Congressional Record, Volume 144 Issue 54 (Tuesday, May 5, 1998)

[Congressional Record Volume 144, Number 54 (Tuesday, May 5, 1998)]
[Senate]
[Pages S4226-S4231]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

COMPREHENSIVE ANTI-TOBACCO LEGISLATION

Mr. HATCH. Mr. President, to date, our efforts to develop
comprehensive, bipartisan anti-tobacco legislation have been stymied by
the lack of consensus on a number of major issues.
Over the next few weeks, I intend to devote full attention toward
refocusing our efforts on a bill which can be enacted this year.
To accomplish that goal, it is important that Congress and the
Administration reflect on what our objective actually has been--and
should continue to be.
Last June, the 40 State Attorneys General, public health
representatives, tobacco company officials, and representatives of the
Castano group, announced a bold new initiative focused on eradicating
the scourge of youth tobacco use.
This proposed global tobacco settlement presents Washington with a
once-in-a-generation-opportunity to help families and communities raise
a whole generation of youth tobacco-free.
Certainly, no one in Congress was bound to the particulars of the
June agreement.
But, we would not have seen such virtually unprecedented legislative
consideration of the tobacco issue in the past 11 months were it not
for this settlement.
In short, our objective in 1997 was to improve the public health, and
specifically the health of our youth, through a constitutional package
of reforms which relies on a guaranteed stream of revenue from tobacco
companies.
Our objective should be the same in 1998.
But it appears that it is not.
Unfortunately, partisan politics, fear, greed and Washington's pile-
on mentality have caused us to lose sight of this objective.
Instead, we are simply trying to ``out-tobacco'' one another. If that
continues, the public interest will not be served, and Big Tobacco will
win.
As an optimist, I remain hopeful the Congress will succeed this year
in passing strong, anti-tobacco legislation

[[Page S4227]]

that is comprehensive, workable, and Constitutionally-permissible.
But as a realist, I also know that the events of the last few weeks,
in which this issue has become increasingly fractionalized and
politicized, make our task that much more difficult.
Comprehensive tobacco legislation is now in jeopardy. Not for want of
trying, to be sure, but for a lack of consensus on several crucial
issues.
For us to consider comprehensive tobacco legislation, and then to
fail, would be a terrible loss, a loss for our country, a loss for our
political system, and a loss for the generation of our youth America's
parents hope to bring up tobacco-free.

Let me be blunt. Our failure to enact comprehensive anti-tobacco
legislation would also be a significant victory for the tobacco
industry, an industry which has knowingly marketed harmful products for
decades, deliberately targeting our youth in their quest for profits.
Let me be equally frank. Passage of just any bill will be a
significant loss for the American people, who should be able to rely on
their legislators to write sound, responsible legislation.
In writing a bill, we should not give in to the tobacco industry's
demands. We should not give in to their less-than-veiled attempts to
force both the Administration and the Congress into abandoning our
objectives--addressing the problem of youth tobacco, reforming the
legal system to allow for appropriate compensation to claimants,
enhancing biomedical research with respect to tobacco, improving the
public health, as well as helping our farmers transition away from
growing tobacco.
At the outset of my remarks, I want to distinguish carefully and
clearly any substantive concerns I have about the legislation that has
emerged from the Commerce Committee with my respect and admiration for
those who have brought the legislation to this point.
First and foremost, I commend the Chairman of the Commerce Committee,
Senator McCain. Anybody who knows anything about John McCain knows that
he is a patriot and true American hero.
As I will lay out, while I do have significant concerns with many of
the major details of the legislation that the Commerce Committee has
put forward--and would have preferred that we could have worked more
closely together--I do commend the efforts of all the members of the
Commerce Committee in moving a bill forward for floor consideration.
But before I discuss the policies of tobacco control, I want to sound
a cautionary note about its politics.
Pundits report that Democrats are in a ``win-win'' position on this
issue.
As conventional wisdom goes, the minority can keep on moving the goal
posts of this legislation, proposing more and more harsh amendments,
defying Republicans to vote against their ever-changing version of the
bill.
In this way, the Democrats can either foster the perception that they
are tougher on Big Tobacco by making the bill more and more onerous, or
they can tar and feather any recalcitrant Republicans with the charge
that Republicans are in cahoots with Big Tobacco. That is pure bunk.
Listening to the President's press conference last week, I was
impressed by his earnest statement that this not be an election year
issue. But, as we all well know, any issue raised consistently fewer
than six months before an election is an election issue. It cannot be
avoided.
All rhetoric aside, the way to accomplish our goal--the reduction of
youth tobacco use--is for the Congress and the White House to work
together on a bill which can be enacted and implemented. We are not
there yet, despite public protestations to the contrary.
A number of key differences in approach are major stumbling blocks to
enactment of a bill. These barriers include:

Allocating any revenues that are derived from a bill

The Senate budget resolution calls for all revenues to be devoted to
Medicare.
While the House has not completed work on its version, there are some
in the House who believe that tobacco revenues should be used for more
general tax decreases.
Others suggest the tobacco revenues be used to help pay for health
insurance for low-income people.
A fourth approach is embodied in the President's budget, which
advances a number of new or expanded domestic spending programs that
will be financed with tobacco revenues.

Determining the final cost of the proposal

The bill approved by the Senate Commerce Committee has an initial
price tag of $516 billion over the next 25 years, without any
calculation of the lookback provision, which naturally could push that
price tag much higher.
In contrast, the original settlement offered on June 20, 1997 was
$368.5 billion.
Legitimate questions have been raised about the ability of various
industry players to pay a sum as high as $500 billion to $700 billion,
which is what, extrapolated out, the Commerce bill could cost in the
end.

Let's face it, as much as many would like to penalize this industry,
we are penalizing ourselves if we enact a new program predicated upon
revenues that won't be there.

Assessing the per pack or per can increase

A related question is the price per product increase that will result
from the new industry payments.
A widely-reported figure is the Treasury Department's estimate that
the Commerce bill, for example, will result in a per cigarette
pack increase of $1.10 five years from now.

As the Judiciary Committee's hearing last week revealed, we do not
know the precise methodology the Administration used to make this price
projection. Deputy Secretary Summers told the Judiciary Committee last
week that he would provide us with the information that I requested,
but we are still waiting.
We do know that Wall Street experts, like David Adelman of Morgan
Stanley Dean Witter, Martin Feldman of Salomon Smith Barney, and Gary
Black of Sanford C. Bernstein, have concluded that the Administration's
projections are far too low and that the true retail price of a pack of
cigarettes--measured in constant 1997 dollars--will be in the
neighborhood of $5 per pack in year 5, more than a $3 increase.
Under this scenario, the price per carton will shoot up $30. This
increase is almost twice as high, twice as fast, as the ``up to $1.50
per pack'' increase over 10 years called for by the President last
September.

Ascertaining the effect on law enforcement

The Treasury Department testified before the Judiciary Committee last
week that ``by closing the distribution chain for tobacco products, we
will be able to ensure that these products flow through legitimate
channels and effectively police any leakages that do take place.'' In
fact, Deputy Secretary Summers said that with these regulatory
controls, ``we do not expect a large-scale smuggling problem. . .''
Law enforcement officials at all levels with whom I have spoken are
not so sanguine. These are the officers who will be on the front lines,
policing against the violence, hijackings, smuggling, and other related
crimes that are inherent in any opportunity for a black market.
One officer with whom I spoke termed the Treasury statement
``laughable.''

Developing a consensus on the agriculture provisions

One of the most unifying themes in the tobacco debate is the need to
make certain that we provide an adequate program to transition American
farmers out of tobacco production into other alternatives.
There are major divisions, however, on how to structure that program.
There are two major approaches in the Senate, one developed by our
colleague from Kentucky, Senator Ford (the ``LEAF'' Act), the other by
our colleague from Indiana, Senator Lugar.
The major difference between these two bills is that the Lugar bill
terminates the tobacco price support program, while the LEAF bill does
not.
The final key difference is in determining the extent of the role of
the tobacco companies in any final legislation.
As many are aware, the Department of Justice has undertaken one or
more investigations related to tobacco companies.
If there have been violations of the law, they should be prosecuted
to their

[[Page S4228]]

fullest, and it behooves the Department to move forward on its
investigations swiftly and conclusively.
But this specter of wrong-doing should not be allowed to cast such a
shadow over the tobacco legislation that it becomes an excuse for
inaction.
Some have castigated the companies for their departure from
directionless congressional deliberations.
I do not believe that Congress needs the approval of the industry to
pass tobacco legislation.
As everyone knows, I am no friend of the tobacco industry or their
products.
But, having made these points, as a legislator with a deep
appreciation of the process of building consensus in our democratic
society, I do believe that Congress would be wise to consider the
perspectives of the tobacco industry in fashioning legislation.
This is true for one very fundamental reason: we want a program which
works, a program with which this tremendously-resourced, tremendously-
creative industry will comply.
Perhaps I am just not as smart as those who believe the companies
cannot contribute anything constructive to the process.
When Congress is dramatically affecting a sector of the economy, as
long as that industry's products are legal, as long as they have a
right to perform in our society, then that industry's views should be
heard, no matter how much we don't like that industry.
That should not amount to a veto.
No outside group--not the tobacco companies, not the private
attorneys, not the state attorney generals, not the public health
groups, not anyone--should expect or be granted a veto over this
legislation.
What all affected parties should get is a forum for their views, an
opportunity to be heard. This is the very essence of democracy.
So I must ask those who pride themselves on not sitting down at the
table with this industry to reexamine this position.
I echo the suggestion that Mississippi Attorney General Mike Moore
made a few weeks ago, that the President reconvene all of the original
participants in these negotiations. Congress should be part of such
talks.
It just seems to me that beyond the purely public health issues,
tobacco legislation has major social, political, and economic
dimensions that argues for an inclusive process as possible.
Some 50 million Americans use these products. Public health experts
almost unanimously agree that we should not make them go cold turkey
overnight.
There is also the question of political philosophy of whether it is a
proper role for the government to take away the freedom of adult
Americans to consume tobacco products.
Moreover, as a conservative, I am generally loath to endorse any type
of new taxes. I am particularly sensitive about advocating a regressive
scheme whereby the lower income segments of our society which have
disproportionately higher smoking rates are called upon, in essence, to
fund social programs dictated by the political elites.
Tobacco revenue ought not be used to finance an explosion of new
entitlements, a veritable ``honey pot'' of money to fund a mini Great
Society.
I am afraid that the President's approach in the budget strays down
this path by paying for child care and education initiatives with the
as yet agreed upon and uncollected tobacco revenues.
To put it bluntly, the President has spent the money even before
Congress has passed a bill.
Also from an economic standpoint, I am mindful that several million
decent, tax-paying, Americans are dependent, directly or indirectly, on
the tobacco industry for their livelihoods.
We have wisely, I think, sought to make an accommodation to the
thousands of tobacco farmer families.
Do we not also have some similar responsibility to carefully consider
the economic interests of those who work on the loading docks at Philip
Morris or sell cigarettes at the local gas station or 7-11 Store?
Still other of our citizens are shareholders in these firms or may be
dependent on pension funds with substantial holdings of tobacco
securities.
I note that Yale University, home of one of the most absolutist anti-
tobacconists, Dr. David Kessler, recently voted not to divest its
tobacco holdings from its endowment investment portfolio. To me, this
says a lot.
We in Congress and the Administration must take care not to engage in
a game of political one-upsmanship in which we all trip over ourselves
in the race to show the public who is the toughest on tobacco.
We may find that in the quest to punish the black-hatted tobacco
industry we will have trampled over the interests and security of a lot
of ordinary, hard-working Americans.
These are very hard questions to answer, but they are questions which
must be resolved before Congress can write a tobacco bill.
Ten days ago, I received a bipartisan letter from four of the State
Attorneys General who participated in last year's settlement
negotiations.
This letter--which I believe is a serious effort to help Congress
make the corrections necessary before we consider the Commerce
Committee legislation--highlighted three areas of concern, three
particular areas in which Congress runs the risk of undermining the
settlement's objectives if it continues down the current road.
I ask unanimous consent that that letter be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

Colorado Department of Law,

Office of the Attorney General,

Denver, CO, April 24, 1998
Hon. Orrin G. Hatch,
U.S. Senate,
Russell Building, Washington, DC.
Dear Senator Hatch: We are pleased to respond to your
request for our legal views on pending tobacco legislation.
You have specifically asked us about any constitutional
concerns and the consequences. There are three key issues of
concern to us: 1. the difficulty of accomplishing several
provisions of the legislation without the industry's waiver
of constitutional challenges; 2. the potential for creating a
contraband market; and 3. potential bankruptcy of the
industry.
We are glad that Congress is now seriously focusing on
passing comprehensive tobacco legislation and that full
Senate consideration is likely in the near future. We have
appreciated the opportunity to work with you, Senator McCain,
and others throughout the hearing process and committee
consideration of tobacco issues. Your leadership in holding
the first Congressional hearings last year addressing the
legal complexities of the tobacco settlement was especially
helpful. We look forward to continuing to share whatever
insight and expertise we have gained from several years of
engaging in legal battles with the tobacco industry.
The landmark agreement reached on June 20, 1997, was not
perfect, but it includes critical themes which should provide
the framework for any Congressional action. Tobacco
legislation must be comprehensive. It must pass
constitutional muster so the war against teen smoking moves
to the streets and not the courthouse. And any financial
settlement must not bankrupt the industry and produce even
greater problems for the nation.
As lawyers, we believe that the industry's waiver of
constitutional challenges is necessary to accomplish many of
the public health goals within the bounds of the
Constitution. Losing the voluntary nature of the settlement
agreement may have severe legal repercussions. Therefore, the
following consequences should be considered:

no consent decrees

Consent decrees are essential to ensure long-term
compliance by the industry with key elements of the
comprehensive package. Consent decrees, by definition,
require the consent of all parties to the litigation. If a
party does not agree to the terms of a proposed decree, then
the court cannot thrust a settlement upon the parties.
Theatre Time Clock Co., Inc. v. Motion Picture Advertising
Corp., 323 F. Supp. 172, 173 (E.D. La. 1971). Therefore, If
any party objects to a term contained within a proposed
consent decree, a court cannot order its acceptance. Flight
Transportation Corp. Securities Litigation v. Fox and Co.,
794 F.2d 318, 321 (8th Cir. 1986). Consequently, if the
tobacco industry will not enter into the consent decrees,
particularly the advertising restrictions, corporate culture,
payments, and other enforcement mechanisms of the decree, the
lawsuits cannot be settled with assurance. The states will
lose those enforcement mechanisms that were contemplated to
be included in such consent decrees.

look-back penalties

Penalties must have a direct relationship to the harm being
prevented. Penalties imposed by the government must be
``rational in light of [their] purpose to punish what has
occurred and to deter its repetition.'' Pulla v. Amoco Oil
Company, 72 F.3d 648, 658 (8th Cir. 1995). Therefore, there
must be a reasonable relationship between the penalties
imposed and the harm likely to result from the defendant's
conduct as well as the harm that

[[Page S4229]]

has actually occurred. Id. at 659 (quoting TXO Prod. Corp. v.
Alliance Resources Corp., 509 U.S. 443 (1993)).
Although the courts have not articulated any precise
formula for ascertaining the ``reasonableness'' of penalties,
Justice Scalia observed that the touchstone is the value of
the fine in relation to the particular offense. Austin v.
United States, 509 U.S. 602, 627 (1993) (Scalia, J.,
concurring in part and concurring in the judgment). If there
is no reasonable relationship, the penalties would be
considered an excessive fine and would not withstand judicial
scrutiny. See generally TXO, 509 U.S. 443; Pulla, 72 F.3d
648.
The June 20 agreement with the tobacco industry had a
formula for the penalties imposed, which linked the actual
cost of a youth who begins smoking and the profit received
from that youth over the course of his life, to the amount of
the penalty. This demonstrates precisely the type of rational
relationship required by courts.
However, the proposed look-back penalty may not pass
judicial scrutiny. At $3.5 billion, the fines are the largest
imposed on any industry for any conduct. As originally
proposed, the penalties could be suspended if the
manufacturers made serious, good faith efforts to curb youth
smoking but, unfortunately, failed to successfully change the
behavior of teenagers. This approach provided a due process
review, rather than imposing penalties through strict
liability. Under the current Senate Commerce bill, the
companies will be penalized even if they make every
reasonable attempt to halt youth smoking.
A look-back penalty closely tied to tobacco company
behavior, or a penalty voluntarily agreed to by the
companies, is constitutionally sound and a valuable mechanism
for fighting youth smoking.

advertising and marketing restrictions

The District court in Beahm v. U.S. Food and Drug
Administration, 966 F.Supp. 1374 (M.D.N.C. 1997), held that
the FDA's regulations relating to restrictions on tobacco
advertising were beyond the authority of the FDA and,
therefore, were invalid. This case is currently on appeal to
the Fourth Circuit. Although that court has not yet ruled on
the validity of existing FDA advertising regulations, even if
it should find that those regulations are within the purview
of FDA control, the advertising and marketing restrictions
set forth in the June 20th agreement may not survive First
Amendment review. This is in part because the restrictions
envisioned by the June 20 agreement are much more expansive
than the FDA restrictions currently being litigated. The
total ban on outdoor advertising, black and white only ads,
prohibition on Internet advertising, and prohibition on event
sponsorship are but a few examples of the marketing and
advertising restrictions contained in the June 20 agreement,
implemented by the voluntary Master Settlement Agreement,
Protocol and consent decree.
It has been recognized that the First Amendment ``directs
us to be especially skeptical of regulations that seek to
keep people in the dark for what the government perceives to
be their own good.'' Liquormart, Inc. v. Rhode Island, 116
S.Ct. 1495, 1508 (1996). Furthermore, even communications
that do no more than propose a commercial transaction are
entitled to the coverage of the First Amendment. Id. In
recognition of the seriousness of this issue, the Supreme
Court has stated that ``when a State entirely prohibits the
dissemination of truthful, nonmisleading commercial messages
for reasons unrelated to the preservation of a fair
bargaining process,'' strict scrutiny is applicable. Id. at
1506. Consequently, in order to survive judicial review, the
government must demonstrate that its restriction on speech
was no more extensive than necessary. Id. at 1509. Because of
this heavy burden, ``speech prohibitions of this type rarely
survive constitutional review.'' Id. at 1508.
Although the June 20 agreement with the tobacco companies
does not propose a total ban on advertising, its
expansiveness may nonetheless cause a reviewing court to
apply the strict scrutiny review utilized in Liquormart. As
that court recognized, not all commercial speech regulations
are subject to a similar form of constitutional review. Id.
at 1507. Therefore, when a state regulates commercial
messages to protect consumers from deceptive, misleading, or
otherwise harmful advertisements, ``less than strict review''
is appropriate. Id. However, because the advertisements
forbidden by the June 20 restrictions would have presumably
been truthful in nature and the restrictions are being
implemented for purposes other than protecting the bargaining
process, it seems likely that this less stringent standard of
review would be inapplicable. Consequently, the government
would have to demonstrate that there were no less intrusive
means available to accomplish their goals. As the court in
Liquormart recognized, application of this standard usually
acts as the death knell for government restrictions. Id. at
1508.
In this same vein, the restrictions included in the June 20
agreement could probably not be characterized as time, place
or manner of expression restrictions, which carry with them a
less stringent standard of review. Specifically, such bans
are content neutral. See generally Kovacs v. Cooper, 336 U.S.
77 (1949). Conversely, the bans envisioned in the agreement
are obviously content driven.
In sum, the expansiveness of the proposed advertising
restrictions as well as the high burden that must be met in
order to justify such restrictions, raise serious concerns
that without the industry's voluntary consent and
participation, the advertising prohibitions envisioned in the
June 20 agreement may not survive First Amendment scrutiny.
Additionally, the June 20 agreement incorporated the FDA
regulations, which, if overturned by the Fourth Circuit,
would also be unavailable as a regulatory mechanism. While it
is true that the industry would have some incentive to limit
its advertising and marketing to achieve the look back
requirements, if the look back penalties are also found to be
legally deficient, their value as an incentive would be
eliminated.

advertising restrictions against retailers, distributors, wholesalers,
and advertising businesses

The June 20 agreement contemplated that the participating
companies would police their retailers, wholesalers,
distributors, and advertising agencies by contract and by
refraining from placing ads with them. These voluntary
implementation mechanisms were to be built into the Master
Settlement Agreement, Protocol and consent decrees. However,
any legislation that could be unconstitutional as to the
industry could also be unconstitutional as to the related
agents. Therefore, the same First Amendment issues that could
preclude the government from instituting blanket prohibitions
on advertising by tobacco manufacturers may also preclude
prohibitions affecting industry agents.

document disclosure

The public depository of documents set forth in the June 20
agreement presumed some level of voluntary participation on
the part of the tobacco industry. While documents filed in
court, or otherwise made available to the public, can
certainly be put in a central public depository, it is
questionable that the industry can be required to release
documents not otherwise available, including documents it
considers privileged or confidential, as well as any future
documents or research.
Obviously, almost any American business would object to the
government seizing its internal corporate documents and
opening them for inspection. The depository raises both
private property and search and seizure concerns.
The Fifth Amendment provides in part: ``nor shall private
property be taken for public use, without just
compensation.'' U.S.C.A. Const. Amend. 5. It has been widely
recognized that the property to which this amendment applies
is that which ``is made up of mutually reinforcing
understandings that are sufficiently well grounded to support
a claim of entitlement.'' Nixon v. U.S., 978 F.2d 1269, 1275
(1992) (recognizing that former President had a property
interest in presidential papers). Those property interests
may be created in a myriad of ways, including uniform custom
and practice. Id. at 1276.
Accordingly, the documents that were to be deposited by the
tobacco companies in a public depository constitute
``property'' for Fifth Amendment purposes. This conclusion is
consistent with the district court's decision in Nika Corp.
v. City of Kansas City, 582 F. Supp. 343 (W.D. Mo. 1983),
wherein it was held that a corporation's documents
constituted ``property'' invoking Fifth Amendment
protections. See also U.S. v. Dauphin Deposit Trust Co., 385
F.2d 129 (3rd Cir. 1967) (trust company had a property
interest in various business records). In Nika the court held
that the government could not confiscate particular business
documents without providing for a method of compensation for
such taking. Id. Although the court found that there were
adequate means provided in that case, this clearly
demonstrates that corporate documents constitute ``property''
for Fifth Amendment purposes, thereby invoking the necessity
for compensation when the government takes such for public
purposes. Consequently, there is a strong possibility the
tobacco companies could not be compelled to deposit the
documents specified in the June 20 agreement without just
compensation.
Furthermore, if the Fifth Amendment protects the industry
from being required to hand over to the government all of its
documents, it seems that it would also protect them from
being required to pay the costs of the depository, unless the
costs are somehow built into other licensing fees.
The tobacco companies would almost certainly raise
objections based on case or controversy and standing against
individuals wishing to challenge a decision by the companies
to withhold documents. Under Article III, Sec. 2 of the
Constitution, the federal courts have jurisdiction over
disputes only where there is a ``case'' or ``controversy.''
Raines v. Byrd, 117 S.Ct. 2312, 2317 (1997). One element of
that test requires the complainant to establish that they
have standing to sue. Id. This requires the complainant to
demonstrate that he has suffered a personal injury fairly
traceable to the defendant's allegedly unlawful conduct * *
*.' Id. Therefore, any individual wishing to protest tobacco
companies' refusal to disclose documents would have to
establish that they were injured by such refusal Presumably,
the only means of doing so would be to assert that the
refusal negatively impacted their own personal pending
litigation with a particular tobacco company. However, this
would be difficult to demonstrate because a tobacco company's
refusal to deposit documents in a public depository is not
the equivalent of refusing to produce those documents in a
particular action. Consequently, any individual

[[Page S4230]]

wishing to protest the tobacco companies' refusal to disclose
documents might have to wait until their own suit was filed,
motions for discovery were made, and a particular tobacco
company refused to comply, before they would have standing on
this issue. Even then, they might not be able to demonstrate
that they were somehow injured by the tobacco company's
refusal to place such documents in a public depository.
One of the primary benefits to individual claimants of
having the industry documents placed in a public depository,
aside from having ready access to the documents, is the
voluntary agreement of the companies not to challenge the
authenticity of the documents when they are offered as
evidence in individual trials. The companies are now well-
known for fighting vigorous evidentiary battles. If the
industry does not enter into the voluntary agreements, one
can also assume that they will challenge the introduction of
these documents in individual trials, resulting in
considerably more expense for the plaintiffs than was
envisioned under the June 20 agreement.

contraband

As law enforcement officials of the states, we are also
concerned about the danger of creating a contraband market
for tobacco products. Our children will not be helped by
creating a new product line for organized crime, nor by
providing a new entry market for drug dealers. Additionally,
the adverse health consequences of smoking cigarettes
produced in unregulated foreign or clandestine domestic
markets are likely to be even more significant than
cigarettes produced by the existing U.S. companies.
The experience of the states with relatively high tax rates
on tobacco products has been studied in some detail. Revenues
lost to smuggling cigarettes into these states has been a
major concern. This is estimated to be a $1 billion per year
problem nationwide. In 1988 California increased its tobacco
tax from 18 cents to 35 cents per pack and today the
contraband market is estimated to be between 17.2 and 23% of
cigarettes sold. Michigan increased its cigarette tax in 1994
from 25 cents to 35 cents a pack. Michigan lost an estimated
$144.5 million per year in tax revenue. Washington State
increased its tax in 1997 to 82.5 cents per pack, and lost an
estimated $110 million a year to smuggling. New York State,
with a 56 cent state tax estimates it is losing about $300
million of tax revenue per year due to smuggling. The typical
scenario after a state makes a significant increase in its
cigarette tax is a decrease in sales in that state, but a
marked increase in sales in neighboring states. Smoking rates
in the higher-tax state typically remain the same, so the
increase in sales reflects purchases to take into the higher-
tax state.
There is a definite correlation between tax rates and the
level of smuggling. For many years, the differential in tax
rates on tobacco products was mainly an interstate problem
with contraband products being smuggled into those states
with the highest tax rates. The problem has now reached
international proportions. At first, popular American brands
were smuggled into other countries. We are now seeing that as
tobacco taxes rise nationwide, foreign manufactured
cigarettes and other products are being smuggled into the
United States.

bankruptcy

Finally, we believe it to be in the best interests of
accomplishing the broad public health goals of legislation to
avoid bankruptcy of the tobacco industry.
Critics of the June 20 settlement have suggested that
bankruptcy is not a great risk. This industry has a history
of annual domestic profits. For example in 1996 Philip Morris
and RJR (76 percent of the market) had domestic profits of
$6.3 billion. While it is not possible to determine precisely
the market value of the domestic tobacco companies (not the
parent companies), it is possible to estimate their market
value--if they were sold today. The stock of the Nabisco Food
Company, which is 80.5 percent owned by RJR, trades publicly.
This allows an extrapolation of the value which the market
places on RJR's tobacco operations. That value is $1.184
billion. Part of that is comprised of international
operations and part is domestic. Foreign tobacco companies
like Imperial and Gallaher trade at price earning rations of
10 to 11. If one uses a 10.5 P/E for Reynolds' international
earnings, Reynolds' domestic operations have a negative
market value of $1.1196 billion. Using similar valuation
methods for the other companies, Brown & Williamson is worth
a negative $240 million; Lorillard is worth a positive $641
million and Philip Morris USA is positive $3.855 billion. If
one were to ignore the fact that foreign tobacco companies
trade at P/E's higher than the imputed value of domestic
companies and assume identical valuation of domestic and
foreign companies, the entire domestic industry could be
worth as much as $21.484 billion. On this basis, the total
market of the industry (both foreign and domestic) is
estimated to be less than $50 billion. Liability to the
states alone exceed several hundred billion dollars. The
conclusion is obvious--this is an industry that produces
significant cash but has questionable inherent value as many
industry assets cannot be converted to other uses and have
little value outside the tobacco environment.
State Attorneys General do not seek financial ruin of any
industry. It is our job to bring about compliance with the
laws and that is what we seek from the tobacco companies.
This is an industry that sells a legal product, employs
thousands of people, and provides a living to many more,
ranging from farmers to retailers. Our goal has been to hold
the industry accountable for its actions, and to provide for
significant public health gains. If the current companies are
liquidated, new companies can be expected to step into the
breach, within or outside this country. We would have
virtually no claims against these replacement tobacco
companies for past industry practices. Further, foreign
tobacco companies (possibly with manufacturing operations
abroad) might immediately step in to satisfy US demand for
cigarettes. This, of course, could hurt our farming
communities and those whose employment depends on this
industry.
In conclusion, we appreciate your interest and efforts to
move comprehensive legislation forward. We are concerned that
the fundamental goal of reducing youth smoking may be lost in
the current political rhetoric. It's time for action and for
comprehensive legislation to achieve this goal now, not after
years of additional litigation and debate.
Sincerely,
Gale A. Norton,
Attorney General,
State of Colorado.
Betty D. Montgomery,
Attorney General,
State of Ohio.
Jan Graham,
Attorney General,
State of Utah.
Christine O. Gregoire,
Attorney General,
State of Washington.

Mr. HATCH. In brief, the concerns highlighted in this letter from the
Attorneys General of Colorado, Ohio, Utah and Washington are:
(1) The difficulties created by enacting legislation without the
industry's voluntary waiver of several constitutional prerogatives.
The Generals raise specific legal concerns about attempting to
legislate in the absence of consent decrees and other voluntary
agreements with the industry.
These concerns go to several major features of any comprehensive
bill: advertising and marketing restrictions (including restrictions
affecting retailers, distributors, and advertisers); look back
penalties; and document disclosure.
We should also take to heart General Mike Moore's observation that,
in the nearly three years since it was first proposed, the FDA's rule
on tobacco advertising has not gone into effect.
We all know the cause: litigation.
But by settling the lawsuit, in Mississippi, there is no billboard
advertising today, a result that goes far beyond the FDA rule and what
the Constitution would permit us to do legislatively.
(2) The second concern of the Attorneys General is the untoward
effect that the potential bankruptcy of the tobacco industry would
entail. Let me be clear about my position on this.
I would like nothing more than for the tobacco industry to pay a
trillion dollars. But I also want an anti-tobacco program which works.
All of the bills before Congress have in common a serious effort to
curtail youth tobacco use. All of the bills rely on industry payments
to fund those efforts.

If we bankrupt the companies, or if we drive them offshore,
ultimately no one wins, because we need the industry payments to fund
the massive anti-tobacco program the American public wants. Without
that funding source, the whole program goes down the drain.
If the companies become bankrupt or move offshore, it is a whole new
ball game, and one which we cannot control.
It would be more intellectually honest just to ban tobacco.
On this subject, the AGs' letter said:

State Attorneys General do not seek financial ruin of any
industry. It is our job to bring about compliance with the
laws and that is what we seek from the tobacco companies.
This is an industry that sells a legal product, employs
thousands of people, and provides a living to many more,
ranging from farmers to retailers. Our goal has been to hold
the industry accountable for its actions, and to provide for
significant public health gains. If the current companies are
liquidated, new companies can be expected to step into the
breach, within or outside this country. We would have
virtually no claims against these replacement companies for
past industry practices. Further, foreign tobacco companies
(possibly with manufacturing operations abroad) might
immediately step in to satisfy U.S. demand for cigarettes.
This, of course, could hurt our farming communities and those
whose employment depends on this industry.

(3) The third major point of concern for the Attorneys General is the
potential for increasing the black market for illegal contraband
cigarettes.

[[Page S4231]]

A recent case study from Alaska is illustrative. Five months ago,
Alaska increased its cigarette tax from 29 cents to one dollar. From
all we know about nicotine addiction, the resulting decrease in sales
cannot be explained by sudden cessation. Rather, it appears that legal
sales were replaced in part by black market cigarettes. The Alaskan
legislature is considering rolling back some of the tobacco taxes.

With respect to the issue of contraband the AGs' letter says:

The letter from the AGs notes that the cigarette contraband problem
is already a $1 billion nationally. For example, the AGs provide an
estimate that in the state of California--which raised its state
tobacco tax in 1988 from 18 cents to 35 cents a pack--that today
between 17% and 23% are smuggled. That's about 1 in every 5 cigarettes.
The AG's letter goes on to say:

There is a definite correlation between tax rates and the
level of smuggling. For many years, the differential in tax
rates on tobacco taxes was mainly an interstate problem with
contraband products being smuggled into those states with the
highest tax rates. The problem has now reached international
proportions. At first, popular American brands were smuggled
into other countries. We are now seeing that as tobacco taxes
rise nationwide, foreign manufactured cigarettes and other
products are being smuggled into the United States.

I have also received letters from a number of law enforcement
organizations, whose thousands of members will be expected to provide
the first line of defense against these smugglers. These law
enforcement officers are extremely apprehensive that passage of
this legislation will precipitate the emergence of a thriving black
market in cigarettes, posing huge problems for law enforcement at every
level. They say the Commerce bill, in particular, will inevitably lead
to the creation of a massive black market, giving organized crime a new
line of business and undermining not only respect for the rule of law,
but also the real goal of the legislation, preventing underage tobacco
use.

I might also add that one of the most frightening outcomes of a new
black market would be the likelihood that children will find it easier
than ever to purchase tobacco products.
One of government's principal responsibilities is to help families
and communities keep children from smoking. A large, lucrative black
market could have the unintended consequences of making parents' job
harder.
It is not too hard to envision unregulated cigarettes being sold on
literally every street corner.
In response to this concern we have been told by the Administration
not to worry because the system contemplated by the Commerce Committee
bill is a closed system.
When our colleague from California, Senator Feinstein, asked a series
of questions about this black market she was repeatedly told about this
purported closed system.
I believe that Senator Feinstein shares my concern about the
government's ability to design a ``closed system,'' given our
experience with guarding the nation's borders and safeguarding our
children in the costly and never-ending battle against illicit drugs.
I share Senator's Feinstein's pointed remarks on this issue because
I, too, simply do not believe that this closed system will prove so
easy to implement.
It seems to me that the real question for policymakers is this. Given
these facts, how can we shape a comprehensive national tobacco control
strategy that can help prevent the next generation of young Americans
from choosing to use tobacco and help those already addicted to stop?
In my view, most of the essential elements for answering this
question can be found in the proposed global tobacco settlement
announced last June 20th.

In return for funding a comprehensive anti-tobacco education and
cessation program with an unprecedented payment of $368.5 billion
spread over 25 years, under the agreement the industry would be granted
a measure of financial certainty and predictability by settling a
series of pending lawsuits.
Now, almost 11 months after that settlement was proposed, it still
holds forth the best model for comprehensive legislation which can be
enacted this year.
It contains the limited liability provisions which are necessary to
evoke tobacco industry compliance with the program.
The President's most senior representatives have said, both publicly
and privately, that they would not oppose some version of those
provisions in a bill which was otherwise acceptable. It is not the
breaking point some assert it to be.
The AGs' proposal also avoids some of the pitfalls inherent in
legislation currently being discussed. For example, it will pass
Constitutional scrutiny.
At some point, you have to stand up for some principles like the
First Amendment's protection of commercial speech--a principle that,
according to virtually every constitutional law expert that has
testified before the Judiciary Committee, will be subject to court
intervention if advertising and promotion restrictions of tobacco
products are written into a federal statute.
For example, noted First Amendment practitioner Floyd Abrams has
stated that attempting to codify the existing FDA rule--currently in
held in abeyance pending further judicial proceedings in the Fourth
Circuit Court of Appeals, would run afoul of First Amendment
protection.
By virtually insisting that the Commerce Committee codify the FDA
rule, the Administration is risking a protracted Constitutional battle
over advertising provisions that industry will voluntary go far beyond.
Still others point out that, absent industry agreement by contract
and consent decree, it will be unconstitutional to require so-called
industry lookback penalties if certain tobacco reduction targets are
not met.
Mr. President, these are issues that concern me very much.
They are issues which merit serious study, and then concerted action,
but they should not be stumbling blocks to enactment of a final bill.
I am alarmed.
I see the sands racing through the hourglass as we move toward
adjournment, but I do not see consensus emerging on the shape of
tobacco legislation.
Indeed, I see the Congress increasingly polarized, as members race
into either one of two camps: the ``keep-upping-the-ante'' faction,
those who will ``pile on'' any punitive bill, or the ``minimalist
approach'' contingent.
The result of this polarity is a paralysis which cannot be breached
until we realize we are jeopardizing our effectiveness through
politicization.
Surely there is a middle ground, a basis for legislation which
focuses on our real target--weaning a generation of kids off of
nicotine--not on the politics of punishment.
These political games not only disappoint those we represent, but
also, as I have outlined, punish them as well.
We owe our kids, and we owe their parents, hard-working Americans in
every state, so much, much more.

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