Tobacco firms get breathing room

Companies no longer have to pay farmers $ 1 billion a year

The tobacco industry is breathing easier after the end of a federal assessment that forced cigarette manufacturers, cigar companies and chew makers to make 10 years of payments to farmers, averaging nearly $ 1 billion annually.

The expiration of the Tobacco Transition Payment Program has bolstered the bottom line of Big Tobacco after years of tax in-

Though the end of the mandated payments on Sept. 30, 2014, went largely unnoticed among industry watchdogs, it was long visible on the horizon for Big Tobacco. “They’ve been anticipating this since the deal was done 10 years ago,” said Blake Brown, an agricultural economist and professor at North Carolina State University. “There was a real cost to manufacturers for this.” That cost has been snuffed out. The USDA declined to release an itemized list of payments made by the Big Tobacco companies to deregulate tobacco farming, citing tax privacy law.

A USA TODAY review of U. S. Securities and Exchange Commission filings, earnings call transcripts, government data and analyst reports reveals the depths of the benefits for the nation’s top tobacco companies after the assessment’s expiration:

Group: The largest U. S. maker of cigarettes, whose Philip Morris USA unit makes the Marlboro brand, is the biggest winner. The company no longer has to make payments that cost it $ 1.1 billion in the final three years of the tax equivalent, according to SEC filings.

American: The second- largest U. S. cigarette manufacturer, maker of the Camel brand, paid about $ 583 million in the final three years of the assessment, according to corporate filings. Reynolds American Chief Financial Officer Andrew Gilchrist recently told investors the policy change “played a significant role” in boosting the company’s finances.

The third- largest manufacturer — which Reynolds American acquired in June — paid about $ 330 million over the final three years of the tax while it was an independent company, according to a public filing.

Representatives for Altria Group and Reynolds American declined USA TODAY’s requests for comment.

President George W. Bush established the system of buyouts when he signed a bill in late 2004 implementing the assessment on tobacco companies.

The plan deregulated the tobacco farming industry, putting an end to a complex Great De- pression- era system in which the government kept crop prices artificially high in part by limiting the amount each farmer could grow.

Farmers received the buyout payments from Big Tobacco to help them deal with the sudden elimination of federal quotas and price controls. They were compensated based on the total pounds of tobacco they were allowed to grow under the previous system. Almost 52% of the nation’s tobacco farmers stopped growing tobacco within a year of deregulation, according to research firm IBISWorld.

NCSU agricultural economist Brown said manufacturers passed the extra assessment along to smokers in the form of higher prices — an estimated 5 cents per pack. About 13.2 billion cigarette packs were sold in the USA in 2014, according to the Centers for Disease Control and Prevention, so 5 cents per pack adds up quickly.

Now that the assessment is gone, tobacco companies will reap the benefits of higher cigarette prices implemented to fund deregulation.

Marty Barrington, CEO of Al- tria Group, hinted this year that the largest U. S. tobacco manufacturer would use the cash to bolster its online strategy and improve its position in the e- cigarette market, among other things.

“There’s lots of places for us to invest in our businesses,” he said when asked about the savings Jan. 30, according to a transcript of the call by Seeking Alpha. “Our goal is to keep our brand franchises strong and relevant, and there’s lots of tools to do that.”

Profit margins for U. S. tobacco makers increased from 18.5% in 2009 to 24.2% in 2014, according to IBISWorld. The industry collected about $ 9.7 billion in profit in 2014, the research firm estimated. Margins will get another boost now that the industry does not have to make payments that averaged $ 960 million a year.