Cites Legal Risks Related To Tobacco Payments
posted June 20, 2005
NASHVILLE — Governor Phil Bredesen today vetoed tobacco legislation, citing concerns by the Attorney General that the bill poses “a substantial and serious threat” to payments the State is receiving under the landmark Master Settlement Agreement with tobacco companies. The veto is Gov. Bredesen’s first.
The legislation would have taxed certain small cigarette manufacturers in order to discourage underage smoking and raise an estimated $12 million for improvements to Tennessee’s healthcare safety net. After vetoing the bill, Bredesen instructed Finance and Administration Commissioner Dave Goetz to replace the lost safety net funds as soon as possible by looking for cuts elsewhere in the Fiscal Year 05-06 budget, which takes effect July 1.
“We’re talking about a relatively modest amount of money that will be fully absorbed with small reductions in other areas of the budget,” Bredesen said. “This veto won’t undermine our efforts to strengthen the healthcare safety net.”
As introduced, SB2002 would have broadly taxed cigarette sales — as well as sales of liquor, wine and beer — in order to raise money for TennCare. The measure stalled in legislative committees, but in late May was amended to focus the tax on certain small cigarette makers, also known as “non-participating manufacturers” under the tobacco Master Settlement Agreement.
The Master Settlement Agreement, a legal agreement the State of Tennessee entered into in fall 1998, requires leading U.S. cigarette makers to reimburse the State for smoking-related illness costs incurred by TennCare. Since then, tobacco companies have paid the State more than $1 billion. In the current fiscal year, the State will receive more than $153 million.
State law requires non-participating manufacturers to set aside limited amounts of money that could go to the State in the future, but does not subject them to other legal restrictions such as limits on advertising. But the Attorney General believes targeted taxation of non-participating companies without increased levies on larger companies could be interpreted as a violation of the Master Settlement Agreement — and that could jeopardize tobacco company payments across the board.
In a June 17 letter to the Governor, Attorney General Paul G. Summers said some large tobacco companies might interpret the new tax as a violation of the Master Settlement Agreement, and could sue to withhold their payments as a result. Even though SB2002 included language designed to render the measure void in the event it was determined to be a violation, Summers said Tennessee’s tobacco payments still “might be delayed several years while we argue this point in court.”
Given the legal risks, Gov. Bredesen chose to veto the legislation. “This is a complex issue that raises a number of complex legal questions,” the Governor said. “This veto falls on the side of caution.”
House Majority Leader Kim McMillan and Senate Democratic Leader Jim Kyle said that, while they are disappointed in Gov. Bredesen’s veto of legislation designed to curb underage smoking, they understood the practicalities of Bredesen’s decision.
“The goal of this legislation was to curb underage smoking by offering price equalization,” said Democratic Leader Kyle. “While I would not suggest that I speak for all Senators, I believe my extreme disappointment is reflective of many in the Senate.”
Kyle noted the legislation passed in the Senate by a vote of 31-0.
The legislation, Senate Bill 2002 and House Bill 1886 required cigarette companies who did not participate in the National Tobacco Settlement and sell their cigarettes at a much lower price, to have an additional fifty cents per pack added to the price. The money the program generated, $12.5 million, was designed to go into the Healthcare Safety Net for individuals who are no longer on TennCare.
“The public policy is sound,” said Majority Leader McMillan. “Curbing underage smoking is very important and putting all of the cigarette companies on the same level is a proven way to achieve this goal.
“Just because we can’t get the all of the attorneys to agree on how the legislation might effect the state doesn’t mean we give up on trying to keep children from buying cheap cigarettes,” McMillan added.
Kyle called upon the Bredesen administration and the state’s attorney general to provide the legislature a complete review of the merits of the state participating in the national master settlement agreement.
“If participation in the master settlement agreement prohibits Tennesseans from discouraging underage smoking then we need to ask ourselves if it is in the state’s best interest to continue participating in the master settlement agreement,” Kyle said.
The announcement also came with budgetary plans from the Bredesen Administration to assure the TennCare Safety Net was going to be fully funded. The bill’s $12.5 in revenue will be made up through cash management until the revenue estimates can be reexamined.
“We appreciate Governor Bredesen’s commitment to the TennCare Safety Net program,” said McMillan. “Making sure the money and programs will be available for people who are losing their TennCare is important to both Democrats and Republicans.”
“The Senate and House leadership worked to achieve broad, bipartisan support,” said Kyle. “It’s unfortunate that our progress on improving public health by preventing underage smoking is being stopped at this stage in the process.”
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