Orrin Hatch

Mr. HATCH

Mr. HATCH. The Senator comes from California, the largest populated State in our Nation. How many people live in California?

Mr. HATCH. Can I ask the Senator from California another question that I think is relevant to her concerns?

Mr. HATCH. Is the Senator concerned about that?

Mr. HATCH. Is the Senator aware of this comment by CBO in April 1998--and I hope this is in the form of a question that is acceptable to the manager of the bill--about black-market cigarettes: Any legislation that would rapidly raise the price of a product by a third or more would almost certainly spawn a black market as people attempted to evade the high prices. Tobacco is no exception. Is the Senator aware of that?

Mr. HATCH. And I would like to ask, isn't it true that the distinguished Senator from California heard the testimony of witnesses saying that if the per-pack price under the Commerce bill goes to $4.50 to $5.50 per pack, there is going to be an extensive black market? Isn't that true?

Mr. HATCH. May I also ask the Senator from California, are you aware of the fact that we have had extensive testimony on this very issue before our Judiciary Committee? I hope this question is fair. I hope that I will be permitted to ask it, under the Senate rules. I surely hope that the manager of the bill will recognize we are going to abide by the rules, if he wants to be a stickler on them. Is it not true that we have had literally hours of testimony on this very issue?

Mr. HATCH. I think that is what I will do, because it seems to me that some of the people around here are afraid to get the facts on this matter. And I have to say that it is highly offensive to have someone come here and suggest that the distinguished Senator from California and I are not trying to get to the bottom of the facts, especially since the facts are so complex here. So I will ask the distinguished Senator from California, isn't it true that you are trying to get to the facts of this matter? Is that right?

Mr. HATCH. May I ask her a question?

Mr. HATCH. Mr. President, could I ask the distinguished Senator from California a question? Do I have the right to do that, under the parliamentary rules here today? If she will----

Mr. HATCH. I am trying to answer that question.

Mr. HATCH. That only went up to 1991.

Mr. HATCH. Who came in and testified about how they threatened him, his life, his family's life, how the city become inundated in organized crime, until they finally had to reduce the size of the excise tax in order to prevent further black marketeering? Remember how he told us his family had to be removed to a safe house? How ordinary citizens could not even go out at night because they were afraid of random gunfire? The distinguished Senator from Massachusetts also showed a chart here today----

Mr. HATCH. There is no question in my mind about it. If we pass this legislation the way it is currently written, we are going to have a black market like you have never seen before. When Canada raised its taxes so dramatically, they found this to be the case. Remember the mayor of Cornwall, Canada----

Mr. HATCH. As the Senator knows, we held extensive hearings on this issue in the Judiciary Committee. The Treasury Department sent up Deputy Secretary Larry Summers, who gave us a five-line piece of paper as the basis for their analysis. When we asked him about whether they had a model, he wasn't able to respond very carefully. There is apparently not much of a model backing up the Treasury Department's assertions in this area. But, on the other hand, we had three of the top analysts from Wall Street who spend all of their time working on tobacco-related issues trying to be able to be accurate in informing their customers, and they had extensive economic modeling done that showed the retail cost per pack of tobacco under the $1.10 bill that we have before us would be somewhere between, as I recall, $4.50 and $5.50 per pack. And if that is so, then the distinguished Senator's concerns about the black market are certainly legitimate and justified. I might add that the Finance Committee last week did not view it as a precedent for the future. But I cannot believe that it is good for the Finance Committee, good for the full Senate, and good for the American people to consider what one Wall Street analyst has projected to be an $861 billion program without the Finance Committee having a meaningful opportunity to study the Treasury Department's estimates of the costs of the program. As chairman of the Judiciary Committee, I tried to get a full explanation of the Treasury model before a hearing that we held on April 30. But, the administration failed to provide us with their model together with a full explanation of their assumptions. And what I can only conclude from that is they did not have a model; perhaps they were just hypothesizing. I hope this is not so. Late the night before the hearing, I succeeded in getting only a one- page summary table that some Treasury and White House staff insisted on calling a model. Let me just say that I hope we could all agree we should not launch a huge new, multi-billion Federal program, with such far-ranging implications, on the strength of a one-page chart. It is also important for me to note that many Wall Street analysts have been calling for a full explanation of the Treasury projections for a few months. Several Wall Street experts have participated in meetings with administration officials and Commerce Committee staff and explained their own models and their own assumptions so this should have been a very open process. In fairness to the Treasury Department, I must say that finally, late on May 12, but only after our hearing that same day where two financial analysts testified--and this was 2 weeks after our hearing in which Deputy Secretary Summers testified--Treasury did provide our Committee with an additional 11 pages of information. For the record, I must note that this still is not everything I have asked them for. For example, Treasury s one-page summary table that they insist on calling a model assumes a 23 percent reduction in cigarette sales from 1998 to 2003, based upon a semilogarithmic demand function with an initial elasticity of minus 0.45. I might not know the difference between a semilogarithmic function and a hole in the ground, but there are experts who know how to assess this information. These experts deserve a chance to analyze this data on something this important. And the fact is, on the evening of April 28, Treasury and the White House staff said they would send over the formula for this function, that they would send it right over. At this meeting, it was explained to my staff that this function gradually reduced the price elasticity as the price climbed. Frankly, this makes sense, because you would expect that as price goes up, there would be fewer and fewer people left who are willing to pay the higher and higher prices. But the administration officials also said that in year 5, for some statistical reason, the Treasury elasticity function would actually increase, under the Commerce bill assumptions. So, while they are saying that as a general matter the elasticity would get slightly lower as price climbed, they were also saying that in year 5, at least, this elasticity would actually grow higher. You can see why anyone would want to study the underlying assumptions for these conclusions very carefully, since elasticity of demand--that is, the responsiveness of individual consumption due to an increase in price--is so important to the writing of this law. Our debate on the floor over the Kennedy amendment calling for a price increase of $1.50 per pack centered on this price elasticity issue. But the formula that was going to come right over from the Treasury never came on April 28, as they said it would. At the April 30 hearing, I renewed this request by asking Deputy Secretary Summers to provide this information with the details of the so-called Treasury model. And, as I said earlier, the Treasury Department did finally send us additional information after our hearing on May 12, but we are still waiting for their semilogarithmic demand function. I have no reason to believe there is anything magical about this information and cannot imagine why it has not been provided. Certainly, it is not like I am asking for some sensitive top-secret security information. We are asking for information to help us understand how to write properly a bill that is being touted as having a $516 billion revenue impact, but in reality which is probably $861 billion, according to those who have developed full, detailed models with assumptions which they are willing to make public in at least two open hearings. So, I have to say the testimony we heard from these financial analysts just completely blows away the Treasury Department testimony that was given, and certainly the 1-page so-called model that they presented to the Committee, and even the 11 additional pages that they gave us which really weren't very helpful. And I have to say I take exception about remarks made hear earlier today suggesting that these financial analysts had a vested interest in killing the McCain legislation because it would help their investors. We did, in fact, discuss this issue with the analysts at our recent hearing. They advised the Committee, and I believe they had no reason to mislead us, that their only vested interest was in providing accurate information to their clients. They have both recommended buying and selling tobacco stocks, depending on the company and the time. The companies they represent do not own tobacco stocks, as was alleged here earlier, at least not in the traditional sense. It is clear that they may hold tobacco stocks for their clients who have purchased them, just as they hold stocks in a myriad of publicly-traded companies, but it is hard to argue that this is ownership of those stocks. That was a little lengthy, but I don't know how else to explain it.

Mr. HATCH. In response to my colleague from California, it is correct. I am a member of the Finance Committee and, of course, on that committee voted against the $1.50 increase at the manufacturers level, not because I would not like to punish the tobacco companies, but because that amount is excessive and in the process will not lead to a bill which can stop youth tobacco use.

Mr. HATCH. I thank the distinguished Senator for her kind remarks. I have listened very carefully to her. There is no question in my mind--not only from my own personal evaluation and study of these issues, but also from conferring with the top constitutional experts in the country, that both the original Commerce bill and the managers' amendment we are now discussing, are unconstitutional in scope and intent. This is especially true with regard to the FDA provisions where it would appear that the advertising restrictions are too broadly conceived to be enforced. Both Larry Tribe, a constitutional expert on the left, and Robert Bork a renowned scholar on the right, have concluded these provisions are problematic and raise constitutional concerns. With regard to any other advertising ban, as embodied in the new title XIV of this managers' amendment, the only way they can go into effect will be if the tobacco companies actually voluntarily consent to these restrictions on advertising. As the distinguished Senator knows, they have not voluntarily consented. Far from it. The companies have said they will fight this bill. This means that if the McCain bill passes in its current form, and thus there is no voluntary consent to the advertising provisions, we will have up to at least 10 years of litigation. During that time, we face the possibility of having no money for our stated purpose of helping reduce youth smoking, no money for smoking cessation, nor for any of the other stated purposes such as biomedical research, settling the state suits, and farmer transition payments. And at the end of 10 years, it will be entirely likely that the tobacco companies will have won their suits because of the constitutional infirmities within this bill. I am just talking about advertising. Then we go to the look-back provisions. There are at least two major constitutional problems with the look-back provisions as written in this bill. One is that they are going to punish these companies even though they don't show fault on the part of the companies when the projected youth smoking reduction targets are not attained. The constitutional experts have said that may constitute a bill of attainder which is expressly prohibited by the Constitution. There are other constitutional infirmities with regard to the look- back provisions. So it doesn't take anybody on the side of tobacco companies 3 minutes to know that if they face the Commerce bill, in which they had no part in drafting, during which they were not even allowed to provide input, for which they gave no consent to waive their constitutional rights, then it is a lot cheaper for them to litigate the matter with a good prospect of winning than to pay over $800 billion in the next 25 years. I might add just parenthetically that by some estimates there could be 1 million young children whose lives will be cut short prematurely because Congress has failed to write a constitutionally sound bill. So the Senator raises very important issues; she raises very important considerations here and very important criticisms of this particular piece of legislation. It really bothers me that many in this body are rushing to ``pile on'' this legislation without trying to bring the tobacco companies onboard, albeit screaming and kicking. Let me state for the record. I have no respect whatsoever for the tobacco companies. I think that their record shows clearly they have lied to the American people for decades. They knew their products were addictive. They knew they caused cancer. They deliberately marketed their products to young children, and then denied it. I would like nothing more than for them to pay a trillion dollars a year. But what I would like even more is for us to endorse a workable, constitutionally-sound new War on Tobacco, and we are not going to do it by writing a bill which fails the constitutional test. Such an approach is destined for failure. I remember clearly when Mississippi Attorney General Mike Moore testified before our committee, not once, but twice. He related that the attorneys general knew all these evil things about the tobacco companies when they were negotiating the settlement last year, they waded through all the relevant documents, and they concluded that the far greater goal was to help a generation of youth from becoming addicted to tobacco than to continue to focus on the companies misdeeds. If the companies broke the law, if anyone in the companies broke any law, they should be punished to the fullest extent possible. Nothing here would preclude that. Nor should it. But I get upset when some suggest that we can help children by thinking up literally every measure we can to punish the tobacco companies and then loading them into one constitutionally-infirm bill. It seems to me it is possible to punish the companies, but at the same time compel them to underwrite financially a new public health program that can do future generations more good than anything we have ever envisioned. We simply can't develop that comprehensive public health approach without the industry's consent, again, however reluctant. I can go on and on. Tomorrow, I plan to go into greater detail on the constitutional infirmities of both the original Commerce Committee bill, which everybody knew was just a vehicle for amendment, and the bill as now amended with the managers' amendment, which is just as bad as the original Commerce bill with regard to constitutional concerns. So I thank the distinguished Senator from California for bringing this out. I also appreciate her working with me to try to resolve these difficulties. And, as my dear friend from California knows, the original settlement on June 20 of last year was for $368.5 billion. All of us gasped for breath when we heard that. We thought, ``Why in the world would the tobacco companies agree to pay $368.5 billion?'' The reason is because they want some limits of liability, even though they will still have abundant liability; they want some finality to the litigation that they face, a predictability that will allow them to make the large payments we envision to underwrite the new public health program we are trying to develop. And so, if we take away even the few aspects of limited liability that are there, there is no chance at all of ever getting the tobacco companies to come on even a modest bill. I thank the distinguished Senator from California for being willing to help cosponsor the bill that we are working on that would require $428.5 billion in payments over 25 years, or $60 billion more than the June 20, 1997 settlement. I believe that if we can limit it to somewhere between $400 billion and $430 billion, and if we can include reasonable limited liability provisions for the companies--limited liability provisions that restrict class actions but do not stop individuals from suing--than I am hopeful we can get the companies to come back on board. I am not sure if this is possible, but I think we ought to try, or the whole program will be lost. And if we get them back on, then this whole matter can work and work to the best interests of children and society as a whole. So I thank my colleague for being willing to work together on this and, of course, for bringing up the points she is raising here today. I hope that at least cursorily answers her questions, and I will be glad to go into much greater detail later.

Mr. HATCH

Mr. HATCH. Will the Senator yield for a question without losing his right to the floor?

Mr. HATCH. The $868 billion is one of the estimates, is it not----

Mr. HATCH. Of Wall Street analysts who have thoroughly developed tobacco models, economic models, and have spent literally years developing these models?

Mr. HATCH. They say that when you extrapolate out the $1.10 price of the Commerce Committee bill--or the managers' amendment as I think we should call it--the actual price tag could range as high as $868 billion, because the $1.10 number is based solely on the manufacturers' level and does not count the wholesale or retail markups or any other factors which could lead to price increases, such as state excise taxes?

Mr. HATCH. I am saying the $1.50 would be even higher, wouldn't it? That is what I am asking.

Mr. HATCH. The $1.50 number is certain to be even higher?

Mr. HATCH. Could I also ask my friend another question? Those who are arguing for a $1.50 price increase are saying there will be no black market, that there will be no smuggling any consequence. Is it not true that after California raised its excise tax in 1988, today they are finding that one out of five packs of cigarettes are contraband today. Is that not true?

Mr. HATCH. Let me just show you this chart in connection with my next question. It is one thing to talk about Norway, Denmark and the United Kingdom as some have in this body. It is entirely another thing to talk about the United States of America where most of the big tobacco companies actually reside and exist. This chart shows U.S. cigarette imports from Canada, 1984 through 1996. You notice it was relatively level here up until 1990, when Canada suddenly increased their excise taxes dramatically. Then, all of a sudden we have imports from Canada going up dramatically. There were U.S. cigarette imports from Canada in 1984, imports which then went back into Canada and sold as contraband at a lower price. Is the Senator aware of that?

Mr. HATCH. The Senator serves on the Senate Judiciary Committee with me, and I believe is fully aware of the hearings, where we discussed the fact that four major law enforcement organizations representing hundreds of thousands of policemen in this country said that if we go to $1.10, which we believe could extrapolate as high as $800 billion, that we would have a dramatic increase in contraband which would spawn all sorts of violence?