Business Week Date: 11/29/98 By John Carey
No sooner had the attorneys general of eight states inked their
historic deal with Big Tobacco than antismoking activists were
pleading with other fence-sitting states: Don't sign it. Smoking
foes argued that the $206 billion settlement was riddled with
No such luck. By Nov. 20, just one week after the deal was
announced, the 46 states that hadn't already settled with tobacco
signed--to meet a deadline pushed by the industry. ''It's hard to
say that getting $7 billion over 25 years isn't in the long-term
interests of Massachusetts citizens,'' says George K. Weber,
chief of tobacco litigation for the state.
He's right--if the goal is fattening state coffers. The governors
can't wait to collect so they can enact popular tax cuts or
education programs. Says University of Florida law professor
Lars Noah: "This was the state AGs deciding to get as much as
they can while the industry was still interested in making a deal."
On the other hand, if the goal is to reduce smoking and
tobacco-related health-care costs, then it's not very successful.
For example, Big Tobacco agrees not "to take any action the
primary purpose of which is to initiate, maintain, or increase the
incidence of youth smoking." But kids will still be able to get
tobacco-branded clothes and gear from coupons in cigarette
packs--and a survey in Massachusetts showed that kids with
such merchandise were three times as likely to smoke. Large
billboards advertising smoking are banned. But companies can
coat neighborhoods with smaller signs.
Or consider the $1.45 billion to fund a national foundation to
reduce smoking. Under the agreement, the money can't be used
to tell consumers how the industry manipulates public opinion--
even though studies have shown that's the most effective
antismoking message for kids. When it comes to public health,
the deal ''is a complete sham,'' concludes cardiology professor
and antismoking activist Stanton A. Glantz of the University of
California, San Francisco.
The deal also closes off key lines of attack for antismoking
litigators. Suppose a city wants to sue tobacco to recover the
costs of smoking-related illnesses, much as the city of Chicago
is now doing in suing gun manufacturers. The deal precludes
such local suits--even though no city is party to the deal.
The deal's worst flaw, however, is that the money puts the states
squarely into bed with industry. Big Tobacco added a provision
that shrinks the payout to states if companies' market share
drops or the federal government hikes cigarette taxes. That
means every dollar collected by new federal taxes would mean
a dollar less for the states, and a 35 cents per pack tax hike
would leave the states with nothing.
State lawyers say higher cigarette prices are a good thing, period.
"Our true goal is reducing smoking. We are willing to give away
state dollars to do that," says one AG aide. But imagine what will
happen if Congress decides to raise cigarette taxes. Suddenly,
46 governors would risk losing much or all of the tobacco money
they'd expected. The deal gives them a strong incentive to lobby
against the move. No wonder Wall Street has bid up shares of
Philip Morris Cos. and RJR Nabisco Inc. by 9.8% and 12.4%,
respectively, since details of the deal began to surface Nov. 9.
This may be the best settlement anyone could have struck with the
industry. And it's less frightening than the one proposed in June,
1997, which would have given companies immunity from private
suits. Still, state AGs should have learned from the story of
Dr. Faustus: Some deals are better not made at all.