Tobacco Industry's Strength May Presage Its Own Demise

Article excerpt

Over the years, anti-smoking forces have tried to bury the tobacco industry under liability claims, to ostracize it from society and to strangle it with regulations.

But in a settlement hammered out with 40 state attorneys general and lawyers for diseased smokers, the industry would be allowed to continue earning generous profits for many years - even as it is forced gradually to price and market itself out of business.

"The paradox here is that we have had to keep the industry financially healthy in order to finance its own demise," explained Iowa Attorney General Thomas Miller, a hard-liner among the attorneys general. In effect, the proposed settlement would translate into a 75-cent per pack increase in the federal cigarette tax, which would require each new generation of smokers to pay for the health consequences of smoking by previous generations. The gamble by government officials and public health advocates is that this sharp rise in the price of cigarettes - along with advertising curbs, a massive anti-smoking campaign and tighter regulations over the content of cigarettes - gradually will reduce smoking and its harmful effects on American health. In deference to the political sensitivities of 50 million American smokers, however, no official tax increase would appear anywhere in the federal tax code. Instead, Congress will be asked to give a legislative blessing to a $368 billion settlement of liability claims, which the industry would pay over 25 years to a government-administered compensation and education fund. Anti-tobacco negotiators fully expect the companies to finance most of the payments with an increase in the wholesale price of cigarettes. In fact, to encourage them to do so, they will press for special legislation that would protect the companies from price-fixing suits. Longtime critics of the industry will take little moral satisfaction from an arrangement that puts the settlement's financial burden on smokers rather than on an industry that, in their views, has engaged in 40 years of lies and deceit. An Economic Quandary But in recent months, the state attorneys general leading the latest assault on the industry came to realize that the economics of the tobacco industry made it impossible to simultaneously punish the companies, wean America off its cigarette habit and generate billions of dollars for victims and state governments. Despite forceful declarations Friday that the industry would suffer for its misdeeds, punishment in the end turned out to be the least important goal and the most difficult to achieve. "Financially, I don't know if there is any way to really punish the tobacco companies short of legislating them out of business," said Arthur Schleifer, an economist at the Harvard Business School who advised some of the attorneys general. By outlawing the sale of cigarettes, the government could have instantly vaporized the value of that portion of tobacco company stock tied to U.S. cigarette sales - maybe $25 billion in valuation at the time the talks shifted into high gear earlier this spring. …