicotine is addictive and manipulated the level of nicotine in cigarettes and that executives lied to Congress about what they knew. The tobacco companies vehemently deny the allegations. But even as the industry tries to discredit Wigand, it's clear his testimony could become a cornerstone of lawsuits brought by five states and Blue Cross & Blue Shield of Minnesota, which seek to recover more than $5 billion in smoking-related health-care costs and billions more in punitive damages.

Facing these tough attacks, cigarette makers are desperately trying to switch battlefields. In the case brought by Mississippi, where Wigand's testimony first came to light, tobacco industry lawyers have laid the ground for a defense based on the economics of tobacco. The new tactic--also expected in lawsuits by Florida, Massachusetts, Minnesota, and West Virginia--has three main points: States already are compensated for smokers' health costs by the revenue from hefty excise taxes. Smoking imposes little extra cost on local governments--and may even save states money when sick people die young. And, finally, health costs cannot fairly be separated from Big Tobacco's overall contribution to a state's economy.

It's a nifty tactical shift by tobacco. But states contend that these arguments miss the point: The fight, they say, is about fraud and the health costs of smoking, not economics. "The plaintiff gets to define his case, not the defendant," says Richard F. Scruggs, the lawyer representing Mississippi. Adds George Weber, chief of consumer protection in the Massachusetts Attorney General's Office: "Since when is paying taxes a license to violate the law?"

A body of new studies and a review of state economic trends may give the states ammunition against tobacco's new line of defense. A report released in late January by the Centers for Disease Control finds the direct medical cost of smoking totals $50 billion a year nationwide, more than double the $21 billion in revenue from tobacco agriculture and manufacturing.

A soon-to-be-released study by two University of Michigan professors is expected to conclude that tobacco accounts for a net economic loss in all but six big tobacco-growing states and that states would gain substantially if people spent their cigarette money on nearly anything else, from pretzels to stock portfolios. "Fifty cents of every dollar [spent on cigarettes] is exported to North Carolina and the other tobacco states, and only half remains to benefit the local economy," says Kenneth E. Warner, one of the study's authors.

DUELING ECONOMISTS. Tobacco lawyers will scramble to muster whatever data they can find, including government research, to counter the mounting evidence that tobacco is a net economic drain. Cigarette manufacturers argue that taxes are already paying for any economic costs that tobacco imposes. In 1993, tobacco sales accounted for $13 billion in federal, state, and local tax revenue, more than four times the $3 billion value of the crop that year.

A report by the Office of Technology Assessment found that smokers in 1993 paid $13.3 billion in excise and sales taxes but cost governments only $8.9 billion in health-care expenses. And the Tobacco Institute, the industry-funded advocate, is expected to release a report within weeks claiming that tobacco has a positive economic impact on the U.S. through job creation, exports, marketing, and capital spending. The study will deny that smoking creates significant net health costs, sources say.

DOUBLE-DIPPING? These figures, say industry lawyers, don't even take into account other contributions cigarette manufacturers make by creating retail jobs and buying billboard space, for instance. Advertising expenditures run $6.2 billion a year, and tobacco lawyers and lobbyists rack up untold millions in fees each year defending the golden leaf from its legions of adversaries. "There are significant supporting numbers to say that we're a net plus" to many states, says Thomas F. McKim, R.J. Reynolds Tobacco Co. counsel for tobacco litigation.

The industry plans to argue that demands from states for further payment from Big Tobacco amount to double-dipping. Legally, they contend, states cannot claim financial harm if they fail to establish that smoking causes uncompensated damage. "It's basically inconsistent for the states to say, on the one hand, we want the benefit of excise taxes, but on the other hand, we want reimbursement for health care," explains Daniel W. Donahue, general counsel to R.J. Reynolds.

Nor are cigarette makers squeamish about making an even more controversial point in their defense. In cases pending in Minnesota and Mississippi, the industry's lawyers insist that Big Tobacco should be credited for reducing government spending on such items as Medicaid and Social Security as a result of the premature death of smoking victims. "It's the euthanasia defense," retorts Northeastern University law professor Richard A. Daynard, a leading anti-tobacco activist. "We've done everybody a great favor by killing these people off who would otherwise be receiving pensions."

Disparagement aside, the industry maintains that states are trying to saddle it with health-care costs unrelated to smoking. To prove the point, tobacco companies have obtained court approval to conduct case histories on about 20 people from Minnesota's so-called victim pool. The idea is to find out whether individuals have other ailments that may have caused their health problems, rather than blame tobacco entirely. "On a lifetime basis, smokers may cost the state no more than nonsmokers," says American Tobacco Co. lawyer Murray Garnick.

Trying to convince judges and juries that tobacco companies give more than they take is a bold gambit, particularly given the waning impact of tobacco on state and local economies. Despite near-record corporate profits, employment in tobacco farming and manufacturing is declining. The industry provides 700,000 production, manufacturing, and retail jobs, according to its own figures. Overall, however, output from the nation's 124,000 tobacco farms has been flat since 1990, at about 1.6 billion pounds, 25% below the level in 1975. Farmers planted only 674 million acres of tobacco last year, down 10% from 1993. And despite growth in overseas sales of tobacco products, Agriculture Dept. statistics show cigarette consumption in the U.S. has not climbed year-over-year since 1973.

To appreciate how far the clout of cigarette makers has fallen, consider the state of North Carolina, the largest tobacco producer. Today, tobacco accounts for only 20% of North Carolina's farm income today, down from 60% in 1950. Tobacco production has dropped 30% since 1993, and acreage has shrunk 40% in the same time. Richard N. Apple, a fifth-generation tobacco farmer from Brown Summit, N.C., expects to be the last in his family to raise tobacco. He has a nursery business to supplement his tobacco income, but he doesn't want his children following him into the crop. "There's just too much stress in it today," says Apple.

Still, Big Tobacco keeps fighting hard on all fronts. In November, cigarette manufacturers filed a preemptive lawsuit in Texas challenging Attorney General Dan Morales' right to sue the industry to recover the state's share of health-care costs, estimated at $2 billion by the CDC study. Other suits challenging states' authority to pursue legal claims have been filed in Massachusetts and Maryland. The hardball approach is making headway: Colorado Attorney General Gale Norton decided not to pursue a suit, citing the prohibitive costs.

CONSTITUTIONAL ISSUE? Elsewhere, tobacco states are coming to the industry's defense. South Carolina Attorney General Charles Condon, for instance, is mulling over a lawsuit claiming the Food & Drug Administration's proposed regulation of tobacco as a drug violates state sovereignty and the commerce clause of the Constitution. Tobacco farming and manufacturing in South Carolina are together a $200 million-a-year industry.

With so many states, not just individual smokers, now entering the fray, the personal responsibility issue may arise in a new way. Plaintiffs hope to persuade jurors that the argument the industry has always made--smokers know about cigarettes' health risks--also should apply to tobacco companies. "My goal is to take the principle of responsibility that the industry has been bandying about and apply it to the industry itself," says Laurence H. Tribe, a Harvard Law School professor who is working pro bono on behalf of Mississippi, Florida, and Massachusetts. "The taxes they've paid are not enough compensation for the harm done." That will soon be up to judges and juries to decide.

Before it's here, it's on the Bloomberg Terminal.