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Settlement Really Just A Tax Increase, According To New York Times Article

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