Cheap cigarettes from little tobacco companies
Cheap cigarettes from little tobacco companies have fouled up the $246 billion deal that big tobacco companies made with taxpayers.
Little companies grabbed eight percent of the market from 1997 to 2003, according to a March 27 report from the Brattle Group in San Francisco.
The report could trigger a reduction of annual payments from tobacco companies to the 46 states that signed the 25-year agreement.
Illinois is supposed to receive more than $9.1 billion -- or approximately $364 million annually -- from the Master Tobacco Settlement Agreement through the year 2025. llinois' payout is the fifth largest from MTSA, after California, New York, Pennsylvania, and Ohio, respectively.
Companies have paid $41 billion so far, according to the March 28 Financial Times.
The agreement calls for companies to pay $6.5 billion on April 17, but it also requires adjustment if states have failed to enforce laws that should cripple competition.
Under identical law in 46 states, companies that did not sign the agreement gain no financial advantage by staying out. Outsiders must pay into escrow accounts.
Outsiders get their escrow back in 25 years, if no state successfully sues them.
From an outsider's angle, the agreement looks like a state sponsored cartel.
"The agreement made states directly interested in the profits of the big companies," said Everett Gee, general counsel of S & M Brands Inc. in Keysville, Va.
S & M Brands makes Bailey cigarettes. Gee said the Bailey family has grown tobacco for five generations. He said they started making cigarettes in 1994.
Gee disputed the Brattle Group's finding that companies lost market share because of the agreement. He said they lost market share because of greed.
He said they increased prices more than enough to pay the states. He said, "These prices shocked the consumer."
He said signers of the agreement would have lost more than eight percent of the market if states had not protected them.
"At those prices you would expect 60 to 70 percent," he said.
In 1998, Gee said, the Baileys received a letter from a law firm giving five days to sign the master settlement agreement.
"We would have had to pay in states where we never sold a cigarette," he said.
The Baileys did not sign. They started making escrow payments.
"We have paid our escrow always," Gee said. "We are under the largest scrutiny."
He estimated the escrow at $4.35 per carton, but won't know until next year.
For companies that signed the agreement, the Brattle Group report gave owners three weeks to decide whether to adjust payments.
R.J. Reynolds in Winston-Salem, N.C., had not decided as of April 5.
He said states would have to prove to arbitrators that they diligently enforced the laws.
States and companies that signed the agreement jointly hired the Brattle Group. States do not permit taxpayers to read the report.
States and companies that signed the agreement jointly employ Price Waterhouse to calculate market shares. States do not permit taxpayers to read the report.