To the Ashtray of History

Was this what was promised? Billions of dollars later and more than six years after the tobacco settlement was signed, American taxpayers and consumers deserve an answer. But they won't like it.

Back in the 1990s, state attorneys general sued “Big Tobacco” claiming that tobacco companies had lied about the health risks of smoking and run up state Medicaid costs in treating sick smokers over the years. Eventually, the tobacco companies decided to settle the state lawsuits for $246 billion. In the years since the signing of that settlement — in reality, a permanent sales tax — it's clear who are the winners and losers.

State governments did well. They won a staggering sum of money, to be doled out by tobacco companies over just the first 25 years, with payments continuing in perpetuity. States have so far spent most of the money on a wide range of programs unrelated to treating sick smokers or reducing smoking rates, according to an annual report by the General Accounting Office. The particulars can be unseemly. Kentucky, for example, reportedly spent $271,750 for improving the prawn industry, while North Carolina spent $100,000 on “motorsports research.”

State attorneys general also came out winners. They discovered a new tool for growing their own power. Now, instead of waiting around for the legislature to raise taxes or pass new laws regulating industries, attorneys general can do it all themselves. As New York Attorney General Eliot Spitzer has since demonstrated, often all it takes is indictment-by-press conference, and pretty soon he has a settlement that puts (who else?) the attorney general in charge of regulating the industry.

Trial lawyers did well by the tobacco settlement, too. The trial bar was slated to get an estimated $13 billion, which for some worked out to $7,716 per hour, according to legal scholar Robert Levy, assuming the lawyers worked 24 hours per day, seven days per week, for 42 months. Trial lawyers reinvested a lot of the money in political campaigns and developing new litigation campaigns.

Big tobacco companies, as it turned out, did quite well by the settlement. They raised cigarette prices beyond the actual settlement costs and gained the states as partners in a cartel to hamstring competitors. Small tobacco companies that were never part of the state lawsuits or the multi-state settlement were required to make annual escrow payments to the states. Then, when the upstarts did better than expected and carved into the market share enjoyed by the majors — and state revenue — states responded by passing laws raising taxes, er, escrow payments. “All states have an interest in reducing … sales [by non-settlement companies] in every state,” Vermont's attorney general admonished his peers in 2003.

So where does that leave taxpayers, consumers, small businesses, and anyone concerned about unchecked government power? Holding the bag. Yet, despite the massive, unprecedented transfer of wealth and ambitious new regulatory regime unleashed by the tobacco settlement, it was all negotiated in a backroom deal. No legislator voted on it, no small businesses were consulted, and no taxpayer had a chance to lobby against the tax increases.

And the agreement, which was entered into by 46 state attorneys general, never gained the approval of Congress, an egregious violation of the U.S. Constitution. Article I, Section 10 of the U.S. Constitution specifically prohibits a state from entering into an agreement or compact with another state without the consent of Congress.

Looking at the tobacco settlement, one begins to understand what the Founding Fathers feared when they wrote the Compact Clause. That's why the Competitive Enterprise Institute launched a lawsuit on August 2 challenging the tobacco settlement: to end such abuse of power and restore one essential constitutional check on government greed.