Tobacco Quota Buyout
Jasper Womach

Both the House and Senate approved differing tobacco buyout proposals that are part of major tax proposals approved by both chambers (H.R. 4520). Both proposals would eliminate the current price support and production control system that has operated since the 1930s. However, the two bodies proposed different methods of funding the program. The House version would use Treasury funds while the Senate version would impose an assessment on tobacco product manufacturers and importers. Also, the Senate version would give FDA authority to regulate tobacco products.

The Chairman's Mark for Conference Committee of October 4, 2004, largely reflects the House version, but does fund the buyout with an assessment on manufacturers and importers of tobacco products. Total expenditures are limited to a maximum of $10.140 billion. The expenditures are to be made over a 10-year period from FY2005 through FY2014. If domestic cigarette consumption remains at the current level of about 20 billion packs, the cost to manufactures would be about 5¢ per pack each year for 10 years. Remaining Phase II payments of about $2.5 billion from manufacturers to farmers (adopted in conjunction with the Master Settlement Agreement between major manufacturers and states) would terminate.

The Chairman's Mark, like both the House and Senate proposals, eliminates tobacco marketing quotas, acreage allotments, and nonrecourse loan price support authority. It contains no provisions to control how much tobacco might be grown in the future, who could produce it, or where it could be produced. As compensation, the roughly 436,000 current quota owners would be paid $7 per pound (in 10 equal annual installments) on their 2002 basic marketing quotas (totaling about $6.7 billion). Similarly, the roughly 57,000 active producers would be paid $3 per pound on their 2002 effective marketing quotas (totaling about $2.9 billion). Nearly all of the active producers also are quota owners and they would get both payments on that portion of the effective quota they also own.

Active tobacco farmers, and quota owners leasing out the production rights to the active producers, are supportive of a buyout because sales of U.S.-grown leaf tobacco have declined sharply in recent years and are expected to continue declining. The decline is due largely to the federal support program, which mandates a market price that is much higher than the price of foreign produced tobacco. Consequently, termination of price support has been on the policy agenda for several years. Termination of price support would mean a loss of annual quota rental income to landowners. Thus, a buyout of tobacco quotas from landowners and transition assistance for active growers has been supported by producer interests as an acceptable adjustment plan.

The national tobacco marketing quota is the quantity of tobacco all domestic producers are permitted to market each year. For crop year 2004, the sum of the marketing quotas for the various kinds of tobacco is about 800 million pounds (about half the size it was in 1997). The national quotas are allocated among individual farms based proportionally on their history of producing tobacco. If farms with quota are sold, the new owners acquire the quota. Also, farms and/or quota can be leased to other producers. Effectively, lease rates paid for quota are the value farmers attach to the tobacco price support program. In economic terms, the value of the price support program is capitalized into quota prices. The capitalized value and rents will disappear if the quota and price support program are eliminated.

Over time, particularly in recent years, domestic and foreign buyers of tobacco have turned to non-U.S. suppliers. This shift largely is due to the higher prices of U.S. tobacco leaf compared with the lower prices of other large exporters like Brazil, Malawi, and Argentina. With rapidly declining quotas, financially struggling producers have rallied behind the idea of a quota buyout program. The farmers also have joined with the anti-smoking/health organizations seeking legislation that would give the Food and Drug Administration authority to regulate cigarettes. The FDA authority included in the Senate-approved bill was originally introduced as S. 2461 (DeWine-Kennedy) and H.R. 4433 (Davis-Waxman). There is opposition from some cigarette manufacturers, but not all, to granting FDA authority over tobacco, as well from those in Congress who are generally opposed to giving the federal government expanded regulatory authority over private businesses and consumers.

On July 24, 2003, the House Agriculture Committee held a hearing that produced testimony from witnesses representing farmers, product manufacturers, and health organizations.

Comparison of Tobacco Quota Buyout Proposal Adopted by the Senate and House

Senate-passed H.R. 4520 (Grassley, Jumpstart Our Business Strength (JOBS) Act, adopted July 15, 2004, with S.Amdt. 3562, substituting the language of S. 1637 for the House language. S. 1637 was approved by the Senate on May 11, 2004)	House-passed H.R. 4520 (Thomas, American Jobs Creation Act of 2004, adopted June 17, 2004)	Chairman's Mark for Conference Committee American Jobs Creation Act of 2004
Tobacco Market Transition Act (TMTA) of 2004 Subtitle B, Title XI of H.R. 4520 (Chapter 2 of S.Amdt. 3563, and similar to S. 1490, (McConnell). [Sec. 1140-1152]	Fair and Equitable Tobacco Reform Act of 2004 Title VII of H.R. 4520 (similar to H.R. 4033, Jenkins)	Fair and Equitable Tobacco Reform Act of 2004 Title VI of H.R. 4520
FDA Regulation Subtitle A, Title XI of H.R. 4520 (Chapter 1 of S.Amdt. 3563, and identical to S. 2461 (DeWine/Kennedy). Gives FDA regulatory authority over the content and marketing of tobacco products. [Sec. 1101-1132]	None	None
Total Payments and Other Spending Total payments to quota owners and producers are about $11.6 billion. Additional spending of about $0.4 billion. for community assistance, research, administration, and stability programs, and settlement of outstanding loans under the current program. (CRS cost estimates).	Total payments to quota owners and producers are about $9.6 billion. There is no additional spending for community assistance or other activities. (CRS cost estimates).	Total payments to quota owners and producers, as well as costs related to disposition of loan pool stocks, are limited to $10.14 billion. There is no additional spending for community assistance or other activities.
Funding Sources Payments to quota owners and active producers, and other expenses, are to be made from a Tobacco Trust Fund created in the CCC. Money comes from quarterly assessments on product manufacturers and importers. Cigarettes pay 99.409%. [Sec. 1151 (380S)] Remaining Phase II payments of about $2.7 billion for farmers by manufacturers under the MSA would stop.	Funds to make payments are drawn from the general fund of the Treasury, but not to exceed the revenues coming into the Treasury from excise taxes on tobacco products. [Sec. 725] The remaining $2.7 billion in manufacturer Phase II payments to farmers under the MSA would continue.	Payments to quota owners and active producers, and other expenses, are from a Tobacco Trust Fund created in the CCC. Money comes from quarterly assessments on product manufacturers and importers. Cigarettes pay 96.331%. [Sec. 625] Remaining Phase II payments of about $2.5 billion for farmers by manufacturers under the MSA would stop.
Payment Timing Payments to quota owners and producers are made in 10 equal annual installments from 2004 through 2013. Advance payment options are available to owners and producers. [Sec 1151 (380B and 380C)]	Payments to quota owners and producers are made in 5 equal annual installments from FY2005 through FY2009. [Sec. 722(e) and 723(d)]	Payments to quota owners and producers are made in 10 equal annual installments from FY2005 through FY2014. [Sec. 622(e) and 623(d)] Advance payment options are available to owners and producers through financial institutions. [Sec. 624(e)]
Quota Owner Payments Quota owners as of July 1, 2002, are to be paid $8/lb. on marketing year 2002 basic quota, divided into 10 equal payments of 80¢ per pound. [Sec. 1151 (380B)] (Estimated cost = $7.6 billion)	Quota owners as of July 1, 2004, are to be paid in proportion to their 2002 basic quota. Total amount available for payments is $7/lb. times the total basic quota for the 2002 marketing year. [Sec. 721(3) and Sec. 722 (e)] (Estimated cost = $6.7 billion)	Quota owners (numbering about 436,000 (including about 57,000 active producers and 379,000 landlords) as of the date of enactment are to be paid $7/lb. on marketing year 2002 basic quota, divided into 10 equal payments of 70¢ per pound. [Sec. 622] (Estimated cost = $6.7 billion)
Active Producer Payments Traditional producers (numbering about 60,000), who raised tobacco in 2000, 2001, or 2002, are paid $4/lb. on 2002 marketing year effective quota, divided into 10 annual installments of 40¢ per pound. Payments are reduced by 1/3 for each year tobacco was not grown by the producer. [Sec. 1151 (380C)] (Estimated cost = $3.9 billion. Nearly all producers own some quota.)	Farmers who share in the risk of production and are actively engaged in producing tobacco for the 2004 crop year are paid in proportion to actual marketings or quantity considered planted in the 2002 marketing year. Total amount available for payments is $3/lb. times the total marketings in the 2002 marketing year. [Sec. 721(1) and 723(d)] (Estimated cost = $2.9 billion)	Traditional producers (numbering about 57,000), who raised tobacco in 2000, 2001, or 2002, are paid $3/lb. on 2002 marketing year effective quota, divided into 10 annual installments of 30¢ per pound. Payments are reduced by 1/3 for each year tobacco was not grown by the producer. [Sec. 623] (Estimated cost = $2.9 billion. Nearly all producers own some quota.)
Quotas and Licenses Current marketing quotas and acreage allotments are terminated. [Sec. 1141] In future years, a national base acreage and base poundage is established for each kind of tobacco. Poundage permits are divided among only active producers. [Sec. 1151 (380I)]	Marketing quotas and acreage allotments are terminated. [Sec. 711]	Marketing quotas and acreage allotments are terminated. [Sec. 611 and 612] There are no restrictions on who can produce tobacco in the future or where it can be produced.
Price Support Price support loans and no net cost assessments are terminated. [Sec. 1142] Annual assessments of up to 5¢ per pound divided equally between producers and purchasers are used to finance a Tobacco Market Stability Program. [Sec. 1151 (380M)]	Price support loans and no net cost assessments are terminated. [Sec. 712]	Price support loans and no net cost assessments are terminated. [Sec. 612]
Production Controls and Restrictions An new Acreage / Poundage Limitation Program (like the current quota system) allocates tobacco base acres and pounds among only active producers and requires reductions when needed in order to balance supply with demand at reasonable prices. Unlike the current quota program, the new acreage and poundage bases cannot be sold, leased or transferred. [Sec. 1151(380M)]	In 2005 and subsequent marketing years, there are no acreage or quantity limits on production, no restrictions on who can produce tobacco, and no restrictions on the regions allowed to produce tobacco.	In 2005 and subsequent marketing years, there are no acreage or quantity limits on production, no restrictions on who can produce tobacco, and no restrictions on the regions allowed to produce tobacco.
Tobacco Board Establishes a permanent Tobacco Quality Board in USDA to examine domestic production and imports and advise on matters of quality and appropriate production levels. Establishes a permanent Production Board in USDA for each kind of tobacco to advise on the appropriate acreage limitations. [Sec. 1151 (380G and 380H)]	None	None
Other Tobacco Programs The Federal Crop Insurance Corporation is authorized to fund the research and development of insurance for tobacco producers. Funding from an assessment on tobacco producers and purchasers is authorized at a rate of up to 5¢ per pound. [Sec. 1152]	None	None
Community Assistance Makes economic development grants to Maryland ($20 mil.), Pennsylvania ($14 mil.), South Carolina ($50 mil.), and North Carolina ($50 mil). Grants are to be made in equal annual payments over five years. [Sec. 51 (380O)] Makes grants to colleges and universities for research on agricultural (tobacco and tobacco-related) enterprises, technologies, and uses ($12 mil./year for five years = $60 mil.). [Sec. 1151 (380Q)]	None	None

CRS Products

CRS Report RS21642(pdf), Comparing Quota Buyout Payments for Peanuts and Tobacco.

CRS Report RL32619, FDA Regulation of Tobacco Products: A Policy and Legal Analysis.

CRS Report RS20802, Tobacco Farmer Assistance.

CRS Report 95-129, Tobacco Price Support: An Overview of the Program.

CRS Report RL31790, Tobacco Quota Buyout Proposals in the 108th Congress.

CRS Report RL30947(pdf), U.S. Tobacco Production, Consumption, and Export Trends.

Summary of S. 1490 and H.R. 3160 in this briefing book.

Other Resources

Three university-based sites with a focus upon tobacco policy issues are:
NC State University, Tobacco Economics;
University of Kentucky, Tobacco Economics Online;
University of Tennessee, Tobacco Policy and Economics.

The Economic Research Service maintains a Tobacco Briefing Room.

The National Agricultural Statistics Service (NASS) keeps track of production and publishes data by commodity.

Farm Service Agency (FSA) administers tobacco quota and price support loan programs and publishes fact sheets describing program operations along with activity details.

The Foreign Agriculture Service keeps track of tobacco exports and imports by the United States and other countries.

CRS Contact: Jasper Womach (7-7237)

Page last updated October 6, 2004.

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