The Tobacco Deal: Smoke And Mirrors?

If the settlement becomes law, taxpayers could be the big losers

The best place to glimpse the future of the proposed $368.5 billion tobacco settlement could be Pascagoula, Miss. That's where years of legal battles paid off for tobacco's adversaries on July 15: $170 million was deposited in Pascagoula's SouthTrust Bank, the first installment in Mississippi's $3 billion settlement with the industry.

Now the question is: What should Mississippi, the first state to settle with the tobacco industry, do with the money?

FATAL FLAW. The answer will echo around the nation, if Congress adopts the global tobacco settlement reached by 40 state attorneys general and the tobacco industry on June 20. The agreement will likely undergo extensive revision. But using the present settlement as a framework, a growing chorus of critics is starting to follow the money--and they're finding a fatal flaw. Thanks to vague wording in the settlement, much of the money could be misspent, they say, doing little to meet the deal's supposed goals: to improve public health and compensate tobacco victims. Now those critics are worrying that what first looked like a landmark public-health achievement could become a public-policy nightmare.

Already, tobacco has quietly won an extremely lucrative prize: In the balanced-budget agreement signed into law on Aug. 5, the companies got a $50 billion windfall. That's the amount new cigarette taxes will raise, and the budget agreement says tobacco can deduct that amount from what it will owe if the settlement becomes law. That provision followed a 6-month period in which tobacco companies gave nearly $2 million in unregulated "soft money" to national political parties, according to Common Cause. About $1.6 million went to Republicans. Philip Morris Cos. led the pack, giving $794,500--$673,700 of it to Republicans.

Worse, critics say as much as one-third of the money in the settlement won't come from the tobacco industry at all: Some $140 billion could come out of the pockets of U.S. taxpayers. That's because the agreement says all payments "shall be deemed ordinary and necessary business expenses"--meaning they are tax deductible. So the industry will get a tax break equal to about one-third of what it pays, or roughly $140 billion. "This settlement represents the biggest single subsidy of the tobacco industry ever," says Stanton A. Glantz, a professor in the cardiology department at the University of California at San Francisco.

The pact is being sold as a victory for the nation's health. Mississippi Attorney General Michael Moore, the prime mover behind the deal, has called it "the most historic public-health achievement in history." Moore later broke ranks to settle--but it's not clear he will achieve much for public health. "There are those who say the whole purpose of the suit was to repay the Mississippi taxpayer," says State Senator Dick Hall, chairman of the Mississippi Senate appropriations committee.

The issue is so politicized that Hall can't even move the money from Pascagoula to Jackson, the state capital. "The attorney general is from Pascagoula, and the lead attorney, Dickie Scruggs, is from Pascagoula, and I guess they just wanted it down there," he says. When the money reaches Jackson, he fears that "it will be a feeding frenzy." And as Mississippi goes, so may go the nation.

Tobacco isn't winning every battle. On Aug. 6, a Florida court ordered the release of key industry documents. But the industry's losses are few and far between. Even the deal's defenders are concerned tobacco is winning too much. "A lot of issues still haven't been settled. This is all very murky," says William D. Novelli, president of the National Center for Tobacco-Free Kids, who helped negotiate the deal. He believes the deal's problems will ultimately be solved.

State officials even disagree about whether their share should be used for public health. Some, such as New York Attorney General Dennis Vacco, argue that states should be able to use their awards on anything they like. Others, such as Minnesota Attorney General Hubert H. Humphrey III, a critic, believe the money must be "used for the public health and not fixing potholes," says his spokeswoman, Holly Ziemer.

There are other controversies. The settlement allocates about $1 billion, for example, to antismoking efforts. But the funding may not be effective, critics say. According to one proposal, much of it "would go to pharmaceutical companies and the medical industry" for free chest X-rays and free nicotine patches for smokers who want to quit, says William Godshall, executive director of SmokeFree Pennsylvania.

The agreement provides for $500 million for an antismoking ad campaign and additional money for other tobacco-control programs. But Robin Hobart, co-director of Americans for Nonsmokers' Rights in Berkeley, Calif., says it's not enough. "The $200 million we now spend for tobacco control is just a drop in the bucket."

The ads contemplated in the settlement may also be vulnerable to an industry attack. In Massachusetts, which has an ad program like California's, the industry has lobbied to cut funds for the ads and has even threatened to sue the state for defamation, says Gregory Connolly, who oversees the Massachusetts Tobacco Control Program. "If you think the industry is going to sit back and let opponents run aggressive antismoking ads without fighting back, you're crazy."

MAJOR PROBLEM. The settlement does have its defenders, of course. One is attorney John P. Coale, who represents smokers in 26 state class actions. He notes that the deal could overwhelm the U.S. tort system. Tort payouts now total about $3 billion annually, he says. The settlement could dump $5 billion into the system--dwarfing all other cases. Coale, a lead negotiator in the agreement, doesn't know how the money will be divvied up. But he's confident it will go to "the things that everyone agrees the end the country gets helped."

But not everyone agrees. A major problem with the agreement is that Congress has control over how much the tobacco industry should pay. And Congress has proved remarkably ineffective at taking any punitive action against the industry. Besides, congressional paralysis was precisely what the agreement was supposed to surmount. That's why the state attorneys general took matters into their own hands. Now that their deal has moved to Congress, tobacco has already won a $50 billion prize in the congressional halls and cloakrooms it knows so well. That little victory is a warning sign that, settlement or no, the tobacco industry won't fade quietly away.

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