Rocky Mountain News
November 12, 2005
Colorado losing out on millions in tobacco settlement
By Peter Blake
Colorado was unfairly deprived of nearly $25 million by the national tobacco settlement in 2003 alone.
Because population growth here outstrips the national average, the state will lose even more in the future.
So concludes a recent study by professor Jeremy Bulow of the Stanford Business School.
The formula written into the 1998 Master Settlement Agreement gives each state a specified percentage of the national revenue it produces, instead of providing it with a fixed amount - i.e. an excise tax - for each cigarette actually sold in the state.
Colorado's share of the annual take is roughly 1.15 percent, even though we had 1.56 percent of the nation's population in 2004.
That 1.15 percent is fixed in perpetuity even though our share of the national population will soon approach 2 percent.
In other words, Colorado is and will continue to be a donor state, just as it is in federal highway funding.
We have taken in $572 million in settlement money since 1998, but the figure should have been considerably higher.
The agreement, according to Bulow, effectively implemented a set of national taxes in return for the settlement of lawsuits against the Big Four cigarette manufacturers. The states also agreed not to bring more suits in the future.
It also made it difficult for new firms to enter the tobacco market in the future, which is why the Big Four were very happy to agree to it.
The agreement was signed by 46 states; the other four had signed separate pacts earlier. Colorado, under then Attorney General Gale Norton, was a latecomer to the table, which might help explain our relatively low share of the gross.
So why did the states agree to this formula instead of promoting an increase in the federal excise tax on cigarettes?
Because the attorneys general involved wanted the money to go directly to the states instead of to Washington, which is good at siphoning a large amount off the top before sending the money back out.
Another option would have been for the states to each levy a set excise tax. But that would have been too fair. The AGs who were ramrodding the agreement in the biggest anti-smoking states understood that their states would gain more than others under the formulas they created in the agreement.
The big winner in 2003 was New York with $550 million over what it would have gained through an excise tax. California was second with $340 million.
Colorado was a loser, down $24.7 million, but many states did even worse. North Carolina was down $170.2 million and Kentucky $172 million.
A few more statistics: Colorado smokers paid in $112.7 million in 2003 at the settlement agreement rate of $4 per carton, but got back only $3.12 per carton. New York smokers paid the same $4 per carton, but the state got back $12.21. The California return was $6.85.
Colorado state government did benefit in one peculiar way from the agreement. Because the agreement was deemed to be the settlement of a tort case, the proceeds were considered a windfall outside the normal revenue-growth limits imposed by the Taxpayer's Bill of Rights. If the proceeds were attributed to an excise tax, the state would have had to refund money to taxpayers.
There was one more reason for attorneys general to handle the pact as a tort settlement. Their colleagues in the private bar who were hired to negotiate the deal received billions of dollars in contingency fees initially and, according to Bulow, will collect another $500 million a year "for as far as the eye can see."
Colorado, at least, used salaried employees in the attorney general's office to work the deal and did not have to pay these outrageous contingency fees.
The constitutionality of the Master Settlement Agreement was challenged in federal court in Louisiana last August by the Competitive Enterprise Institute of Washington, D.C.
It claims that the agreement violates the Compact Clause of the Constitution, which says that "No state shall, without the consident of Congress . . . enter into any Agreement or Compact with another state."
Congress was asked to sign off on it, but never got around to it. The states' attorneys general did it by themselves, with a little help from their legislatures.
It's not just an academic quibble. The suit claims that the ageement usurps Congress' exclusive authority to regulate interstate commerce. The National Association of Attorneys General took over those powers and ended up establishing a sort of national cartel that harms consumers by driving up prices and restricting competition. It smacks of a giant antitrust violation.
The agreement authorized price increases in all states, not just in the original participating states. That's why the others were virtually forced to join. As state Treasurer Mark Hillman said in a Wall Street Journal piece, "Smokers in every state would pay the cost; the only question was whether each state would collect its share of the benefits."
States aren't allowed to opt out and the agreement can be changed only with the unanimous consent of the states and of the participating cigarette manufacturers.
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