Ky. Legislature defeated plan to fund underfunded state retirement programs with tax on manufacture of cigarettes in Ky.

By Bob Rowland
Where can Kentucky find a viable source of revenue to fulfill its commitment to retired employee pension and health benefits? How about getting the money from taxes collected in Kentucky, but actually diverted to other states through a bad deal with big tobacco companies?

Does this sound complex, too good to be true, or perhaps illegal?  That’s exactly what high paid lobbyists told legislators in order to protect the interests of big tobacco companies, and in the process denied retirees the only viable source of money that would have enabled lawmakers to effectively deal with unfunded pension benefits in 2006.
Over $150 million collected every year on tobacco sales in Kentucky is diverted to wealthy states like New York, Massachusetts and California under the terms of a legal settlement with big tobacco companies.  A proposal in the 2006 legislature would have replaced payments to the settlement with a direct state tax on tobacco manufacturers – all of which would stay right here in Kentucky.  Tobacco companies argued the tax was illegal under the terms of the settlement and pointed to Minnesota where a court had placed a restraining order on that state’s ability to levy a tax on tobacco manufacturers.  Big tobacco companies vowed to keep such taxes tied up in court forever!
Forever lasted only until May 16.  That’s the day the Minnesota Supreme Court ruled the tax was completely legal, and did not violate the terms of the legal settlement or the contract clause of the U.S. Constitution.  In Kentucky, lawyers for Governor Fletcher and Attorney General Stumbo agree on at least one thing – the legal settlement with big tobacco companies does not limit the sovereign power of the state to levy taxes on tobacco manufacturers.
A recent court ruling in the Franklin Circuit court in Kentucky also indicates that tobacco companies required to pay a state tax could deduct such taxes from their payments to the legal settlement. But big tobacco companies still oppose a direct tax on manufacturers because it would end the loopholes that allow them to pay considerably less to the settlement than is required of small independent tobacco companies now operating in Kentucky.

A direct tax on tobacco manufacturers to replace participation in the legal settlement is essentially a tax on the big, wealthy states that have been taking advantage of smaller states since the settlement began in 2000, and on the big tobacco companies that avoid paying their fair share through loopholes in the legal settlement.

Governor Fletcher advocated passage of this tax on tobacco manufacturers, but more important, he proposed using a significant portion of the proceeds to help fund public retirement systems.  Retired public employees should actively support this legislation in future sessions of the General Assembly and lay claim to the extra revenue it produces to supplement the funds already appropriated to the retirement systems from the General Fund. This proposal will be opposed by big tobacco companies, but it can pass with the active support of retirees. 

Failure to effectively deal with unfunded pension benefits places retirees on a collision course with financial disaster. Replacing participation in the legal settlement with a direct tax on tobacco companies is one of the few, and perhaps only, viable sources of funds that can have a meaningful impact on the pressing needs of public retirement systems in Kentucky.  Without this tax on tobacco companies, the unfunded liability crisis will continue to grow.
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Bob Rowland is a member of the KPR.  He currently works as a consultant in Frankfort and is a registered lobbyist for the Council of Independent Tobacco Manufacturers of America.  He can be contacted by email at

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