Analyst Sees Tobacco Bill Bankruptcy Risk

As the Senate Commerce Committee vowed to complete the outline of a tobacco bill by week’s end, a financial analyst told the panel Tuesday that the administration’s tobacco proposal would be so costly that it could throw at least one of the biggest companies into bankruptcy.

Martin Feldman, an analyst with Salomon Smith Barney, told the committee that the administration’s proposal, which would raise the price of a pack of cigarettes by $1.50, would cost at least $644 billion over 25 years. That is nearly twice the amount in the settlement accepted by the tobacco companies last summer to head off lawsuits by 40 state attorneys general.

And if youth smoking rates failed to decline as fast as required by the administration’s proposal, the tobacco companies would face huge additional penalties. That probably would force R.J. Reynolds into bankruptcy by 2003 or 2004, Feldman said.

Feldman’s testimony could give the committee cover to raise cigarette prices less than Clinton has recommended. Once in bankruptcy, RJR would be highly unlikely to continue to make payments, which are crucial to balancing the federal budget and providing a cushion for domestic spending increases or income tax cuts.

Treasury Department officials, who also testified before the committee, did not directly dispute Feldman’s numbers but they disagreed with some of his assumptions.

Deputy Treasury Secretary Lawrence Summers admitted that the administration’s proposal is “significantly above what is embodied in the attorneys generals’ settlement.”

However, Feldman and Summers disagreed over whether retailers of cigarettes will add more than the price increase mandated by the legislation when they sell the cigarettes.

Feldman asserted that retailers would pass on more than the legislated price increases to make up for the profits lost as a result of lower cigarette sales.

Summers disagreed, saying that wholesalers and retailers would avoid marking up prices excessively.

“When prices are already going up, there’s going to be resistance to further price increases,” Summers said. He noted that if prices were to rise still further, that would discourage more customers from buying cigarettes and take a still bigger bite out of retailers’ profits.

Other economists also differ over how much the industry can afford to pay. “The most important point is that the industry will pass on the $1.50 or whatever the increase is to the consumer in the form of higher prices,” said Jeffrey Harris, an economist at the Massachusetts Institute of Technology.

Harris noted that in 1997--when the cigarette companies were in the midst of settling cases in Mississippi, Florida and Texas--they raised the price of cigarettes by 12 cents a pack after having held the price relatively steady for several years.

“Clearly they were passing on the cost of the settlement and they are going to continue to do the same thing with this settlement,” he said.

The higher prices, however, could lead to a black market in cigarettes, Feldman said. “It’s not more than three years before those black markets kick in very hard.”

Commerce Committee Chairman John McCain (R-Ariz.) said that he plans to try to get a bipartisan consensus among committee members in the next few days. However, he and other committee members said that none of the tough issues had been settled.