Tennessee Governor Vetoes Cigarette Tax Hikes

Published August 1, 2005

Tennessee Gov. Phil Bredesen (D) vetoed legislation in June that would have increased taxes on off-brand cigarettes.

In a June 20 letter to Sen. John Wilder (D-Somerville), Bredesen said enacting SB2002 would endanger the state’s payments under the Tobacco Master Settlement Agreement (MSA). The settlement has generated more than $1 billion in payments to the state government from the tobacco industry since the agreement was reached in 1998. Tennessee is projected to receive $153 million of settlement money this fiscal year.

“I believe it would be a mistake to allow a bill that jeopardizes such a significant funding source for the state to become law, particularly in light of the comparatively limited revenue the bill was expected to generate,” said Bredesen in the letter.

Concerned About Violation

Bredesen said he based his decision on a June 17 letter from Attorney General Paul G. Summers, who said some large tobacco companies might interpret the new tax as a violation of the MSA. Even though SB2002 included language that would have voided the measure if it was determined to be a violation, Summers wrote Tennessee’s tobacco payments still “might be delayed several years while we argue this point in court.”

Cigarette taxes in Tennessee are 20 cents a pack. They would have gone up another 50 cents a pack on off-brand cigarettes made by small companies that are not a part of the MSA.

The state estimated the tax increase would have brought in about $12 million. The money would have been used to help fund TennCare, which Tennessee created in 1994 to replace its Medicaid health care program for low-income individuals.

Tobacco Companies Squared Off

Major tobacco companies have taken opposite positions on the governor’s veto.

R.J. Reynolds Tobacco Company supported the bill, and two days after the veto issued a statement calling the veto a “loss for Tennessee.”

“The bill that was overwhelmingly approved by the state legislature was based on solid constitutional grounds,” said Tommy Payne, executive vice president of external relations for R.J. Reynolds, in the statement. “As passed by the Tennessee legislature, and enacted into law in four other states, this legislation is consistent with the MSA and would have generated needed revenue for the state.”

In early June, Phillip Morris USA sent a statement to Tennessee officials blasting the attempt to impose “equity fees” on small companies that are not signatories to the MSA.

“The equity assessment proposal being advocated by some tobacco companies that have signed the Master Settlement Agreement (MSA) would impose an extra tax in MSA states on Non-Participating Manufacturers (NPM’s) over and above the escrow payments that they are required to make by law,” the statement said.

Non-MSA Producers Angry

On June 10, Clark T. Corson, president of the Council of Independent Tobacco Manufacturers of America (CITMA), a trade association of tobacco companies that are not party to the MSA, issued a statement accusing R.J. Reynolds of backing the legislation to wipe out small-company competition.

“This effort by Reynolds America to construe that states’ coffers will be filled by a selective tax on a discounted price segment of the industry which only accounts for seven percent of the entire cigarette market in the United States is purely a market share grab, and is designed to put small companies out of business,” Corson said.

In a telephone interview, Corson said there are about 100 small cigarette producers that did not sign the Master Settlement Agreement. They instead signed private agreements that require them to pay the same amount per carton as the MSA signers, with the collected money put into an escrow account to pay for future cigarette-related medical claims.

The small companies may not deduct the escrow payments from their taxes, as the MSA signers may do.

“Reynolds promoted this equity tax idea to try to force small companies out of the market,” Corson said, pointing out that small companies’ share of the tobacco market has grown from less than 1 percent of sales in 1998 to more than 7 percent. He attributes this growth in part to skyrocketing cigarette taxes, which are driving some consumers to the lower-cost off-brands.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.