Capitol Perspectives: Missouri Ballot Initiatives: A Tale of Two Tobacco Taxes

by Mark Hughes

Missouri’s cigarette tax, at 17 cents-per-pack, is the nation’s lowest. This makes the tax an irresistible target for advocates who want to raise money for public uses.

This year two initiative petitions to raise the cigarette tax have been approved by the secretary of state, circulated by supporters and turned in to have signatures verified by local election authorities.

Missourians approved the initiative process in 1908 to give individual citizens more power in self-governance. By gathering enough signatures, it allows proponents to go around lawmakers and decide by popular vote whether a statutory change or constitutional amendment should be adopted.

The tobacco tax proposals targeted for this year’s November ballot provide insight into how the initiative idea has grown beyond its simple original purpose.

At first glance the tax measures appear straightforward enough. One would gradually increase Missouri’s cigarette tax to total a 23-cent-per-pack increase in the year 2021. This would raise about $100 million per year earmarked for transportation infrastructure improvements.

The other measure would gradually raise the tax on all cigarettes to a total increase of 60-cents per pack by 2020. Further, it would add an additional 67 cent-per-pack increase on “certain cigarettes” to raise the tax on these smokes by $1.27 a pack. This proposal, advocated by a group called Raise Your Hands For Kids, would raise about $300 million per year earmarked for early childhood education.

So what’s surprising about citizens circulating petitions to raise taxes on a bad habit to fix roads and help educate kids? Well, both proposals to increase taxes on tobacco are bankrolled largely by tobacco companies. Further, groups one would normally expect to support taxing cigarettes – like the cancer society and heart association – are opposing it. And groups that have previously opposed increasing tobacco taxes – like petroleum retailers – are supporting the smaller tax.

In fairness to these two groups, the health advocates say they are opposing the $1.27 a pack increase because it isn’t high enough and the petroleum retailers say they have only opposed unreasonable tax proposals and this one is reasonable; we’ll take them at their word.

But what is really going on here is a battle for big bucks between Little Tobacco and Big Tobacco.

In 1998, Missouri was one of 46 states that entered into a Master Settlement Agreement with major cigarette makers. This Rembrandt of a legal settlement involved a complex agreement in which states received billions in exchange for not suing cigarette manufactures for liability relating to their allegedly being less-than-truthful about the harmful effects of their product.

This was a great deal for tobacco companies because it limited staggering legal exposure and passed along the cost to buy off the states to their customers through higher cigarette prices. These companies are Big Tobacco.

But what if someone started a cigarette company after the settlement agreement and didn’t have that huge legal exposure? These companies would be Little Tobacco. They could charge less because they didn’t have to buy off states. To address this, the settlement required participating states to make Little Tobacco pay, too. This led to something called the Allocable Share Release loophole. This loophole allows Little Tobacco to dodge paying into a fund intended to equalize the costs relating to Big Tobacco’s higher pack price needed to pay off states.

Missouri has never repealed the ASR loophole. Big Tobacco sued. This year, a settlement was reached recovering $50 million for the state, in exchange for lawmakers passing the repeal. That didn’t happen.

Meanwhile, Big Tobacco’s proposal – which would put an extra 67-cent tax on Little Tobacco’s cigarettes – is facing its own legal challenges. The latest is whether a change an appeals court made to the description after the signatures were collected invalidates the petitions.

Since 2001, Big Tobacco has paid Missouri $2.2 billion to not sue them. They’ve contributed more than $2 million to put the extra tax on Little Tobacco on the ballot.

The courts will ultimately decide whether voters will get to decide. Feel the power?