The Tobacco Buyout

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. The Act, which includes a range of corporate tax cuts, began as a repeal of an export tax break for U.S. corporations that had been deemed to be in violation of the rules of the World Trade Organization in 2003. The final Act became a vehicle for a range of business tax relief along with simplifying international tax law. Tucked away in the legislation is quite possibly the most historically significant part of the bill. Along with reducing the tax rate on corporations repatriating income from overseas operations, the Act contains a buyout for tobacco quota owners and growers.

A tobacco buyout has been an item of considerable discussion for years. Tobacco growers and their communities have waited as legislation has been presented and subsequently languished in Congress since 1998 after the completion of the Master Settlement Agreement. Outside tobacco communities, however, the issue seems of little relevance. In essence, the tobacco buyout provides quota holders and tobacco farmers with a payment in exchange for their tobacco allotment. In this manner, the quota system can be eliminated, while providing compensation to those who would stand to lose from the change.

The concept of a buyout is not an effort to eliminate tobacco production in the United States, but to shift the U.S. market toward a more global model, with the price of tobacco allowed to rise and fall with global stocks. Currently, U.S. tobacco is marketed above the global price, with domestic leaf earning a premium due to scarcity and quality. During the past decade, tobacco quota amounts have been reduced dramatically, a result of the declining amount of U.S. leaf demanded by tobacco manufacturers. Competition from overseas producers and a decline in domestic tobacco consumption have compounded domestic producers’ difficulties.

 

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The Tobacco Buyout

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