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Kentucky seeks tobacco-funded revenue stream
Kentucky Correspondent

FRANKFORT, Ky. — In an effort to raise revenue for education, small businesses and the state’s retirement systems, to name a few, Gov. Ernie Fletcher has proposed to end Kentucky’s involvement in the Master Settlement Agreement (MSA) and begin a flat fee of $4 per carton to be paid by tobacco companies on all cigarette sales in the state.

Fletcher, a Republican, first made the recommendation during his State of the Commonwealth address and during his budget address to the General Assembly.

“Kentucky received a bad deal in the MSA,” he said. “Our past Attorney General settled for less than 50 cents on each dollar Kentuckians pay to support the MSA. In contrast, New York settled for $3.65 for each dollar they pay to support the MSA. That’s a great deal … if you live in New York. But for you, my fellow Kentuckians, that’s not fair and it’s not smart.

“I suggest we take a serious look at improving Kentucky’s return on our tobacco sales. If we got our fair share, Kentucky would get over $150 million more each year. And if we got our fair share, we could dedicate more funds to support secondary education, agricultural diversification and our other pressing needs rather than subsidizing governments in other states.”

Fletcher said the new assessment should be made due to declining payments of the MSA and would not risk future payments. It would not be a tax increase.

The proposal specifically earmarked $45 million in small business tax cuts; $40 million for postsecondary education; $25 million for public employee and teacher retirement systems; $19 million for teachers for another instructional day; $10 million for the ag development fund; and additional money for debt service for projects.

Currently the state receives more than $100 million annually in MSA payments due to the landmark 1998 settlement between the major cigarette manufacturers and 46 state attorneys general.

While the fee would bring in additional millions to the state, according to administration officials, executives from Philip Morris, one of the companies involved in the MSA warn legislators that the proposed assessment would endanger Kentucky’s compliance with the national settlement.

In a report from the Associated Press, Philip Morris spokesman Bill Phelps said the proposal would be a breach of the settlement and could be contested in court, though he declined to say whether the company would join any challenge.

He said Kentucky could wind up having the fee struck down and losing the settlement payments, which have totaled about $700 million.

“By trying to get revenue in this way, this has a lot of risk,” Phelps said. “It could put some important things in jeopardy.”

MSA funds have been used for initiatives including public health issues like smoking cessation programs as well as agricultural diversification projects.

Opponents of the new proposal fear a loss of all MSA funds in the event that tobacco companies sue and win.

State Attorney General Greg Stumbo stated in a letter that Kentucky could put millions of dollars at risk if lawmakers choose to opt out of the current agreement in exchange for something else.

The letter was in response to a request by State Rep. Rob Wilkey (D-Franklin,) for an opinion on the matter.

Fletcher’s chief of staff Stan Cave, a contract lawyer, however maintained that Kentucky could continue MSA payments in 2006 by making the new assessment’s effective date Jan. 1, 2007 and that if tobacco companies sue in 2006 and unexpectedly win, the state could then simply continue the current MSA deal.

State Democratic leaders unveiled their own plan last week that would raise $75 million in revenue from tobacco companies.

The plan called for those non-participating tobacco companies that did not take part in the MSA to pay the $4 per carton assessment to the state as opposed to an escrow account.

Those companies were required by the General Assembly to pay into that escrow account in exchange for protection from lawsuits similar to the protection the larger manufacturers received by way of the original MSA. That money has never been available to the state for expenditures.

State House of Representatives Speaker Jodi Richards said the payment agreement would benefit the companies in tax advantages and would provide $20 to $30 million annually for the state.

He estimated that with the combined money already present in the fund, (approximately $15 million) the 2006-08 budget could receive as much as $75 million.

While politics will play a part in what plan, if any will pass the state legislature, it is obvious that the MSA is clearly on the table in exchange for a better deal.

This farm news was published in the February 22, 2006 issue of Farm World.