Congress May Snuff Oout Tobacco Subsidy

Source from:  By VANESSA O'CONNELL The Wall Street Journal 09/06/2004

When Congress after Labor Day takes up landmark legislation that would give the Food and Drug Administration regulatory control over cigarettes, the linchpin of a potential deal is a plan to aid struggling tobacco farmers. But negotiations could stumble on one element of the plan: Much of the aid is going to millionaires, country clubs and city dwellers far removed from the tobacco business. They would become beneficiaries because they hold tobacco quotas, or allotments, that are attached to the land they own and permit a specified amount of tobacco production each year. With minor exceptions, farmers who lack quotas can't sell tobacco without risking penalties. A product of a Depression-era subsidy program, the tobacco quota was designed to stabilize a shaky industry by keeping the supply of tobacco leaf in line with demand. Since then, quotas have been handed down with land through families, even after the families moved off the farms. Today, the majority of quota holders are not tobacco farmers. Now they’re in line for a windfall if a federal plan to rescue tobacco growers through a $12 billion "tobacco buyout" becomes law. An estimated 40 percent of the funds would go to nonfarming quota holders under a plan that pays them a set amount for each pound of tobacco their allotment allows them to grow. One such beneficiary is Mary M. Hamilton. The former alumni director for the elite private Brearley School in Manhattan, and her brother, T.A. Morgan Jr., a retired journalist, inherited a quota along with a 1,850-acre North Carolina property. They could receive a total of about $90,000 or more, paid over as many as 10 years. [b]STRANGE BEDFELLOWS[/b] The buyout plan stems from an unlikely alliance of tobacco-state politicians and antismoking advocates formed to push legislation that would give the FDA control over cigarettes. Antismoking advocates and some lawmakers have fought for years for FDA oversight of cigarettes, hoping to create strict new rules for lower-tar, reduced-risk and sweet-flavored cigarettes. The ingredients and makeup of cigarettes aren't regulated at the federal level. Philip Morris USA, the leading cigarette maker and a unit of Altria Group Inc., supports the FDA legislation in the Senate bill. But most other tobacco companies strongly oppose it, saying curbs on advertising would let Philip Morris retain its lead. Supporters of the FDA formed an alliance with U.S. tobacco-state senators to combine new regulation of tobacco with the $12 billion buyout plan. The quota system has fostered a sort of secondary market with mixed results for farmers. Those who don't farm the land lease the quota to those who do. Clifton J. Capps Jr., a grower in Vance County, N.C., said he pays 35 cents to 40 cents a pound, or roughly $3,850 to $4,400 a year, to lease the quota Hamilton and her brother own. Capps wanted to generate more economies of scale than possible under his own small quota. The secondary market lets farmers put together larger acreage, but it also added to their costs. Capps, who leases 10 tobacco quotas, said, "It's getting more difficult to make a profit." About 10,000 farmers own no quotas at all. Under the buyout plan, tobacco production probably would still be restricted to keep prices up but growers would no longer have to pay leasing fees. PLENTY OF CRITICS The buyout's potential windfall for those who don't farm is beginning to draw sharp criticism from opponents of the legislation. An estimated 80 percent to 85 percent of the people who would receive buyout payments don't qualify as growers. "Basically, quota holders make out like bandits," said Richard Wiles, senior vice president at the Environmental Working Group, a Washington watchdog organization. In Kentucky, Virginia, North Carolina and Wisconsin, beneficiaries include country clubs, churches, colleges, universities and high schools that bought or were bequeathed land in tobacco-growing counties, giving them tobacco quotas. They include: McFarland School District in Wisconsin owns a tobacco quota tied to a parcel of land it bought for future development a few years back. The school says it receives about $2,700 in rent a year from a farmer who leases the land, including about $780 for the school's tobacco allotment. Pornographer Larry Flynt and his brother, Jimmy, together with their 86-year-old father, own land in Kentucky with a quota to grow about 600 pounds of burley tobacco in 2003. Grandsons of a tobacco farmer, they left the area without becoming growers. "We got out of the tobacco business and into the porn business," said Jimmy Flynt, president of Hustler Entertainment, the video division of the pornography publishing empire founded by brother Larry, the creator of Hustler magazine. "We walked away from that blood, sweat and tears." The offspring of James Stillman Rockefeller, who died in August, also would benefit from the buyout if enacted. According to the Environmental Working Group, the late Rockefeller owned the right to grow about 16,000 pounds of burley tobacco and about 9,000 pounds of flue cured tobacco. Those rights pass to his heirs. Quota owners were the subject of contentious debate on the Senate floor in July. Sen. Richard J. Durbin, a Democrat from Illinois, characterized quota owners as "the closest thing to being given some title or royalty that you can imagine — because those folks are then entitled to grow tobacco and have special treatment under the law." "I would like to have the benefits go to the farmers," protested Sen. Don Nickles, a Republican from Oklahoma, who voted against the buyout. He said the tobacco allotments are "a government benefit basically which we have given and which has benefited a few." [b]NOT JUST PEANUTS[/b] Other quotas have become political hot potatoes. The 2002 Farm Bill dramatically changed U.S. policy toward domestic production and marketing of peanuts, paying peanut quota holders 55 cents per pound for each pound of quota held. The top 10 percent of peanut subsidy recipients in 2002 collected 62 percent of the payments, according to the Environmental Working Group. Top recipients included John Hancock Mutual Life Insurance Co. Spokesman Stephen Burgay said the company collected $2.2 million for the buyout of the peanut quotas. But the tobacco buyout is far richer. The Senate plan, for instance, would pay tobacco growers $4 per pound for each pound of tobacco grown, while quota holders would receive $8 per pound for each pound of quota held. Those who qualify as growers and quota owners get both payments, or $12 a pound. The payments would be spread over a number of years. The Senate version of the buyout would be financed by cigarette makers, who would pass the costs on to smokers. The House version of the bill has no FDA provision, and it charges its $9.6 billion buyout to the U.S. Treasury rather than to the cigarette makers. The Senate approach may be an easier political sell since taxpayer funds aren't involved. But it isn't embraced by most of the cigarette companies. Reynolds American Inc. said the tobacco buyout would "devour" cigarette manufacturer earnings. Its own estimated obligation if the buyout were enacted is "a shade over $400 million annually," said Tommy Payne, the executive vice president of external relations. That represents nearly half of the roughly $875 million to $925 million in operating income Reynolds currently projects for 2004. The bill is on its way to conference committee after passing the Senate in July. The notion that there should be a federal quota buyout has been around since the late 1990s, but it is only now that it has gained enough support in the Senate to have any realistic chance of congressional passage. Though support for the buyout now seems stronger than ever, the plan could still fall apart. For one thing, the tobacco legislation is attached to a giant, unrelated corporate-tax bill for which the House and Senate versions are substantially different. Both parties want to pass this tax bill, because in its absence there are punitive tariffs on exports. But it's not certain whether the corporate tax bill will make it out of the conference. Enditem