Outlook: Congress lights a fire under cigarette deal

THE SMOKE was already rising from the global tobacco settlement reached in the US last June between cigarette manufacturers and state authorities. Now Congress has lit a match under it. By this time next week there may be nothing left but ashes. As the Arizona senator John McCain has piloted the Tobacco Bill through Congress, the financial health warning on the side of the package has grown larger and larger.

Nine months ago the cost of the 25-year deal to industry was set at $368bn. Now it has ballooned to something not much short of $600bn. Of this, $125bn will have to be handed over in the first six years, irrespective of how much worse the market and regulatory climate in the US get for tobacco.

The industry thought it had struck a deal whereby it coughed up the cash and took voluntary steps to wean teenagers off the weed. In return it would get immunity from further legal action and punitive damages for past misbehaviour.

It now transpires that the only limit is on legal payouts exceeding $6.5bn a year, that the settlement will not cover class actions brought by litigants other than state authorities and that it will have to meet manadatory targets for curbing teenage smoking. To cap it all, senators yesterday passed a resolution demanding that no legal protection be afforded to the tobacco industry. It was a non-binding resolution but nevertheless it gives a fair indication of the way the smoke is blowing in Congress.

Faced with this, the industry has sat back, taken a long drag and decided the settlement is not worth a candle. It will legally challenge some of the provisions but the settlement is increasingly looking dead in the water. Investors have understandably become unsettled and share prices have begun to wobble but nowhere near as much as they would have done had the industry indicated it was prepared to accept the new settlement.

BAT, which is number three in the American cigarette market, was already looking at forfeiting most of its US profits to fund the $368m settlement, even with a $1.10 cent hike in a packet of 20. A settlement costing almost twice that would, says BAT, put the industry out of business.

That would be one way of cutting smoking. But it would not help the US government fund the astronomic Medicare bill it already faces to tackle past and present smoke-related illnesses. Smoking kills and there is therefore a lot to be said for Congress playing hardball with the tobacco industry. Particularly since, unlike the situation here, US tobacco taxes do not come remotely close to covering the costs of smoking to the health service.

But there is a point at which Congress will kill the goose that lays the golden egg, to the disadvantage of its own public finances and public health. That point looks near.