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Missouri Settles Tobacco Case That Has Cost It Millions Annually

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Missouri stands to recoup millions of dollars in lost tobacco settlement proceeds, but only if the legislature closes a loophole in the state's tobacco law.

This story was updated at 4:13 p.m.

Missouri has settled a dispute over the terms of a multibillion settlement with the big tobacco companies that has cost it tens of millions of dollars over the last dozen or so years.

Attorney General Chris Koster announced the settlement Monday, saying it will allow the state to recoup $50 million it lost in arbitration and preserve millions of dollars in future payments.

The agreement, however, is contingent on Missouri lawmakers passing legislation to update the state’s tobacco law and repeal a loophole that led to the current fix. The legislation would hike the price of cheap cigarettes sold by tobacco companies that did not join the so-called master tobacco settlement in 1998.

Under the master settlement with 46 states, the major tobacco companies agreed to pay at least $206 billion over 25 years to reimburse the states for tobacco-related health costs. Missouri’s proportionate share of the settlement was about 2.3 percent.

The master settlement, however, allowed the companies to reduce their payments if they lost market share and the states did not enforce a provision aimed at preventing smaller companies that did not join the settlement from gaining market share.

An arbitration panel found that Missouri had failed to enforce that provision in 2003, costing the state $50 million that year. Missouri remains the only state that has failed to pass legislation closing the so-called escrow loophole.

While Missouri has received $2.2 billion since 2001 as its share of the master settlement, the lack of legislative action has threatened to cost the state billions more. Under the terms of today’s settlement, Missouri is slated to get an $11 million increase in annual tobacco payments beginning in 2020.

“Recovering $50 million and preserving future payments provides the legislature some certainty going into the next budget cycle and continues to fund the programs that depend on this money,” Koster said in a statement.  “I hope that we are able to work together to protect a significant revenue stream that benefits Missourians.”

As Koster noted, the attorney general’s office for more than a decade has implored the General Assembly to pass legislation to close the escrow loophole. The requests date back to when Gov. Jay Nixon was the attorney general.

Outside observers, however, were skeptical that this year will be any different, despite the deal struck by Koster.

In fact, the current political environment might be one of the least receptive of any in recent years, says Ronald Leone, executive director of the Missouri Petroleum Marketers & Convenience Store Association (MPCA). The association generally sides with the smaller tobacco companies that would be most affected by the so-called allocable share legislation championed by Koster.

Leone argues that closing the loophole would essentially amount to a back-door tax of an additional 67 cents a pack, or a 400 percent increase, on those tobacco companies.

“The way I think about this issue is you have the Democratic Attorney General Koster asking the Republican Legislature to pass a 400 percent tax increase that solely benefits Big Tobacco, hurts consumers and hurts small business, all in an election year,” he says.

Any one of those circumstances would likely make the proposed legislation virtually dead on arrival, Leone says, “but putting them all together, in our opinion, means the bill probably does not have much chance of passage.”

Koster’s announcement also comes against the backdrop of dueling proposals to raise Missouri’s 17-cent-per-pack cigarette tax, the lowest in the nation, via the ballot box this year.

Leone’s group has offered a plan to phase in an increase of 23 cents a pack from 2017-2021.

Another group, Raise Your Hand for Kids, wants voters to approve a 60-cent-per-pack increase phased in over four years. Their proposal also proposes an “equity fee” that aims to address the allocable share issue.

Raise Your Hand for Kids’ executive director, Linda Rallo, also doubts the legislature’s appetite to enact the legislation needed to close the tobacco loophole.

“I’m not sure why this year would be any different from previous years,” she said.

Dan Margolies, editor of the Heartland Health Monitor team, is based at KCUR. You can reach him on Twitter @DanMargolies.

Mike Sherry is a reporter for KCPT television in Kansas City, Mo., a partner in the Heartland Health Monitor team.

Dan Margolies has been a reporter for the Kansas City Business Journal, The Kansas City Star, and KCUR Public Radio. He retired as a reporter in December 2022 after a 37-year journalism career.
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