Vermont's Smoking Gun

If Vermont's budgeteers are not concerned about what is going on in the wonderful world of tobacco, they should be. It's entirely possible that by 2003 Vermont's fiscal health will be significantly affected by the collapse of a 1998 tobacco deal .

In that year the four companies that make up Big Tobacco cut a deal (called the Master Settlement Agreement - MSA) with a group of private trial lawyers and 46 attorneys general (including Vermont's). In return for a quarter of a trillion dollars, Big Tobacco bought immunity from the state antitrust laws. The money is being extracted from smokers by higher cigarette prices over 25 years, and distributed to the 46 states in annual payments. Vermont's booty from the MSA will be $29 million in fiscal year 2003, and around $24 million a year after that..

Big Tobacco was naturally concerned that their tiny competitors (less than 2% of the cigarette market) would seize the opportunity of the increased prices to peddle discount smokes and capture a larger share of the market. So the MSA, enforced by state laws, requires the non-signing companies to pay "damages" into escrow against their possible future price cutting. No evidence, no trial, no verdict, no injury, just damages.

The MSA scheme is, simply the mother of all antitrust violations, and the little companies don't like it. One of them, a discount cigarette seller called Bedell Wholesalers, brought suit against Big Tobacco to blow up the MSA. In June the 3rd Circuit in Philadelphia rejected Bedell's appeal, but in doing so the court opened the door to a new and deadlier assault on the MSA.

The court held that Big Tobacco didn't violate any laws by asking for and accepting antitrust immunity from the states. But then the court went on to say that since the MSA "empowers the tobacco companies to make anti-competitive decisions with no regulatory oversight", the states themselves are engaged in an actionable antitrust violation.

That astonishing finding will almost certainly produce a new suit - Bedell vs. 46 States. Unless the Supreme Court overturns the 3rd Circuit, the MSA agreement will likely be toast, and the $24 million a year Vermont is confidently expecting to receive for 22 more years will disappear like a hayfield full of army worms.

The state currently applies about $17 million of its annual MSA payment to supporting its expanded Medicaid program, and another $7 million to efforts to persuade people not to smoke. (The rest goes into a reserve). In addition to the MSA proceeds, another $24 million a year from the state cigarette tax is assigned to fund Medicaid expansion.

Medicaid, dramatically expanded as Gov. Howard Dean's legacy, is already alarmingly underfunded. The 2001 legislature declined the governor's urgent request to increase cigarette taxes for Medicaid by 67 cents a pack. To the extent the anti-smoking campaign cuts cigarette sales, the current $24 million tax revenue will shrink every year. If the MSA is overturned, another $17 million from MSA payments will disappear from Medicaid.

From the standpoint of a state budget with little or no surplus - which is likely to be the case by 2003, when a new Bedell case against the states comes to a decision - this will be a serious fiscal aggravation, to put it mildly. But from the standpoint of public honor, it would be a felicitous outcome. That is because the MSA is essentially a shameful deal among three greedy parties - Big Tobacco, the attorneys general, and the billionaire trial lawyers who masterminded it all.

The attorneys general, all the while railing against the health evils and political power of Big Tobacco, gave Big Tobacco an illegal and probably unconstitutional immunity from the antitrust laws, a free hand to price-fix at the expense of their consumers, and a government hammer to beat down their tiny competitors. In return, the attorneys general assured their states of a guaranteed income stream for 25 years.

If ever a deal deserved to come apart in court, it is this one. The collapse of the MSA would be fiscally difficult for Vermont, but principled Vermonters would at least have the satisfaction that their state would no longer be the concubine of Big Tobacco, having sold its integrity in a corrupt bargain.

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August 2001