The main problem with the multi-state settlement with the
tobacco industry is that the deal is really just an excise tax
increase in disguise, since 99% of the damages paid will
be passed on to consumers, according to an article in the NEW
YORK TIMES. The industry will pay direct damages of $2.4
billion, or about one percent of the $206 billion total.
John Gruber, an economist at the Massachusetts Institute of
Technology, commented, "Every single cigarette tax ever passed
has been paid fully by the consumer. There's no reason to think
this will be any different... It's a tax because it's a
set of payments made by tobacco companies that depend on how
many packs they sell."
The article notes that by "disguising" the tax as damages, the
deal may have unintended consequences. One consequence is that
lawyers who helped negotiate the settlement would collect large
contingency fees, which they wouldn't if it was called a tax.
The 200 or so lawyers will collect about $40 million apiece
under the settlement. Oxford University economist Paul
Klemperer said, "By calling the settlement 'damages' it makes
it seem reasonable to pay the lawyers a lot. If you called it
taxes, you wouldn't expect to give lawyers a fraction of the
tax."
A second consequence is that the settlement could be a boon for
small tobacco companies. Liggett & Myers, for example, was not
a defendant in the lawsuits, and therefore could not be forced
to pay damages. However, the attorneys general offered smaller
companies the chance to opt in to the settlement and raise their
prices without having to hand over any of the revenue to the
states.
Economists estimate that Liggett could collect about
$100 million annually as a result of the price increase. Philip
Morris was so wary of Liggett having a cost advantage, they
enticed them to join the settlement by offering to buy three of
Liggett's 14 brands for three times the value of the entire
company.
NEW YORK TIMES, (11/29/98) "The Ifs And Buts Of The Tobacco Settlement," Sylvia Nasar,
sec. 4, p. 1