In Hunt for Revenue, It's Big Tobacco vs. Little

It’s big tobacco vs. little tobacco in the effort to smoke out new revenue for the Texas budget.

Large tobacco companies, which fork over half a billion dollars to the state every year as part of a 1998 lawsuit settlement, want small cigarette manufacturers to pay their share. They’re backing a measure on life support in the Texas House that would tax the small manufacturers to raise tens of millions of dollars per biennium — money lawmakers acknowledge would come in more than handy as they slash health care funding to meet a massive budget shortfall.

But the small tobacco companies say they’ve been down this road before, in Texas and other states, and that it’s merely an effort by big tobacco to stub out the competition. They weren’t a part of the Texas tobacco lawsuit because they weren’t engaging in the same misleading practices big manufacturers were accused of, they say, and they shouldn’t be subject to their own personal tax.

The country’s four largest tobacco companies, accused of suppressing years of evidence about the dangers associated with smoking, settled a lawsuit with then-Attorney General Dan Morales in 1998, agreeing to pay Texas more than $17 billion over 25 years — roughly $3 billion of it for public health and smoking prevention funds. Smaller cigarette companies, which at that time made up just a sliver of the industry, were not included in the arrangement. 

Some lawmakers suggest that they should be, and say the only way to even the score — and hold them accountable for the health problems their cigarettes produce — is to further tax them. State Rep. John Zerwas, R-Simonton, said the small manufacturer fee he and Rep. Mark Shelton, R-Fort Worth, have proposed would raise an estimated $50 million over the next two years, a drop in the bucket compared to the multibillion-dollar budget shortfall, but enough to fund desperately needed state services.

“Right now, we’re giving [small manufacturers] a competitive advantage,” Zerwas said. “My opinion is, we should be getting it from all of them.”

The country’s largest cigarette manufacturers agree, and are largely behind the effort. David Sutton, a spokesman for Phillip Morris USA, said that when tobacco companies signed a settlement with the state of Texas, the small manufacturers were “almost nonexistent.” Now, he said, they make up nearly 10 percent of the market — and ought to be paying Texas accordingly.

“The primary objective of the agreement was to provide a revenue stream to Texas from cigarette manufacturers, to reimburse the state for health care costs related to smoking,” Sutton said. “What we’re talking about here is closing a gap, a loophole, in that system.”

Representatives for small tobacco manufacturers — which claim to make up 5 to 7 percent of the U.S. market, not big tobacco’s suggested 10 — say there’s no loophole: Unlike big tobacco, the attorney general’s office never went after them, and they never made a decision to settle. They argue that establishing a special tax or fee that applies specifically to small tobacco manufacturers is unfair, and maybe even unconstitutional.

“If we’re going to talk about money, let’s jack the tax rate up for everyone,” said Ron Hinkle, who lobbies on behalf of several small tobacco manufacturers through the Small Tobacco Coalition. “We’re for fair taxation.”

The coalition argues a new tax would put small manufacturers out of business altogether, curbing revenue to the state via the existing cigarette tax. And Hinkle said that despite what big tobacco companies say, the settlement wasn’t about paying for health care costs — it was about paying for wrongdoing.

“We didn’t commit the same kinds of acts that big tobacco did, lying about ingredients and advertising to children,” Hinkle said. “We’re not going to pay a settlement fee if we didn’t settle.”

Zerwas said that at the end of the day, the debate is really an internal tobacco industry fight. But he said it’s one the state could stand to benefit from. Still, he too has heard there could be some legal issues with specifically taxing one type of manufacturer. And if his measure doesn’t pass out of committee this week, he said, it’s probably dead. By statute, new revenue bills must start in the House.

If lawmakers don’t act, Phillip Morris’ Sutton said, they’re effectively providing a state-sanctioned subsidy for a certain group of cigarette manufacturers. “Ultimately, the person you’re really harming is the Texas taxpayer,” he said.