Pack It In

Last June, you will recall, a coterie of state attorneys general, joined by plaintiffs’ lawyers and public‐​health advocates, announced a sweeping “resolution” of state Medicaid suits. The tobacco industry agreed to disgorge $370 billion in monetary damages over 25 years, pay additional penalties if specified reductions in smoking by teenagers didn’t occur, submit to Food and Drug Administration regulation, cease all vending‐​machine sales, and rein in certain marketing practices allegedly targeted at children. In return, the tobacco companies were to be immunized from punitive damages for their past conduct and from new class‐​action lawsuits. Individuals could still sue, but subject to a $5‑billion annual cap on compensatory damages.

Now the McCain bill brings the hoot of government down even harder on the industry’s neck. Like the agreement reached last summer, the new bill would expand FDA control, sharply curtail advertising, and ban vending‐​machine sales. But instead of $370 billion, it would extort from $500 to $600 billion from the industry (estimates vary), raise the cap on compensatory damages from $5 billion to $6.5 billion per year, and increase potential penalties if the reduction in teen smoking doesn’t meet established goals. Most important, Sen. McCain refuses to offer the quid pro quo that the industry most covets: immunity from punitive damages and future class‐​action lawsuits.

This final provision on immunity is commendable. If a smoker is injured, our tort system permits him to seek recovery from those who caused the injury. Yes, legislatures can alter the rules at the margin (e.g., they can permit or eliminate punitive damages), but they cannot cut into the irreducible core of our due‐​process right. When a plaintiff is prevented from suing as a member of a class, when compensatory damages are subject to an upper limit, when those constraints minimize his chances of attracting skilled legal assistance to confront a well‐​financed and competently represented defendant, then that right has been fundamentally compromised. The McCain bill preserves that right.

Bui the rest of the bill is awful. Foremost, there’s the neglected matter of free speech. The McCain bill is an outrageous violation of the industry’s First Amendment right to advertise a legal product. It would ban outdoor and Internet ads, characters like the Marlboro Man and Joe Camel, tobacco logos on non‐​tobacco merchandise, sponsorship of sporting events, even color ads on the back covers of adult magazines; and it would restrict the placement, color, and size of point‐​of‐​sale displays.

It doesn’t take a constitutional scholar to realize that the proposed rules are ridiculous. We treat flag burning and Ku Klux Klan orations as protected speech; we even insulate “gangsta rap” from the censors. But if Tiger Woods shows up wearing a jacket emblazoned with a Joe Camel emblem, our new speech guardians will hold the executives of R. J. Reynolds accountable.

Industry critics point to the impact of tobacco ads on uninformed and innocent teenagers. But the debate is not over whether teenagers smoke; they do. It’s not over whether smoking is bad for them; it is. The real question is whether tobacco advertising can be linked to increases in aggregate consumption. There is no evidence for that link. The primary purpose of cigarette ads, as of automobile ads, is to persuade consumers to switch from one manufacturer to another. Six European countries that banned all tobacco ads have seen overall sales increase–probably because now that the ads no longer appear, neither do the warnings of health risks.

Not only does the McCain proposal offend the Constitution, it also raises questions of influence peddling. Take legal fees. Both the original June settlement and McCain’s updated version resulted from the efforts of a handful of private attorneys, hired on contingency arrangements calling for payment of 10 to 25 per cent of recovered damages.

Those favored members of the plaintiffs’ bar were in a hopeless conflict of interest, serving as government subcontractors wielding the coercive power of the state–with financial incentives geared to the magnitude of their conquest–while simultaneously representing future litigants whose rights have been truncated in the process.

What’s worse, contingency‐​fee contracts were awarded without competitive bidding to attorneys, many of whom had bankrolled state political campaigns. In Mississippi, Attorney General Mike Moore selected his number‐​one campaign contributor to lead the state’s bargaining team. In Texas, Attorney General Dan Morales chose five firms for his multi‐​billion‐​dollar tobacco litigation. Four of the five contributed a total of nearly $150,000 to Morales from 1990 to 1995. And in Maryland, the state’s attorney, Baltimore Orioles owner Peter Angelos, who contributed $235,000 to various Democratic political committees from 1995 through 1997, stood to collect 25 per cent of a $3‑billion payoff–despite losing the state’s case in court. The Democratic governor and attorney general successfully pushed legislation reinstating the case under revised rules that will guarantee victory. Worried about how a $750‐​million payoff might look, the General Assembly reduced Angelos’s fee to a barebones $375 million (a lawyer with a contingency contract ordinarily gets nothing if his case is thrown out).

It’s bad enough that last summer’s settlement would transfer wealth from low‐​income smokers to millionaire attorneys in the form of contingency fees, but that’s only the beginning. McCain has also proposed a $1.10 increase in the price of a pack of cigarettes over five years to provide the $6.5 billion that could be paid out in damages for individual liability’ claims. This new tax is madly regressive: more than half of it will be paid by smokers with annual incomes of less than $30,000; only 1 per cent will be paid by’ smokers who earn $100,000 or more.

Furthermore, if we add $1.10 to the existing excise tax of 53 cents, and then add the 15‐​cent tax increase in the latest budget, that’s a total of $1.78-more than $40 billion annually, assuming no change in the 23 billion packs sold each year. Even with lower sales, there are enough billions in perverse incentives to guarantee a flourishing black market.

When California, Maryland, Michigan, and New York hiked their state cigarette taxes, the result was rampant smuggling–not just from low‐​tax neighboring states, but also from military bases, Indian reservations, even Mexico, with exported cigarettes being smuggled back into the United States. After Canada raised its excise tax, smuggled cigarettes accounted for an estimated 30 to 50 per cent of consumption; Canada was forced to lower the tax in order to keep smuggled cigarettes away from children.

Cigarette taxes are a perverse incentive even leaving black markets aside. While our governments, federal and state, claim they want to reduce smoking and are doing so much to make smokers’ lives difficult, these governments have benefited handsomely from excise‐​tax collections. Therein lies major reason they have been unwlling simply to make cigarettes illegal.

The correct disposition of the McCain bill is the one that Steve Forbes prescribed for the tax code: Kill it, drive a stake through its heart, bury it, and start over. Disputes between private parties cannot be resolved in secret negotiations involving attorneys general seeking to replenish their Medicaid coffers, contingency‐​fee lawyers padding their wallets at public expense, and health groups intent upon imposing their lifestyle choices on the rest of us. It is our courts, not our legislatures, in which the resolution of private dispute should take place. At the very least; the McCain bill should be stamped “Warning: This Legislation Is Dangerous to Your Liberty.”