From the CORPS: Taking the Handle off the Pump

Mark Ryan is 53 years old. He has been a tobacco products manufacturer since 1992. He is currently in businesses as D&R under the banner of 2 Daughters LLC of Smithfield, N.C. 

Mark Ryan at CORPS

His manufacturing company is in Kenly, N.C., in the heart of tobacco country in that state. He specializes in pipe tobacco and up until recent federal action, he was a major producer of roll-your-own cigarette tobacco. 

But, he says, he is not in the league (or wasn’t) with larger RYO giants, such as Gizeh in Gummersbach, Germany, and even other manufacturers scattered across America, which were flying somewhat beneath the federal radar until recently. 

“There were two big bangs,” says Ryan. 

First, he says, came the SCHIP, or the Children’s Health Insurance Program Reauthorization Act of 2009 (CHIPRA or Public Law 111-3). The law reauthorized the Children’s Health Insurance Program (CHIP).  CHIPRA finances CHIP through the federal fiscal year 2013.  It preserves coverage for millions of children who rely on CHIP today and provides the resources for states to reach millions of additional uninsured children.  This legislation is designed to help ensure the health and well-being of the nation’s children. This, of course, is being done on the backs of tobacco users.

Nobody objects to health insurance for children. But instead of the taxpayers in general, this is hitting smokers specifically. Not everyone is sharing in this misery. 

Because of the SCHIP or CHIPRA, the federal excise taxes imposed from March to April 2009 by the Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau (TTB) made an astonishing jump.

Look at some of these economic hits in a down economy: Small cigars rose from $1.828 per 1,000 to $50.33 per 1,000. Snuff jumped from $0.585 per pound to $1.51 per pound and pipe tobacco went up from $1.0969 per pound to $2.8311 per pound. 

And here is where Ryan drew the line. RYO tobacco soared from $1.0969 per pound to $24.78 per pound. 

“That increase wiped out an entire industry overnight,” says Ryan. His eyes flash and his face reddens when he thinks about the tax. 

He had recognized the warning sign in 2008 and decided to get out of the RYO business. If he had stayed in, at his present manufacturing pace, he says, he would have owed the federal government, “500,000 every two weeks. That just wasn’t sustainable.” 

In fact, his wholesale price just from federal taxes alone on RYO alone would have run up the scale to $31 per pound. 

“I would make $1 per pound at that rate,” he says. 

With the loss of one huge segment of his income, Ryan says he dropped from about 14 employees to 10. He says the increase really hurt those manufacturers known as non-participating manufacturers, or NPMs. 

However, the NPMs may be muddying the waters even more. Some NPMs, which stretch across the nation, have worked around the increases in RYO by putting the tobacco in tins, and calling it pipe tobacco. This holds some dire consequences for pipe tobacco manufacturers in the future. 

In 1998, the Attorneys General of 46 states signed the Master Settlement Agreement (MSA) with the four largest tobacco companies in the United States to settle state suits to recover billions of dollars in costs associated with treating smoking-related illnesses. Four states – Florida, Minnesota, Mississippi, and Texas – settled their tobacco cases separately from the MSA states. 

But left out of this complex legal matrix were the non-participating manufacturers, who opted out of the MSA, supposedly to take their chances with the States Attorneys General, who sued big tobacco in 1998 and won millions upon millions upon millions. 

The definition of the NPMs goes like this: Non-Participating Manufacturers (NPMs) are tobacco companies that choose not to be parties to the MSA. Therefore, MSA provisions do not bind these companies. The NPMs differ from the Participating Manufacturers in that they: 

• Chose not to settle with the states and have not been released from state claims 
• Do not have to make settlement payments to the states 
• Did not agree to restrictions on advertising, marketing, and promotion of cigarettes. 

As described in the Key Provisions section of this guide, the 46 MSA states enacted Escrow Statutes modeled after Exhibit T of the MSA. These Escrow Statues require NPMs to make payments to escrow accounts they collect annual interest on (as it is earned), and can recover if there is no state judgment within 25 years of deposit. (Note: Virginia and North Carolina have enacted legislation that allows NPMs to choose to release escrow money to the state.) 

In 1997, companies that did not join the MSA sold less than 2 billion cigarettes nationwide. By 2003, such companies sold approximately 32 billion cigarettes. 

Ryan says the Attorneys General have one goal in mind: the elimination of tobacco, period.

“They call us merchants of death. They don’t care about our businesses. They don’t care about our families or our employees. They think we are all from the dark side.

“They are making tobacco unmerchantable,” he says. 

And then, Ryan told this story as an illustration. He says he has been part of the MSA from the start, and has attended countless meetings. At many of these meetings with the feds, he learned of the phrase: “taking the handle off the pump.” 

Wondering what that meant, he found out. Here is how it goes: In the summer of 1831 a cholera epidemic hit London.  John Snow, a young medical student apprenticed to a practicing physician, was sent to the coal yards in Killingworth where miners were dying from the disease. There was little Snow could do and over time, more than 50,000 died in Great Britain from the outbreak. 

After years of studying and writing about his view that the cholera germ had to be ingested from either food or water, he was finally able to prove his theory in an outbreak in 1853. He discovered two sets of people who lived in adjacent neighborhoods, drinking from different water sources. 

One neighborhood group got its water from a particularly nasty and heavily sewage-polluted source from the Thames River and the other from a clean source from another water company. Snow also discovered that a number of people who had “drunk from the Broad Street pump” had died of cholera. He recommended that the “handle be taken from the pump.”

The pump handle was removed, and so was the spread of cholera. Snow is known as the father of epidemiology for this discovery.

That, says Ryan is what he has heard at MSA meetings. The feds are taking the handle from the pump of tobacco. 

First came the MSA ruling, which soaked up billions of dollars. Then the feds established harsh tobacco regulations, and then  made it illegal to use credit cards to purchase tobacco and now they are going after the manufacturing base, he says. 

That will, in his view, finish off the tobacco industry. 

You can check out all of the federal excise tobacco tax hikes at http://www.ttb.gov/procedures/2009-1.pdf