Gubernatorial candidate Chris Koster right about $50 million on the line with tobacco loophole

As part of his campaign to become Missouri’s 56th governor, Chris Koster tweeted a statistic about something he has been working to accomplish during his time as attorney general: closing the tobacco loophole.

In his tweet, Koster called upon the legislature to #FixTheLoophole, which he says will save Missourians $50 million.

The so-called tobacco loophole is money the state hopes to get from five big tobacco companies if it takes a tougher line with smaller ones.

We looked into whether $50 million is really on the line.

Tobacco background

We reached out to the Koster campaign to find out what closing the loophole entailed. We heard back from David Turner, a spokesman for the Missouri Democratic Party.

Turner told us that the tobacco loophole arose in 1998 as part of a master settlement agreement between the attorneys general of 46 states, along with Washington, D.C., and five U.S. territories, and the five largest tobacco companies in the U.S.

The states had sued the tobacco companies for selling cigarettes which they knew caused cancer, emphysema and other diseases. The attorneys general wanted to recover the cost of caring for those people.

The settlement said that in exchange for dropping the lawsuits, the states would receive roughly $10 billion dollars a year, essentially indefinitely. The annual payment to Missouri is about $130 million.

As part of the deal, Missouri passed a law that required all nonparticipating tobacco companies to pay into an escrow fund. This was done in part to ensure that small cigarette makers didn’t gain a market advantage because they would be able to sell cigarettes at reduced prices. 

But there was a catch.

If a state failed to "diligently enforce" the requirement that small companies make escrow payments, and the big tobacco companies lost a set amount of market share as a result, that state would lose a portion of its tobacco settlement money.

According to a state auditor, that’s exactly what happened. The big tobacco companies lost an 8 percent market share from 1997 to 2003. As a result, the companies sued Missouri and other states for violating the settlement.

In 2013, an arbitration panel found that in Missouri, of the 432 million cigarettes sold by nonparticipating manufacturers in 2002, companies made escrow payments on only $102 million. The panel ruled against Missouri and five other states, meaning the Show-Me State had to pay back $70 million from its 2014 payment.

In February, Koster negotiated an agreement with the tobacco companies to return $50 million to Missouri — on the condition the state tighten the rules on the smaller cigarette makers.

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Which brings us to the loophole. Under current Missouri law, the smaller companies can trim the amount they pay into the escrow fund. Missouri is the only state that has yet to take steps to prevent this.

The loophole

The way escrow payments are calculated, small tobacco companies can get most of the money they pay back if they restrict their sales to only a few states.

In order to close the loophole — and return $50 million to Missouri — the legislature would have to pass Senate Bill 1096. The bill would require all nonparticipating manufacturers to either join the master settlement or be subject to modified escrow rules which prevent the companies from gaming the system to keep their escrow money.

SB 1096 has supporters on both sides of the aisle, but it is not without its opponents. Small tobacco companies have been fighting different versions of the bill for more than a decade, calling it a tax on their products and a move on the part of big tobacco to earn more market share at their expense.

SB 1096 has yet to pass either chamber of the General Assembly, and the consequences are already being felt. Because the bill failed to pass before April 15, Missouri can no longer receive the $50 million for 2016. In order to receive the money in 2017, the bill must be signed by Gov. Jay Nixon by June 3.

Taxpayer impact

The loophole is the source of Koster’s $50 million figure, but will recouping the loss actually save taxpayers money?

It certainly has cost the state. In October, Nixon withheld $46.1 million of the state's budget, relying on the passage of SB 1096 to fill the gap. Turner said that money would have gone to the Mental Health Department and the Department of Social Services, among others.

For these programs to be maintained at their initial levels, Turner explained, taxpayers would be forced to cover the money lost in the tobacco arbitration. Gaining the $50 million dollars would allow those programs to remain uncut without costing the taxpayers any additional money.

All things being equal, if the bill passes, taxpayers would win no matter what the state does with the money. If it’s spent on services, citizens get the benefit of $50 million worth of services. If the state cuts spending and lowers taxes, they save money when they file their taxes in April.

And that’s just in 2017. If the loophole isn’t closed, Missouri could lose additional money in the years to come. The big tobacco companies have begun arbitration concerning Missouri’s diligent enforcement of the escrow laws in 2004. If an arbitration panel were to find against Missouri again, the state could be forced to forfeit more money.

If SB 1096 passes, the companies would not seek arbitration for any of the years 2004 to 2014, per Koster’s agreement.

Our ruling

Koster said that closing the tobacco loophole would save Missouri taxpayers $50 million.

The tobacco settlement and the arbitration that followed is complicated, but ultimately, Koster did reach a settlement to return $50 million dollars to Missouri. If the legislature passes SB 1096 by June 3, that money would come to the state in 2017. If it doesn’t, the state could potentially be on the hook for even more.

Any money the state received would be dollars that taxpayers would not have to provide. Taxpayers could get $50 million worth of services or $50 million in tax cuts. Either way, they come out ahead.

We rate this claim True.