July 1, 1998

Burning Issues in the Tobacco Settlement: An Economic Perspective

Download Background Paper No. 25

Background Paper No. 25

Executive Summary The tobacco settlement currently being considered by Congress arose from a private settlement reached by the tobacco industry, state attorneys general, and private attorneys in June 1997. The June settlement would have imposed annual payments for three purposes : to settle the state suits, to provide a fund to pay individual claims, and to provide public anti-smoking programs.

Annual payments under the June settlement would have averaged 62 cents per pack of cigarettes and amounted to $1.5 billion at 1996 prices and volumes. Penalties capped at 8 cents per pack would have been imposed on tobacco manufacturers if certain reductions in teenage smoking did not occur. Also, the industry would have been subject to greater FDA regulation and new restrictions on advertising. In return, class action suits, nicotine addiction suits and punitive damages would have been precluded; individual lawsuits would have had an annual cap and been paid from a fund; and state claims would have been settled.

A bill agreed to by the Senate Commerce Committee would have imposed even larger payments, at least $1.10 per pack depending on projected volume in 2003, but the disposition of funds was not determined. Penalties for failing to reduce underage smoking were larger and not tax deductible. The bill capped payments for individual suits but did not provide immunity from various types of lawsuits. Some financial analysts suggested that the total payments would have eventually exceeded $2 per pack.

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