> News and Events > Tax would target "Small Tobacco"

Saying small cigarettemakers shouldn't gain from suits against Big Tobacco, lawmakers talk up a 50 cents per pack tax on off-brand cigarettes.

By JENNIFER LIBERTO, Times Staff Writer
Published March 10, 2004

TALLAHASSEE - At Discount Cigarette Outlet in Spring Hill, penny-pinching retirees increasingly turn to brands with names like 305's, USA Gold, Bronco and Bailey's.

The off-brand cigarettes sell for half the price or less of big-name brands like Marlboro and Winston. Owner Erich Flesch says his customers love the prices, and he likes the profits, which tend to be higher.

Big tobacco companies, however, are not happy. They have seen their market share eroded by discount brands, which make up 13 percent of cigarette sales in Florida, a six-fold increase in six years.

So some of the big companies have come up with a solution: tax the competition. Some Florida legislators agree.

The problem, they say, is small cigarettemakers were not part of a landmark, multibillion-dollar lawsuit Florida settled in 1997. Five tobacco companies pay hundreds of millions of dollars a year under the settlement. The small companies pay nothing.

"It's really an equity issue," said Rep. Frank Farkas, R-St. Petersburg, who is sponsoring a bill in the House that would impose a 50-cent tax - or fee, as he sometimes call it - on every off-brand pack of cigarettes. "Whether it's a settlement (fee) or a tax, it ought to be across the board."

Off-brand cigarettes not only cut into the profits of the big companies. They also reduce state revenue. That's because tobacco settlement payments to all states are based on business factors such as cigarette sales, profits and market share.

In 2003, tobacco companies paid Florida $514.5-million, down from $750-million in 1998, according to a state analysis. Some of the decrease can be attributed to less smoking. Since 2000, cigarette consumption has decreased about 1.5 percent a year, according to the Council of State Governments. The rest is due to competition from small cigarettemakers that don't participate in the settlements.

Five companies were involved in the Florida settlement: Liggett Group, Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard. Florida was one of four states that agreed in 1997 not to sue these companies for past health wrongs. The companies agreed to pay Florida $11.3-billion over 25 years.

In 1998, 46 other states entered a separate but similar agreement.
The major difference is those states also required smaller cigarettemakers to put money into an escrow account each year. If the states don't sue, the companies get their money back after 25 years. If there is a lawsuit, any settlement is paid out of escrow.

The Legislature's proposed bills let the state keep all the revenue from the new cigarette tax.

Major cigarettemakers supporting the bill, including Liggett and Brown & Williamson, say they merely want to level the playing field with competitors. Big Tobacco proposed similar legislation in Mississippi this year for a 40 cents per pack tax, and successfully lobbied Minnesota to pass a 35 cents per pack tax last year.

Companies that did not settle with Florida say the state would be taking sides in a market share war. They say the lawsuit Florida settled was aimed at compensating for health care expenses caused by smoking and lies about research that proved tobacco was addictive and caused lung disease.

"They're not paying a tax now, they're paying a settlement of a lawsuit for fraud and racketeering and intentionally selling to minors and they chose to settle that lawsuit," said Mike Huey, a lobbyist for Star Scientific Inc., a Virginia company that specializes in cigarettes with reduced toxins.

Some smaller cigarette companies acknowledge they've gained market share since the tobacco lawsuits were settled. But they say the big companies are to blame for raising cigarette prices so much - beyond what the settlements required - that cost-conscious customers went looking for cheaper alternatives.

"Nobody buys our product except because it's cheap," said Yolanda Nader, chief financial officer for Miami-based Dosal, which makes 305's and other brands. "We have no brand loyalty, we're not "cool,' so if they force us to raise our prices, we lose our share of the market."

The bill has passed its first of several House and Senate committees.

Lakeland Republican Sen. Paula Dockery, the Senate sponsor, estimated the new tax would raise about $100-million a year. Under her proposal, the revenue would go into state coffers, instead of being set aside in a specific fund. The House version would siphon off $40-million to educate youths about the dangers of smoking.

Gov. Jeb Bush and House Speaker Johnnie Byrd, R-Plant City, said they have not taken positions on the proposed tax. Senate President Jim King, R-Jacksonville, however, supports it.

"Why should Philip Morris, Liggett and others bear the brunt?" King said. "When the lawsuit was filed, the companies that would be affected (by the new tax) represented an infinitesimal portion of the market and now they don't, and they're getting by without paying anything."

But a recent federal court decision in New York suggests that the big companies' argument is on shaky ground.

Forcing smaller tobacco companies to pay into escrow accounts violates federal antitrust laws, the U.S. Second Circuit Court of Appeals ruled in January in a case involving New York. That ruling prompted a cigarette company to ask a judge to end payments to New York.

Small cigarette shop owners like Flesch have little patience for this debate. To Flesch, there's one bottom line: Florida's proposed legislation will hurt his business and his customers.

"My seniors aren't going to quit smoking just because the prices go up," Flesch said. "I don't particularly like government telling us what to do."

- Times researcher Deirdre Morrow and staff writer Joni James contributed to this report.