Blowing Smoke

Cybercast News Service

October 1, 2003

Here's an intriguing study in creative investing. First, the federal government creates an "asset" out of nothing. Then, more than 60 years later, it proposes to buy out holders of the asset it created. The price tag on the buyout is a cool $13 billion. As they say in Washington, it's nice work if you can get it.

In order to guarantee the price of tobacco for Depression-era farmers, the 1938 Agriculture Adjustment Act created a tobacco quota system. Millions of acres were taken out of production and the erstwhile farmers were paid an annual subsidy not to grow tobacco.

Over the years the quotas were passed down from generation to generation like grandma's favorite quilt; lucrative family heirlooms paid for by the American taxpayers. In many cases the inheritors of these government-created assets moved away from the Old South's tobacco belt to distant states where folks wouldn't know a tobacco leaf from a petunia.

Quotas were bought, sold, leased and traded like a commodity. All the while, the tobacco payments kept flowing to the lucky holders of quotas.

Today, hundreds of thousands of tobacco quota-holders live across America from Maine to Hawaii. A bill currently before the Senate, S. 1490, proposes a one-time "buyout" of these quota-holders paid for by slapping the big tobacco companies with $13 billion in new taxes.

The bill, delayed last week, is scheduled for mark-up Thursday in the Health, Education, Labor and Pensions Committee.

Most will agree that it is insane for the federal government to subsidize the growing of tobacco while simultaneously spending millions to preach the "Stop Smoking" gospel; others doubtlessly object to an agriculture policy that pays farmers not to grow crops.

But the proposed tobacco buyout makes even less sense. Approximately 85 percent of quota-holders do not raise tobacco. Indeed, many never have laid eyes on a tobacco barn.

Yet 326,000 holders of a government-created asset will receive one-time payments to give up their quotas. Some of these luck lottery winners live in such celebrated tobacco raising states as Montana (311), Alaska (258), California (4,819), Maine (257) and even Hawaii (102).

Most of these non-farmers inherited their quota or purchased it as an "investment." Only about 15 percent of quota holders—about 60,000 individuals—actually grow tobacco. They would be eligible to take the buyout, but would continue to participate in the government tobacco price support program.

The Senate legislation would pay for this tobacco windfall by taxing the big cigarette companies based on their share of the market. The tobacco companies simply will pass along the buyout tax to consumers.

While the anti-smoking crowd will cheer higher cigarette prices, the practical economic effect is entirely predictable. Higher prices will further stimulate the flourishing black market in cigarettes and provide yet another incentive to the lucrative trade in cigarette smuggling. Higher prices for premium smokes will drive consumers to cheaper brands and imports.

Since the tobacco lawsuit settlement, for example, cheaper imports have increased their market share by 1,000 percent, leading to the continued loss of manufacturing jobs in the tobacco patch, mostly in the South.

The basic question, however, is this: Why should the government buy back an asset it created as a bountiful windfall for a favored few? The holders of tobacco quota have received billions of dollars in taxpayer money over the six decades since the New Deal program was established.

These people have profited handsomely and already have been compensated for their "investment." Why do they now have to be paid to give up something the government bestowed in the first place?

It has been suggested, for example, that the tobacco quota system could be phased out over time, say through a reduction of government payments of ten percent annually over a period of ten years, zeroing out the program in a decade at no cost to consumers and no loss of manufacturing jobs. This would give quota-holders in Honolulu and Helena the time to adjust to the new reality that the free ride is coming to an end.

The politics of the tobacco quota buyout are nearly as noxious. In order to garner Democratic support for a $13 billion giveaway, Republican leaders are prepared to grant the Food and Drug Administration regulatory control over tobacco.

Cigarette giant Philip Morris has caved in to FDA oversight because it already commands almost half of the market and stands to loose little by heavy-handed regulation. Other companies, however, would be put a competitive disadvantage by this "Marlboro monopoly."

Americans should be wary of promised one-time buyout schemes. The 1996 Freedom to Farm Act was supposed to wean farmers off government subsidies, but last year Congress passed a record $248 billion Ag-bill, an 80 percent increase over the bill that was supposed to end subsidies. The tobacco quota buyout smells suspiciously like another boondoggle.

Richard Lessner was the executive director of the American Conservative Union from 2003-2005.