[Congressional Record Volume 143, Number 93 (Friday, June 27, 1997)]
[Senate]
[Pages S6723-S6724]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                     TOBACCO PENALTY DEDUCTIBILITY

  Mr. BAUCUS. Mr. President, earlier today, Senator Harkin introduced 
legislation dealing with the recent agreement between States and the 
U.S. tobacco industry. Senator Harkin's provision says simply that the 
payments from tobacco companies to States should not be tax deductible.
  I applaud this effort, and I want to speak for a few moments on the 
subject and how we might proceed from here.
  Last week, a number of State attorneys general reached an agreement 
with several American tobacco companies. The agreement will compensate 
the States for their Medicaid spending on people who suffer from 
smoking-related illnesses, like lung cancer and emphysema, with $368 
billion in payments over the next 30 years. It is also supposed to 
include measures to protect the public health and provide tobacco 
companies with protections against future losses.
  Congress must soon be asked to pass a law implementing this 
agreement. Because the agreement is very large and very ambitious, we 
will need a lot of time and study and consultation before we can reach 
a final judgment. But let me start with a basic principle.
  I think we all would agree that a fair negotiated agreement is much 
better than litigation. But the key word is ``fair.'' The agreement 
must be fair to States as they pay Medicaid expenses, fair to the 
Federal Government as it pays for Medicaid and Medicare, fair to kids, 
fair to the public, and fair to the taxpayers.

  Initially, my reaction to the first point is that we should give the 
attorneys general a lot of deference on fairness to States. After all, 
they negotiated the agreement. With respect to the Federal 
contributions to Medicare and Medicaid, though, I am concerned that the 
agreement may not be fair. On public health, it seems they have come to 
some very good provisions on advertising, but perhaps weaker provisions 
on regulation of nicotine.
  All this will take some more study. But I see one thing right away 
which seems to me grossly unfair to taxpayers. That is, under the terms 
of this agreement, tobacco companies will apparently be able to deduct 
their compensation payment from their tax bill as ordinary and 
necessary business expenses.

[[Page S6724]]

  Thus, the tobacco companies could deduct $368 billion from their 
taxable income and reduce their tax payments by about $123 billion, 
assuming we maintain a corporate tax rate of about 33 percent during 
the course of this agreement. In effect, this would reduce the tobacco 
companies' payment by $123 billion and force the taxpayers to pick it 
up instead. That is a full third of the compensation payment to States.
  I believe that is wrong. I believe it is unfair. The basis of this 
whole agreement is the idea that tobacco companies bear some 
responsibility for the illnesses caused by tobacco and nicotine and 
should help pick up the tab.
  I agree with that. I also feel strongly that ordinary taxpayers are 
not responsible for the illnesses caused by tobacco, and they should 
not have to put up $123 billion to pay for the treatment.
  Is there a solution to the problem? Yes, there probably is. We should 
look into the issue, and I believe that the Senate Finance Committee 
should hold hearings on the tax implications of this settlement.
  But already it seems clear that these payments are not necessary 
business expenses. They are, rather, belated compensation for the 
health effects of tobacco. I do not think they should be tax 
deductible. I will explore every means, including legislation if 
necessary, to make sure this agreement is fair to taxpayers.

                          ____________________