Tobacco Market Transition Act of 2002
(H.R. 4753)
“Goode/Boucher/Jones Buyout Bill”

Will Snell
May 2002

On May 16, 2002, U.S. Representatives Goode (I-VA), Boucher (D-VA), and Jones (R-NC) introduced the Tobacco Market Transition Act. This bill contains a buyout to compensate quota owners for the loss of their asset upon termination of the federal tobacco program, provides transition payments to growers, and replaces the existing federal tobacco program with a federally chartered corporation to administer a modified production control/minimum price guarantee tobacco program designed to enhance the price competitiveness of U.S. tobacco. The bill does not contain provisions for Food and Drug Administration (FDA) regulation on tobacco products. A brief overview of the bill follows.

Quota Owner Compensation

• Eligibility: Quota/allotment owners as of July 1, 2002.
• Base Quota: Eligible quota owners will have the option of selecting their 2002 basic quota as their base quota level or the average of basic quota from the 1997, 1998, and 1999 marketing years. Dark tobacco acreage allotments will be converted to poundage by multiplying either the 2002 acreage allotment, or at the election of the allotment holder, the average acreage allotment from the 1997, 1998, and 1999 marketing years, by the 2002 yield, or the average 1997, 1998 and 1999 yield, whichever applies.
• Payment Rate: Eligible quota/allotment owners will be compensated $8.00/lb times their base quota level.
• Timing of Payments: Payments to quota owners will be made by the Tobacco Production Control Corporation (see below) in five equal annual installments during the 2002-2006 period.
• Tax Implications: Quota owner compensation shall be treated as capital gains income for income tax purposes.

Grower Compensation

• Eligibility: Only “active” tobacco growers are eligible for transition payments. “Active” is defined as a producer who provides the Tobacco Production Control Corporation information to demonstrate that he/she planted or is considered to have planted a crop in 2001 or 2002.
• Production Base: Eligible tobacco growers will have the election of selecting 2002 production (marketings ???) or the average pounds produced (marketed ???) for the 1997, 1998, and 1999 marketing years.
• Payment Rate: Eligible tobacco growers will be compensated $4/lb times their production base.
• Timing of Payments: Payments to quota owners will be made by the Tobacco Production Control Corporation in five equal annual installments during each of the 2002-2006 crops years.
• Tax Implications: Grower compensation shall be treated as ordinary income for income tax purposes.
• Death Clause: If a tobacco grower entitled to transition payments dies, the remaining payments shall be transferred to a surviving spouse, or if there is no surviving spouse, payments will be transferred to the estate.

Compensation for Others

• The Tobacco Production Control Corporation shall consider the feasibility to make transition payments to others (e.g., tobacco graders, inspectors, checkers, auctioneers, equipment dealers, warehousemen) who are adversely affected by the termination of the federal tobacco program.

Tobacco Program

• This Act terminates the existing federal tobacco program and replaces it with a program consisting of production licenses, minimum base prices, the continuation of grower-owned cooperatives to purchase eligible tobacco not bought by tobacco manufacturers and dealers, and the allows growers to continue to have the option of purchasing federal tobacco crop insurance.
• The Secretary of Agriculture shall forgive all existing outstanding loans associated with tobacco held in grower cooperatives on the date of enactment of this Act and shall transfer title of these inventories to the Commodity Credit Corporation. Upon enactment of this Act, all No-Net-Cost funds shall be transferred to a Trust Fund (see below)
• The new tobacco program will be administered by a federally chartered corporation called the Tobacco Production Control Corporation, whose members consists of the following Board of Directors:

  • the Secretary of Agriculture
  • two members from each state that produces more than 250 million pounds of tobacco (appointed by the Secretary of Agriculture)
  • one members from each state that produces more than 50 million pounds, but less than 250 million pounds of tobacco (appointed by the Secretary of Agriculture)
  • one member from each state, on a rotating basis, that produces less than 50 million pounds of tobacco (appointed by the Secretary of Agriculture)
  • three members representing flue-cured (appointed by the flue-cured tobacco loan association)
  • two members representing burley (appointed by the burley tobacco loan associations)
  • one member representing other tobacco types (appointed by the non-flue/burley loan associations, on a rotating basis)
  • three members representing the public health community (appointed by Secretary of Health and Human Services)
  • four members representing the domestic tobacco product manufacturers (appointed by the Secretary of Agriculture)
  • one member representing domestic export leaf dealers (appointed by the Secretary of Agriculture)
  • one member responsible for the quality assurance system outlined below (appointed by the Secretary of Agriculture)

• The Tobacco Production Control Corporation duties shall include the following:

  • establish a licensing system for the orderly production and marketing of tobacco in the United States.
  • issue licenses to “active” tobacco producers as defined above, who are prohibited from selling, leasing, or transferring this license (except as part of a lifetime transfer to a spouse or direct descendant engaged in tobacco production).
  • in the case of the licensee’s death, allow for the transfer of the license to the surviving spouse, or if no surviving spouse, to the surviving direct descendants.
  • establish the amount that each licensee may market based on the current formula for determining quotas.
  • establish a system that monitors and assures the quality of domestically produced and imported tobacco.
  • enter into an agreement with the producer-owned loan associations to establish a base price (based on the cost of production) for each kind of tobacco (beginning with the 2003 crops), to arrange for financing and administration of the base price, and receive, process, store, and sell any tobacco placed under loan.
  • conduct a program referendum at the end of the three year period following enactment of this Act if at least 1/3 of the licensees for a specific kind of tobacco request a referendum. If more than ½ of the licensees voting in the referendum oppose the continuation of the program, the Corporation shall conduct a second referendum one year later. If at least ½ of the licensees voting in the second referendum oppose the continuation of the program, the Corporation shall terminate the program.
  • periodically conduct additional referendum to determine if licensees favor continuing the program.

Penalties

• The Secretary of Agriculture may assess penalties (e.g., revocation/suspension of licenses or 100% of the average market price, or both) for any tobacco sold in excess of the amount allowed under the licensing agreement or by an individual without a license.

Funding

• U.S. Treasury create the Tobacco Community Revitalization Trust Fund which shall consist of existing No-Net-Cost funds and other yet-to-be determined funds appropriated to the Trust.
• Funds in the Trust will be available to finance the quota buyout, grower transition payments, costs associated with forgiving existing loans and transferring inventories to the Commodity Credit Corporation, payments to others adversely affected by the elimination of the federal tobacco program, costs encountered by the Tobacco Production Control Corporation, loan associations, and the Secretary of Agriculture in administering the new program.
• The Trust Fund will be administered by the Tobacco Production Control Corporation.

Note: While the exact cost of this buyout proposal is somewhat uncertain given the options quota owners and growers have on selecting base years, and potential funding to others, it is very clear that a significant amount of alternative funding sources beyond No-Net-Cost funds will be needed to fund this Act.

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