Price cut cigarette makers file government claim seeking to revoke part of Colorados Proposition EE

Colorado News

Three discount cigarette manufacturers on Thursday filed a federal lawsuit seeking to prevent a key element of Proposition EE from taking effect if the measure on the November ballot is approved by voters. 

The clause would mandate a pack of cigarettes can be sold for no less than $7 starting next year. 

The Liggett Group, Vector Tobacco and Xcaliber International say the so-called minimum price provision unfairly benefits premium tobacco brands, like Philip Morris International, whose parent company, Altria, helped negotiate the language in the ballot measure. 

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Liggett and Vector are both subsidiaries of the Vector Group Ltd. Phillip Morris is the maker of Marlboro cigarettes, one of the world’s most popular brands.

The discount brands claim that the minimum-price provision would hand Phillip Morris and Altria the market share in Colorado by eliminating the entire allure of discount cigarettes — that they are cheaper.

Proposition EE, which raises taxes on cigarettes and other tobacco and nicotine products in Colorado, was placed on the November ballot when lawmakers passed House Bill 1427 in June. The legislation was rushed through in the final days of the 2020 lawmaking term and was negotiated by Altria, Democratic legislators, health advocacy groups and Gov. Jared Polis’ office. 

Altria has traditionally fought tobacco tax increases in Colorado. The company spent more than $16 million to defeat a ballot question in 2017 that sought to increase cigarette taxes. But this year, Altria hasn’t dropped a penny on Proposition EE. 

“Not only is that fixed minimum-price provision unconstitutional under, among other things, the Commerce Clause of the U.S. Constitution, it was rushed through the Colorado General Assembly and presented to the
voters without complying with Colorado’s constitutional requirements,” the lawsuit says.

MORE: Marlboro’s owners negotiated Colorado’s proposed tobacco tax hike — and it could help them dominate the cigarette market

The lawsuit makes the following specific claims: 

  • Proposition EE violates the Commerce Clause because it favors in-state retailers, “imposes an undue burden on interstate commerce by, among other things, interfering with the interstate sale of cigarettes, and causes negative extraterritorial effects on the cigarette market outside of Colorado.” 
  • The minimum-price provision violates the U.S. Constitution’s Due Process Clause by depriving discount cigarette brands of their protected property interests. 
  • The policy violates Colorado law because neither House Bill 1427 nor Proposition EE mention the minimum-price provision in its title. It also violates Colorado’s single-subject rule mandating that legislation can only address one policy. 

Polis, Colorado Attorney General Phil Weiser and the Legislative Council of the Colorado General Assembly are named as defendants in the lawsuit. None of them immediately returned messages seeking comment on Thursday evening.

“The price-fixing component of Proposition EE would not only benefit Philip Morris and hurt value conscious consumers, it was intentionally omitted from the ballot question, leaving Colorado voters in the dark about this unconstitutional proposal,” Nicholas Anson, president and chief operating officer of Liggett Group and Liggett Vector Brands, said in a written statement.

MORE: Read the lawsuit.

The lawsuit isn’t aimed at stopping Proposition EE from passing, but rather is an insurance policy for the discount cigarette brands aimed at blocking the minimum-price provision should the initiative be approved by voters. The legal action also alleges the minimum-price provision was added to House Bill 1427 to placate Altria and ensure they wouldn’t fight the measure. 

Proposition EE, if passed, would impose the minimum-price provision next year. It mandates that a pack of cigarettes can be sold for no less than $7 and a carton for no less than $70.  Then, in 2024, the price floor rises to $7.50 a pack and $75 a carton.

As House Bill 1427 was making its way through the legislature, state Sen. Owen Hill, a Colorado Springs Republican, warned that the minimum-price provision would be problematic. He introduced an amendment to strip it from the policy, but Democrats rejected the change.  

“We really don’t have the constitutional authority to tell stores the minimum amount they can sell (items) for,” Hill said. 

Discount cigarette makers file federal lawsuit seeking to invalidate part of Colorado’s Proposition EE

Lawmakers and health advocacy groups have defended the minimum-price provision. They say it’s aimed at reducing cigarette smoking in Colorado since studies have shown that as prices go up, use declines. They also contend that other states have implemented similar minimum-price policies.

But the discount cigarette brands point to the fact that in other states, the minimum-price provisions maintain market competitiveness by setting the price floors through a retail price formula, not a blanket mandate. 

“Every state that has sought to raise cigarette prices without utilizing an excise tax has done so without conferring a windfall on in-state retailers at the expense of out-of-state companies,” the lawsuit says. States often raise cigarette prices through ‘minimum mark-up laws,’ which preserves relative price differences between cigarette brands and ensures market competition. State minimum mark-up laws are not anti-competitive because they maintain price differences across cigarette brands sold by competitors, instead of mandating a fixed minimum retail price.”

The lawsuit says minimum mark-up laws promote fair trade “by requiring wholesalers and retailers to mark-up cigarette prices by a minimum percentage over the price they paid.”  

Liggett has directed more than $3.6 million toward an issue committee opposing Proposition EE. Xcaliber International has given the committee, called A Bad Deal for Colorado, $100,000. 

Proposition EE explained: How much more cigarettes, nicotine products would cost in Colorado

In addition to imposing a minimum-price provision on cigarette sales in Colorado, Proposition EE would raise taxes on cigarettes and other tobacco and nicotine products dramatically over the next seven years.

A package of cigarettes is currently taxed at 84 cents in Colorado. If the ballot question passes, that amount would jump to $1.94 starting next year. In July 2024, the tax would rise to $2.24 a pack and then to $2.64 a pack in July 2027.

Nicotine products, including vaping devices and fuel, are not currently taxed in Colorado. But under Proposition EE they would be taxed at 30% of the manufacturer’s list price starting next year if voters OK the ballot question. By July 2024, that would rise to 56% of the list price and to 62% in July 2027.

Tobacco products, meanwhile, which are currently taxed at 40% of the manufacturer’s list price in Colorado, would be taxed at 62% of list price starting in July 2027.

The bulk of the revenue that’s slated to be generated by the new taxes is set to go toward expanding preschool access in Colorado, a 2018 campaign promise of Polis and long a goal of state education advocates.

The Colorado Sun also found another provision in Proposition EE that could benefit Altria, one that actually reduces taxes on so-called modified-risk tobacco products, a designation awarded by the Food and Drug Administration. 

MORE: Proposition EE will raise taxes on tobacco products in Colorado — with one very big exception

Only 12 products have that MRTP designation, four of which are manufactured by Philip Morris. The products are part of the company’s IQOS system, which is kind of a cross between a traditional cigarette and a vape device. It works by heating tobacco sticks to the point where nicotine vapor is released, but the tobacco isn’t actually burned.

An IQOS device. (Via Business Wire)

While tobacco products in Colorado are currently taxed at 40% of the manufacturer’s list price, under Proposition EE the tax on modified-risk tobacco products would fall to 35% starting next year and gradually rise to 41% on July 1, 2027. 

Altria has contended that its IQOS system is the company’s future as cigarette use decreases.

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via Straight News https://coloradosun.com/2020/10/15/proposition-ee-lawsuit-liggett-group-altria/

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