Take Steps to Ensure a Future for Tobacco

TAKE STEPS TO ENSURE A FUTURE FOR TOBACCO

Guest Editorial
Author: Senator Elizabeth Dole

October 27th, 2003 - Much attention has been focused on tobacco quota buyout legislation in Congress. I am an ardent supporter of the buyout because our farmers are in desperate shape from a 50 percent reduction in quota and soon face another cut of as much as 30 percent. What has happened in textiles and manufacturing is soon to happen to rural communities all over North Carolina if a tobacco buyout cannot be achieved. What has not received a lot of attention, however, is a bill awaiting approval by the U.S. Senate that aims to plug some huge holes that are sinking the major tobacco manufacturers such as R.J. Reynolds Tobacco Co. The Prevent All Cigarette Trafficking (PACT) Act, of which I am a co-sponsor, addresses a variety of challenges the tobacco industry is facing. They include the trafficking of smuggled cigarettes, unregulated Internet sales and the enforcement of payment obligations of companies that are not signatories to what is known as the Master Settlement Agreement.

Let's first focus on the problems the major manufacturers are having selling cigarettes. All of them, including Philip Morris, have lost market share and are continuing to lose it. As evidenced by the recent mass layoffs at Reynolds, the tobacco industry has been engulfed in a rapidly changing environment. In 1998, the country's major tobacco companies elected to participate in the Master Settlement Agreement (MSA), a $206 billion settlement to reimburse states for the health-related costs the states were incurring from treating sick smokers. The cost of the MSA was passed on by the major manufacturers to smokers to the tune of approximately 52.5 cents a pack.

One of the unforeseen consequences of the MSA is the emergence of hundreds of discount-brand manufacturers. These so-called non-participating manufacturers are obligated to pay into an escrow account what they would have paid had they been a signatory to the MSA, assuming that at some point the states would be seeking funding from them to pay for future health-related claims. Compounding the problem for U.S. tobacco farmers is the fact that many of these discount manufacturers are foreign-based and use no U.S. tobacco. But there is an even bigger problem for the major manufacturers - not all of the non-participating manufacturers are paying into their escrow accounts as originally intended. Some are using legal loopholes to get around payments while other foreign manufacturers simply cannot be tracked down for payment. This is a growing problem.

Because these companies do not have the extra costs of paying into the MSA, they have steadily increased their market share by selling their cigarettes at a significantly lower price - directly cutting into the market share, and therefore the revenues, of North Carolina's major manufacturers. Cigarette imports have increased 24 percent in the past year, and the percentage share of cigarettes sold that are not manufactured by the four major manufacturers (all of which have major manufacturing operations in North Carolina) has more than doubled since the MSA was signed. The PACT Act aims to ensure that these discount brand manufacturers of tobacco products are paying their obligated share into escrow by putting more stringent enforcement and tracking measures in place. This is an issue of fairness, and Lorillard and R.J. Reynolds and other major manufacturers deserve no less.

Another enormous problem is the interstate smuggling of cigarettes from low-tax to high-tax states. An example of criminal syndicates engaging in this illegal practice occurred last year in Charlotte involving several members of the Lebanon-based terrorist group Hezbollah. The PACT Act will address the smuggling problem directly. Meticulous record-keeping will be required by manufacturers, and middlemen will be required to open their shipping and sales records to state tobacco tax administrators. The PACT Act also will require cigarette-makers to show evidence that they are complying with all federal, state and local laws in the sale and distribution of their products. Finally, stiffer penalties for breaking the law will be enforced by redefining the offense as a felony rather than a misdemeanor.

By tackling these problems head-on, the PACT Act promises to be an important first step to ensuring that RJR and the other major manufacturers have a viable future and that cigarettes are sold to adult customers - and not for trade in a black market and among America's youth. I am proud to stand with my colleagues who have joined me in this effort, and I will continue to work to make it law.