WASHINGTON — A bill approved by the House yesterday that would ultimately reduce by $160 million the tobacco settlement payments that states use to repay tobacco bonds during the next four years should have no ill effect on tobacco bonds, analysts and muni market participants said. Some said the same about a 62-cent federal tax on tobacco products that went into effect this week.
The House voted 298 to 112 to approve the bill that would allow the Food and Drug Administration to regulate tobacco products, with 70 Republicans crossing the aisle to vote in favor of the bill and eight Democrats voting against it. Democratic leaders in the House immediately began pushing yesterday for Senate passage of the bill, which failed in previous sessions to be approved by both chambers.
The bill, sponsored by Energy and Commerce chairman Henry A. Waxman, D-Calif., would allow the federal government to tax tobacco manufacturers and importers to help fund the FDA’s tobacco regulatory activities.
The Congressional Budget Office estimated earlier this month that Waxman’s bill would decrease tobacco tax revenue by $1 billion between 2010 and 2014 due to an expected drop in the consumption of tobacco products. The drop in revenue would cause annual tobacco settlement payments to states to be cut by more than $160 million during the same time period, the CBO said.
“I think it really should be a non-event in the event it does get through” the Senate, said Michael Camarella, a portfolio manager at OppenheimerFunds Inc. “The regulation helps people like Altria [Group Inc.], the largest tobacco company as far as market share … It’s going to hurt the little guys.”
But Camarella noted that the bill may have trouble succeeding in the Senate, where even some Democrats are opposed to it.
The two senators from tobacco-producing North Carolina, Republican Richard Burr and Democrat Kay R. Hagan, have proposed counter-legislation that would establish a separate agency to regulate the tobacco industry. Their bill would also do away with “light” cigarettes or similar product descriptions.
Other muni analysts have agreed that regulations would be helpful, if anything, to tobacco bonds.
Tobacco companies make annual payments to 46 states, the District of Columbia, and five territories under the 1998 Master Settlement Agreement. The payments are made in the spring based on tobacco consumption the previous year. Muni issuers have sold bonds securitized by the payments since 1999. The CBO said states received more than $8 billion in 2008 from the participating tobacco companies.
If approved by the Senate and signed into law by President Obama, the bill would mark the first time the federal government could exert regulatory power over tobacco.
The bill’s consideration came just one day after an additional 62-cent federal tax on cigarettes went into effect, under a law to expand funding for the State Children’s Health Insurance Program by raising the tobacco tax.
Moody’s Investors Service analyst Sally Acevedo wrote in a recent outlook report that the new tax would probably not cause tobacco bond ratings to change, partly because of the structural strength of the bonds.
Camarella agreed, saying, that “a lot of these bonds had declines built into them” and that declines in consumption would be “in line with original expectations.”
But the excise tax could affect ratings in early 2010, according to a report issued this week by Morgan Keegan & Co.
“This could mean a series of downgrades now and possibly another round in a year or two once the full impact of the [tax] increase is apparent. Stress tests incorporate decline assumptions ... but large actual declines outside the stress boundaries may prompt additional downgrades,” wrote vice president and municipal desk analyst Hannah O’Brien-Rupert. But any downward rating action would be presumptive because the impact of the tax won’t be evident until early next year, she said.
