408 PART • Leading in Agribusiness

CHAPTER 19 CASE STUDY

IS THE GOVERNMENT ADDICTED TO TOBACCO?
S moking originated in the Americas where tobacco grew wild. Around 46 million Americans are smokers,
with men (24.8 million) slightly outnumbering women (21.1 million); and in the United Kingdom there are
20 million smokers. As a result of legislative action, however, smoking is down among minors.
In response to the U.S. government’s efforts to reduce smoking, in November 1998 the nation’s leading
cigarette manufacturer’s signed a contract called the Master Settlement Agreement (MSA) with the attor-
neys general of 46 states, five U.S. territories, and the District of Columbia. The original tobacco signatories
on this agreement were agribusiness firms: Philip Morris Inc., R.J. Reynolds Tobacco Company, Brown & Wil-
liamson Tobacco Company, Lorillard Tobacco Company, Liggett Group Inc., and Commonwealth Brands Inc.
In the words of Philip Morris Inc., “The tobacco settlement agreements created fundamental changes
in how tobacco products are advertised, marketed, and sold in the United States. The agreements include a
variety of restrictions on the sale and marketing of cigarettes, including prohibiting . . . any action, directly
or indirectly, targeting youth in the advertising, marketing, and promotion of tobacco products.”
It is estimated that this agreement, also known as the multi-state tobacco settlement, will provide
about $246 billion dollars to the states, territories, and District of Columbia over the first 25 years of the
agreement. (Note: The agreement requires that the tobacco signatories will continue to make payments to
the states in perpetuity.)
Pause for a moment. This one agribusiness industry will pay to the United States, and others close to
a quarter of a trillion dollars until 2023 and then continue to pay even after that. This is a significant sum of
money and surely must have a great effect on the industry. It will be instructive to see how the industry and
government have fared over the past decade. Customers are fewer as the proportion of smokers has shrunk.
Smoking is being banned in eating establishments, government offices, and by many other organizations.
Employees frequently have to exit buildings where they work in order to smoke.
So it seems that the original tobacco signers on the agreement have followed the tenets of the agree-
ment, but others are getting creative about trying to capture a share of the “smoker market.” In the United
States, for example, a federal tax loophole offers deep discounts to people who roll their own cigarettes.
However, rolling your own cigarette is self-limiting. It requires skill and experience. Enter technology: some
tobacco retailers have installed “Roll-Your-Own Cigarette” machines. These machines produce a carton of
cigarettes in eight minutes, and the carton could cost half the price of a branded manufacturer’s carton
of cigarettes.
The reason this technology can deliver a carton of cigarettes at half the price has little to do with
technology and everything to do with tax regulations. These cigarettes are made with “pipe” tobacco, not
cigarette tobacco. Cigarette tobacco carries a federal excise tax of $24.78/pound versus pipe tobacco with a
federal excise tax of $2.83/pound. How acceptable is the substitute? One retailer reported a one-hour wait
by customers for their turn at the machine.
Not to be outdone by the retailers, the U.S. federal government ruled that retailers featuring these
machines must obtain “manufacturing permits and pay applicable federal taxes.” Now these 120 stores
must obtain permits from the Treasury’s Alcohol and Tobacco Tax and Trade Bureau, comply with bookkeep-
ing rules, and pay $10.07 federal excise tax per manufactured carton.
There seems to be a “Darwinian” struggle between tobacco retailers, their customers, and the federal
tax officials. It does not stop with machines . . . sometimes definitions work. Sometimes a cigar is a cigar,
but at other times it may be little more than a cigarette. So, in 2009 Congress raised the federal excise tax
on these “little” cigars, which are filtered, generally sweetly flavored products that are similar in size and
shape to a cigarette. These little “cigarette cigars” were taxed at a rate of $10.07/carton. However, some

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 CHAPTER • Groups and Teams 409

manufacturers then responded by increasing the weight of their little cigars to qualify as “conventional”
cigars. Cigars heavier than three pounds per thousand are taxed only $2–$4/carton. These products would
be priced less than cigarettes also. The beat continues . . .
These are not exactly shining examples of compliance and restraint being demonstrated by the tobacco
industry in a broader context than just the “settlement” signers. However, before we vilify the industry, let’s
look at the other side of the “settlement.”
It seems that the “settlement” states were recipients of record amounts of tobacco revenue funds,
$25.1 billion for 2009 (December 9, 2009). At the same time they were spending less to prevent kids from
smoking and to help smokers quit. Only nine states funded tobacco prevention at half the level recom-
mended by the Center for Disease Control; the others funded prevention programs at one-quarter the rec-
ommended level. Only North Dakota funds a tobacco prevention program at the original level.
So what was the purpose of the settlement, if not for health? Could it be taxes? Maybe nicotine is
not the only addictive substance involved in the tobacco industry. Could it be that tax revenues are also
addictive—to governments?44
Case Study Questions
1. What is the impact of anti-tobacco actions (legislation, education, etc.) on organizations other than
those in the tobacco industry?
2. Visit a variety of local businesses and determine what their smoking policies are for employees. What
do your findings suggest?
3. Can, and should, smoking/non-smoking be used as a criterion in hiring? Why or why not?

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Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.