Vice Squad
Thursday, July 15, 2004
An update on the tobacco buyout

As Vice Squad reported a couple of months ago there was a significant controversy about paying the tobacco farmers almost $10 billion to give up a federal quota program that had existed since the Great Depression. The quotas are set each year depending on the demand and supply situation in order to keep up the price of American tobacco. The payment presumably represents the estimated present value of the quota to the farmers. While the distributional effects of the buyout are debatable, standard economic reasoning suggests that the elimination of the quota would reduce price distortions, almost surely improving economic efficiency.
The buyout provision was included in the corporate tax bill passed by the House last month. On Tuesday, however, an amendment to an agricultural spending bill that prohibits the buyout was adopted. Apparently, the amendment passed overwhelmingly, being supported by a coalition of conservative Republicans and anti-tobacco Democrats. Interestingly, what seemed to make these strange bedfellows was the insistence that any buyout should be paid for by the cigarette makers rather than the taxpayers. Assuming that the government is not interested in having cigarette prices decline, this may be a reasonable requirement. The requirement would make sense particularly if the cigarette making business is not highly competitive although it may not be easy to set up a scheme acceptable to all players to assess the cigarette companies the appropriate fees for the buyout.
On Wednesday, an agreement was apparently reached in the Senate about having the cigarette makers pay for the buyout and, in addition, letting FDA regulate the sale and marketing of tobacco products. (BTW, the Senate version of the buyout is $13 billion.) I assume that if this compromise approach is adopted in the Senate, it will eventually have to be negotiated with the House. Vice Squad will keep you posted.


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