In his WSJ ($) Business World column this week, Holman Jenkins, Jr. addresses the Justice Department’s latest lawsuit against the big tobacco companies, and notes that the public relations benefit of such lawsuits far outweighs any meaningful public benefit:
Were there a single element of human or policy interest in the trial launched by the Justice Department last week, it would be the department’s conspicuous pride in admitting that it had spent an unprecedented $139 million preparing the case. To what end? In its dubious interpretation of racketeering law, the government seeks “disgorgement” of profits earned over half a century from selling cigarettes to smokers who started before age 21 — a newly identified demographic category that Justice calls the “youth addicted population.”
But those 50 years of profits were long ago distributed to shareholders. They won’t be found around the premises in a vault at Philip Morris, er, Altria.
Indeed, just who is the real owner of the big tobacco companies? It might surprise you to find out:
[G]overnment already gets the lion’s share of the proceeds of their continued smoking. Consider: A pack costs about $2.15 at the factory gate, of which the industry’s after-tax profit is about 17 cents. Federal excise tax takes 39 cents, while state taxes range from Virginia’s 37 cents to New Jersey’s $2.73.
Then there’s the additional, and novel, new “tax” imposed by the 1998 settlement with 46 states, which comes to about 50 cents a pack, though no legislator was ever obliged to cast a vote to impose this price hike on smokers.
Bottom line: The industry’s shareholders long ago were reduced to the role of cutouts, allowed to keep collecting a small piece of the pie so politicians can go on posing as scourges of “Big Tobacco” even as government has become, effectively, the “beneficial owner” of the major tobacco companies.
And the public relations benefit to the federal government from these lawsuits also has a rather stark cost:
Revenuers, after all, have imbibed a great deal of free-lunchism from the Campaign for Tobacco-Free Kids, which shouts in one of its press releases: “Raising State Tobacco Taxes Always Increases State Revenues.” Ditto the World Bank, which officially estimates that a 10% tax hike causes only a 4% decline in consumption. The bank goes out of its way to applaud governments like Greece’s and Turkey’s, which get upwards of 10% of their revenue from cigarette taxes.
Of course, a less decorous way of saying the same thing is that governments have learned to be calculating exploiters of the “inelastic” demand of addicted cigarette smokers.
But Mr. Jenkins points out that this ruse likely will not on much longer, but for economic reasons, not good public policy ones:
What might torpedo it politically, if not legally, however, is evidence that the lines are crossing and higher prices are leading to lower revenues.
We’re already there: Revenues under the state settlement have lately begun declining at 4.5% a year, twice as fast as predicted and faster than can be explained by smuggling or smokers switching to renegade brands or roll-your-own.
If this keeps up, we may find out whether the government is really interested in curbing smoking — or in profiting from it.
Read the entire piece. This reminds me a bit of the Texas Republicans’ proposal earlier this year to subsidize state public school finance through an increase in notoriously volatile taxes on gambling within the state. Republicans should be wary that independent voters will figure out that something is terribly skewed about government raising money from activities such as gambling and smoking that it really ought not to be promoting.
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