Missouri Tobacco Receipts Hinge on Ballot Initiative

Prop B seeks to raise fees on 'Small Tobacco' companies, as well as quintuple tobacco tax

Much of the battle to increase the cigarette tax in Missouri by 73 cents a pack has focused on the state’s lowest-in-the-nation levy on a pack of smokes: 17 cents.

But Missouri’s outlier status on another front — involving an obscure notion known as “allocable share” — is also at issue in the Nov. 6 ballot initiative. The initiative is known as Proposition B.

Hanging in the balance, according to Missouri Attorney General Chris Koster, is more than $1 billion in potential state revenue.

The issue boils down to one question: How much money should smaller, regional tobacco companies put in escrow annually to cover any future tobacco-related claims by the state?

Small tobacco
Industry watchers refer to those companies as Small Tobacco, as opposed to Big Tobacco players like Philip Morris USA and R.J. Reynolds Tobacco Co.

Current Missouri law requires the small companies to set aside some funds now, but the Attorney General’s office would not release the figures.

A spokeswoman said it might be a factor in an ongoing arbitration proceeding involving Missouri and 45 other states that entered into a landmark deal with Big Tobacco in 1998. The roughly $206 billion deal settled litigation from states seeking to recoup the Medicaid costs of treating smokers.

One outside estimate, from an analyst who closely follows the industry in Missouri, put the escrow figure at about $400,000 annually. The proposed change in Proposition B, according to that analysis, could up that figure to more than $18 million each year.

Big tobacco
The situation is different for Big Tobacco.

Under the 1998 Master Settlement Agreement, each state (along with the District of Columbia and five U.S. territories) received a portion of the settlement amount based upon their estimated tobacco-related Medicaid expenditures and the number of smokers in their jurisdiction.

Missouri’s portion, or its “allocable share,” came out to about 2.3 percent of the amount — about $4.5 billion, according to a November 1999 report by Congressional Research Service.

Small tobacco manufacturers — since they are not part of the master agreement, and since they do not sell nationwide — argued they should not have to pay the same levy assessed by Big Tobacco to pay for the settlement.

Small manufacturers argued they should base their payment upon the allocable share rate in each state. In Missouri, that meant Small Tobacco paid about 13 cents per carton vs. the $5.67 per carton paid by the national brands.

The agreement had only been in place a little while, when other states started eliminating that differential in the surcharge. Officials argued it was an unintended loophole in the language of legislation implementing the master settlement agreement.

The rollback favors Big Tobacco. By increasing costs for its smaller competitors, it undercuts those companies’ ability to grab market share by selling low-cost alternatives to the name brands.
Missouri’s laggard status on tobacco

Missouri now stands alone as the only settlement state not to have revised the original legislation.
Koster, and his predecessor, Jay Nixon, both of whom are Democrats, have urged lawmakers to pass the revised legislation.

“The General Assembly’s inaction over the last decade has placed our state in terrible and unnecessary peril,” Koster said in a letter earlier sent earlier this year to Senate President Pro Tem Robert Mayer, a Dexter Republican.

By not revising the legislation, Koster argued, Missouri is at risk of losing more than $1 billion Big Tobacco paid to the state through the Master Settlement Agreement from 2004 through this year.

According to the Attorney General’s office, the companies would recoup the money by reducing future payments.

The issue comes down to whether Missouri has adequately enforced the agreement, which the arbitration panel in Chicago is weighing for all the participating states in its proceedings.

The panel could find that Missouri is not doing its part because it has not revised its legislation.

Representatives on both sides of Proposition B said Missouri’s laggard status seems to stem from the fact that lawmakers don’t want to wade into such a complicated and potentially time-consuming issue.

“It’s one of those things that kind of gets bogged down,” said Misty Snodgrass, a government relations director for the American Cancer Society.

Big Tobacco might normally spend heavily against an initiative like Proposition B because of the hike in the cigarette tax.

But the absence of checks from the big-name companies seems to mean they’re willing to stomach the tax increase to win on the allocable share side, said Ron Leone, executive director of the Missouri Petroleum Marketers and Convenience Store Association, which opposes the ballot initiative.

Approval of Proposition B could set off a chain of events ultimately leading to higher taxes for everyone, he said, if state and local governments have to start making up for lost sales tax due to decreased cigarette purchases.

“For nonsmokers who don’t think they have skin in this game,” Leone said, “I’ve got a surprise for you.”

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