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Native Americans frown on proposed tobacco taxes

By Reuters
Sunday, June 26, 2011 5:30 EDT
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NEW YORK (Reuters) – U.S. municipal bonds backed by payments from cigarette makers on Friday extended a rally sparked by hopes that Big Tobacco and state governments were closer to dividing up nearly $6.5 billion of escrowed funds.

But the draft was bashed by a Native-American tribe which says it would violate its sovereignty by forcing them to pay state fees and taxes on cigarettes sold by tribal stores. Tribal stores can be important economic engines for reservations as many are located in remote areas, advocates say.

U.S. states and tobacco companies, including Marlboro-maker Altria, Reynolds, Lorillard, have for years been fighting over how much market share they lost after agreeing to pay states more than $200 billion in 1998.

Smaller cigarette makers, which signed the accord later and make lower payments, can charge lower prices and still make money. Their market share has risen slightly.

Native-American cigarette-makers and tribal reservation stores kept their traditional pricing edge; many do not charge cigarette taxes. A number of cash-poor states have tried and failed to collect these taxes. New York state, for example, has fought lengthy court battles and drafted numerous plans; experts say it loses as much as $1 billion in revenue a year.

Since Wednesday, when news of a draft memorandum of understanding broke, prices of billions of dollars worth of municipal bonds backed by the tobacco payments have risen sharply. The debt was sold by states, counties and cities.

Municipal Market Data Market Analyst Dominic Vonella said: “Tobacco bonds continue to rally on hopes that money in escrow will free up and to help pay outstanding debt service.”

The national tobacco settlement, which resolved the states’ claims for the health care costs of treating ailing smokers, created an escrow fund for payments Big Tobacco argued it did not owe because of their lost market share.

The states countered that they were owed those payments because they were enforcing their rules aimed at preventing loss of market share.

States and cigarette-companies have been considering a May 25 draft memorandum of understanding that covers the escrow payments.

In a nutshell, the states stand to share $4.2 billion to $5.3 billion, while the tobacco companies could end up with at total of $1 billion to $2 billion, according to Janice Jessen, the communications director for Ho-Chunk Inc, the economic development arm for the Winnebago tribe of Nebraska.

Reynolds, maker of the iconic Camel cigarettes brand, stands to get nearly $420 million, according to the document. David Howard, a Reynolds spokesman, said the company had disputed $3.9 billion of payments. Spokesmen for Altria and Lorillard were not available; nor were details on how much they might get.

The draft memorandum also requires states to “enforce existing excise taxes and (pay) escrow fees on any cigarettes sold by Indian tribes on those reservations,” Jessen said.

“We absolutely believe it’s an attack on tribal sovereignty and therefore illegal,” she said. “It would be catastrophic on tribal sovereignty,” Jessen said.

“The great majority of tribes still rely on just local business and retail to help them survive,” she said. “If we have to pay into the escrow fund, we no longer have the competitive ability to sell against Big Tobacco,” Jessen said.

While the excise taxes would vary per state, the fee for the escrow fund would be the same for all. It would be set at $0.0283581 per cigarette, adding 57 cents per pack, she said. she said.

New York, which has some of the nation’s highest cigarette taxes, has tried to sidestep the issue of tribal sovereignty by forcing wholesalers to charge cigarette taxes when they sell them to reservation stores, which would be allowed to get a certain amount of tax-free smokes for tribal members. But some tribes have sued to block the state’s collections.

A copy of the draft memorandum of understanding, which is being considered by the states and cigarette makers, was posted on the website (http://KillTheMSA.com). A spokeswoman for the National Association of Attorneys General declined comment.

Vonella noted that a block size of California’s Golden State tobacco bonds due 2033 traded at a 7.535 percent yield on Friday. That works out to a 353 basis-point-spread over the prices of top-rated debt, according to Municipal Market Data.

Since June 14, yields on those bonds have fallen about 77 basis points, according to MMD, part of Thomson Reuters.

Mochila insert follows.

Reuters
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