SENATE BILL RAISES STAKES ON TOBACCO

Industry aghast at $506 billion price tag

After drawn-out negotiations, a key Republican senator announced a tobacco
bill yesterday that would charge the industry about $138 billion more and
impose harsher restrictions than the settlement companies and states
reached in June.

Senate Commerce Committee Chairman John McCain, R-Ariz., unveiled the $506
billion measure that provides broad federal regulation of the industry,
which rejected it as "unworkable."

"It is Punitive. It is totally unworkable," said tobacco industry lawyer J.
Phil CarIton. "If a bill comes out of committee that even approaches this
draft, we will vigorously oppose it."

The bill would raise cigarette prices by $1.10 per pack in five years, give
the government power to regulate nicotine and make the tobacco companies
pay up to $3.5 billion a year in penalties if teenage smoking isn't reduced
by set targets.

Significantly, though, CarIton said tile tobacco companies wouldn't carry
through on their threat to walk away from the negotiations.

"You can't leave town with someone sticking it to you like this," he said.

The draft bill says nothing about the liability limits that the tobacco
companies have demanded in exchange for the payments and for agreeing to
restrict advertising and marketing. That's because the negotiators couldn't
reach agreement on the liability issue. A spokesman said talks would resume
today.

'We've worked long and hard and we're getting close," said Mississippi
Attorney General Michael Moore, the lead state negotiator in last year's
$368.5 billion national settlement and a participant in the Senate
negotiations.

Even without an agreement on liability limits and consent from the
industry, negotiators said they had taken an important step.

"This complex, comprehensive legislation
will serve as a solid foundation
for the debate that lies ahead," said McCain.

But- as the tobacco industry attacked the legislation as too stringent,
public health advocates said it was too weak on the key issue of cutting
underage smoking. They argue that the $1.10 fee would fail to raise
consumer prices by $1.50 per pack, the price hike they maintain is needed
to curtail underage smoking.

"On the issue that matters most, reducing the number of kids who smoke

the bill does not measure up," said former Food and Drug Administration
commissioner David A. Kessler.

A summary of the bill released by the Senate Commerce Committee, which will
vote on it later this week, included these major provisions:

* The price of a package of cigarettes would increase by $1.10 in five
years, and then stay at that level. The increase would be achieved by
imposing a licensing fee as part of the overall industry payments.

* The industry would pay $506 billion over 25 years, although if sales
volume were to fall as anticipated, that number would drop to about $489
billion. The tobacco companies would make an initial payment of $10 billion
and pay an annual fee that would start at $14.4 billion In 1999, rising to
$23.6 billion in 2003. It would stay at that level, with an annual
adjustment for inflation.

* The goal would be to reduce teenage smoking by 15 percent in three years,
30 percent in five years, 50 percent in 7 years and 60 percent in 10 years.

* The industry would pay a penalty for each percentage point by which the
smoking-reduction target is missed. The penalty would be $80 million for
each of the first five percentage points, rising to $180 billion for
percentage points six through 10, and to $240 million for each percentage
point after that. There would be annual cap of $3.5 billion on penal. ties,
which would not be tax deductible.

* The basic FDA law would he amended to give the agency specific authority
to regulate nicotine. Nicotine would be in a category of its own and would
not be considered a drug or a drug delivery device, as some health
advocates had wanted. The FDA could ban nicotine, but a two-year warning
would be required and during that period Congress could overrule the FDA.

* The tobacco companies would pay up to an additional $26 billion into a
fund to help tobacco farmers switch to other crops or other careers.

For Congress, the question of lawsuits against the tobacco industry has
always been the most controversial piece of the settlement.

The June 20 accord would have banned class-action lawsuits against the
tobacco companies for past or future conduct, prohibited punitive damages
for past conduct and capped annual payments for other suits at $2 billion a
year, rising to $5 billion in the ninth year.

The companies say they had to have these protections to provide
shareholders with a level of predictability. They said that without the
limits, they would not make the payments and would not agree to advertising
and marketing restrictions.