**DESCRIPTION OF PRESENT LAW AND PROPOSALSRELATING TO TOBACCO TAX AND TRUST FUNDAND OTHER PROVISIONS**
Scheduled for Consideration

by the

SENATE COMMITTEE ON FINANCE

on May 14, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

May 14, 1998

JCX-35-98

**CONTENTS**

INTRODUCTION     

I.	TOBACCO REVENUE AND TRUST FUND PROVISIONS RELATED TO S. 1415, AS REPORTED BY THE SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TECHNOLOGY	     

	A.	Present-Law Tax and Trust Fund Provisions	     

	B.	Description of the National Tobacco Proposed Resolution	     

	C.	Description of S. 1415, as Reported by the Senate Committee on Commerce, Science and Technology	  

	D.	Description of Proposed Finance Committee Amendment Relating to Tobacco Taxes and Trust Fund	  

II.	OTHER PROVISIONS	   

	A.	Deductions for Health Insurance Expenses	    

B.  Trade Provisions	     

			1.	Ban on distribution of tobacco products produced by child labor

2. Limits on the authority to promote the exportation of tobacco	

3. Report on impact on U.S. international obligations

4. Anti-smuggling Provisions/Prohibition on imports except under a permit
5. Prohibition against sales of tobacco products in duty-free shops or forwarding through or manufacture in foreign trade zones
C. Medicaid Provision	
**INTRODUCTION**

This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of present law and proposals relating to tobacco tax and trust fund and revenue-reduction provisions to be considered by the Senate Committee on Finance ("FinanceCommittee") on May 14, 1998.  The Finance Committee is considering a committee amendmentto be offered to S. 1415, as reported by the Senate Committee on Commerce, Science andTechnology ("Commerce Committee").(2)

Part I of this document is a description of present-law tobacco revenue and trust fundprovisions and the proposed Finance committee amendment to S. 1415 relating to tobacco taxesand trust fund provisions.  Part II is a description of present law and proposals relating to certainother provisions.

**I.  TOBACCO REVENUE AND TRUST FUND PROVISIONS RELATED TO S. 1415, AS REPORTED BY THE SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TECHNOLOGY**

**A.  Present-Law Tax and Trust Fund Provisions**

**Excise taxes on tobacco products**

	Excise taxes are imposed on cigarettes, cigars, chewing tobacco and snuff, pipe tobacco,and cigarette papers and tubes (Code sec. 5701).  In addition, tax will be extended to "roll-your-own tobacco" at the same rates as pipe tobacco, effective on January 1, 2000. These taxes areimposed upon removal of the taxable tobacco products by the manufacturer, or on importationinto the United States.(3)  The current tax rates are shown in the table below.
**Tobacco Product****Tax Rate**Cigarettes:Small cigarettes(4)$12.00 per thousand (24 cents per pack of 20 cigarettes)Large cigarettes$25.20 per thousandCigars:Small cigars$1.125 per thousandLarge cigars12.75% of manufacturer's price, up to $30 per thousandChewing tobacco$0.12 per poundSnuff$0.36 per poundPipe tobacco$0.675 per poundCigarette papers$0.0075 per 50 papersCigarette tubes$0.15 per 50 tubes
	Effective on January 1, 2000, the tax rate on small cigarettes is scheduled to increase by$5 per thousand (to 34 cents per pack of 20 small cigarettes), and the tax rates on other taxabletobacco products are scheduled to increase by proportionate amounts.  Effective on January 1,2002, a further increase of $2.50 per thousand (to 39 cents per pack of 20 small cigarettes) isscheduled to become effective.  (Tax rates on other taxable tobacco products will increaseproportionately on that date as well.)

	Generally, excise taxes on tobacco products that are removed during any semimonthlyperiod must be paid by the 14th day after the last day of such semimonthly period.  Late paymentof tobacco excise taxes is subject to interest charges and penalties in the same manner as the latepayment of other types of taxes.  In addition, a failure to pay penalty equal to 5 percent of the taxdue but unpaid is assessed under section 5761(b).

	Revenues from the current tobacco products excise taxes are deposited in the GeneralFund of the Treasury.

**Tobacco occupational excise tax**

	An annual excise tax of $1,000 per premise generally is imposed on manufacturers oftobacco products, manufacturers of cigarette papers and tubes, and export warehouse proprietors(Code sec. 5731).  The occupational tax is $500 per premise for taxpayers with gross receipts lessthan $500,000.  Revenues from the occupational tax are deposited in the General Fund of theTreasury.

**Penalty excise taxes**

	In addition to excise taxes imposed primarily to raise revenue, the Internal Revenue Code(the "Code") includes several excise taxes imposed as penalties for taking (or failing to take)certain required actions.  Examples of these excise taxes include taxes on excess lobbyingexpenditures by charitable organizations, certain "self-dealing" activities by officers and othersinvolved with private foundations, failures by private foundations to distribute requiredpercentages of income, and numerous regulatory excise taxes imposed with respect to specifiedactivities of qualified pension plans. Present law does not establish any underage smokingreduction goals or impose any penalty excise tax with respect to such goals.

**Overview of Internal Revenue Code Trust Funds**

	Most Trust Funds that are financed with dedicated excise tax revenues are established inthe Code (secs. 9501 et. seq.).  Examples of these Trust Funds are the Airport and Airway TrustFund, the Highway Trust Fund, the Black Lung Trust Fund,  the Aquatic Resources Trust Fund,the Inland Waterways Trust Fund, the Hazardous Substance Superfund, the LeakingUnderground Storage Tank Trust Fund, the Oil Spill Liability Trust Fund, and the Vaccine InjuryCompensation Trust Fund.  Each of these Trust Funds includes provisions dedicating specifiedrevenues to the Trust Fund and provisions approving expenditure purposes of the Trust Fund(generally as those purposes are in effect on the date of enactment of specific authorizinglegislation). The Code also contains general provisions relating to the management of these TrustFunds.  Under present law, there is no Federal Tobacco Trust Fund.

**B.  Description of the National Tobacco Proposed Resolution**

**Payments required of tobacco manufacturers**

	In general

	The National Tobacco Proposed Resolution, dated June 20, 1997, (the "ProposedResolution") is a draft document advanced by a number of State Attorneys General, members ofthe public health community, and a number of large tobacco manufacturers to resolve litigationbetween tobacco manufacturers and the States, to establish a framework for the regulation oftobacco, to fund various initiatives related to tobacco cessation and control, and to establishlimits on the civil liabilities of tobacco manufacturers.  The Proposed Resolution is intended tobe formalized in a Master Settlement Agreement and implemented through legislation and theexecution of a binding, enforceable Protocol.  

	The Proposed Resolution provides for a number of payments to be made by tobaccomanufacturers.  These include an initial, first-year payment of $10 billion, annual paymentshaving an aggregate nominal amount of as much as $358.5 billion over 25 years, and a "look-back surcharge" of as much as $2 billion per year if targets in the reduction of underage smokingare not achieved.

	These payments would be liabilities of those cigarette and smokeless tobaccomanufacturers that join in the resolution.  An alternative system of payments is required frommanufacturers that do not join in the resolution.  In general, a nonparticipating manufacturerwould be required to escrow an amount equal to 150 percent of what would otherwise be itsshare of the annual payment if it were a participating manufacturer.  The escrowed funds wouldbe available for liability claims against such manufacturers.

	All payments made under the Proposed Resolution are proposed to be currentlydeductible in the year of payment.  The Proposed Resolution specifically provides that allpayments made pursuant to its terms will be deemed to be ordinary and necessary businessexpenses for the year of payment, and that no portion will be treated as a fine or penalty or thecost of a tangible or intangible asset.

First-year payments

	The Proposed Resolution would require a lump sum cash payment in the amount of $10billion to be made on the "Statute Signing Date," the date legislation enacting the NationalTobacco Settlement Agreement is signed into law.   Allocation of the $10 billion among thevarious tobacco manufacturers is not provided in the Proposed Resolution.

Annual payments

	The Proposed Resolution would require participating manufacturers to make annualpayments for each calendar year beginning after the date of enactment in the following nominalamounts:
YearNominal amount(billions of dollars)18.529.5311.5414.55 and thereafter15.0
Beginning with the first payment, the nominal amount of each annual payment would beincreased annually for inflation at a rate equal to the greater of 3 percent or the increase in theConsumer Price Index (the "CPI").  The amount of each annual payment further would beadjusted to reflect changes in sales volume compared to a sales volume in a base year of 1996. Up to 25 percent of any reduction in an annual payment to reflect reduced sales volume would bedisregarded to the extent of any increase in industry net operating profits for a similar period.

	A credit against the annual payment equal to 80 percent of any amounts paid as a result ofa participating tobacco manufacturer's civil liability for past conduct would be provided.  As theannual cap on payment of such civil liability is 33 percent of the annual payment, the maximumcredit available against any annual payment would be 26-2/3 percent.

	Rules allocating liability for the annual payments among the various tobaccomanufacturers are not provided in the Proposed Resolution. 

	Annual payments under the National Tobacco Proposed Resolution would be required tobe made by February 15 of the year following the year to which the payments relate.  If, forexample, legislation implementing the Proposed Resolution were to be enacted in September of1998, the first annual payment would be made with respect to 1999, and would be due onFebruary 15, 2000.

Look-back surcharge

	The Proposed Resolution provides for a look-back surcharge to be assessed against theparticipating manufacturers if certain targets for the reduction of underage smoking are not met.  The targets are as follows:
Year afterenactmentReduction in underageuse of cigarettesReduction in underage use of smokeless tobacco5 and 630%25%7,8 and 950%35%10 and thereafter60%45%
In each case, the underage usage of the tobacco product would be measured by the results of theUniversity of Michigan's National High School Drug Use Survey "Monitoring the Future."  Therate of reduction is measured compared to the rate of usage in 1996.  The surcharge is to becalculated by the Food and Drug Administration ("FDA").

	In the case of underage usage of cigarettes, the surcharge would equal $80 million timesthe number of percentage points by which the reduction in teen usage fails to achieve the target. The surcharge could not exceed $2 billion for any year.  The surcharge is reduced to preventdouble counting of persons whose smoking has already resulted in an imposition of the surchargein previous years.  In the case of smokeless tobacco, the surcharge would be determined througha comparable procedure.  Abatement of up to 75 percent of the surcharge would be possible if amanufacturer demonstrates that it acted in good faith, pursued all reasonable available measuresto attain the targeted reductions and there was no evidence of an action taken by themanufacturer that served to undermine the achievement of the targeted reductions.  

	Under the Proposed Resolution, the lookback surcharge would be a joint and severalliability of all of the participating manufacturers.  Primary liability would be allocated among thevarious manufacturers based on their relative sales, as measured by Federal excise tax payments.

**Overview of expenditure provisions**

	The Proposed Resolution includes recommendations regarding the use of a portion of thepayments received from the participating manufacturers.  Generally, these recommendationsinvolve the designation of monies to Trust Funds or specific agencies for purposes related tosmoking cessation and tobacco related research.  The bulk of the funds remaining aftersatisfaction of the recommendations will be paid over to the States.  However, no specific dollaramount of payments to be made to the States is provided in the Proposed Resolution.    

**Other provisions of the Proposed Resolution**

Regulation of the tobacco industry

	The Proposed Resolution would mandate a significant restructuring of how tobaccoproducts are manufactured, marketed, and distributed in the United States. 

Civil liability

The Proposed Resolution would limit any participating manufacturer's exposure to civilliability arising from the manufacture and sale of tobacco products.  All suits brought by theStates and all Castano Civil Actions would be settled legislatively.  Other legal actions would belimited to those brought by  individual plaintiffs.  No class action suits would be allowed. Punitive damages would not be allowed in individual tort actions.  An annual aggregate cap onthe amount that could be required to be paid by all participating manufacturers in any one yearwould be established equal to 33 percent of the annual payment.  Judgments in excess of $1million would be satisfied only if all other judgments can be accommodated under the annualcap.  As noted above, 80 percent of any payments made to tort claimants could be used as acredit against the annual payment.

**C.  Description of S. 1415, as Reported by the Senate Committeeon Commerce, Science and Technology**

**Payments required of tobacco manufacturers**

In general

S. 1415, as reported by the Senate Commerce Committee, would provide for  a number ofpayments to be made by tobacco manufacturers.  These include an initial, first-year payment of$10 billion, annual payments having an aggregate nominal amount of as much as $564.1 billionover 25 years, and a "look-back assessment" of as much as $3.5 billion per year if targets in thereduction of underage smoking are not achieved.  Additional payments would be required to bemade to a Tobacco Community Revitalization Fund and an International Tobacco Control TrustFund. 

	These payments would be liabilities of those cigarette and smokeless tobaccomanufacturers that join in a Master Settlement Agreement with the States implementing the June20, 1997 Proposed Resolution.  An alternative system of payments would be required fromnonparticipating manufacturers, those that do not join in the Agreement.  In general, anonparticipating manufacturer would be required to make payments equal to pay an amountequal to 150 percent of what would otherwise be its share of the annual payment if it were aparticipating manufacturer.

	All payments made under S. 1415, as reported, are proposed to be currently deductible asordinary and necessary business expenses, except for the look-back assessment.  The look-backassessment would be specifically made nondeductible by the bill.

First-year payments

	S. 1415, as reported, would require a lump sum cash payment in the amount of $10billion to be made to the National Tobacco Settlement Trust Fund within 30 days of the date ofenactment.  The allocation of this amount between the participating manufacturers is specified inthe bill, and generally follows the relative capitalization of the participating manufacturers.(5) Interest on late payments would be assessed at the rate of prime plus 10 percent. 

Annual payments

	S. 1415, as reported, would require participating manufacturers to make annual paymentsto the National Tobacco Settlement Trust Fund for each calendar year beginning after the date ofenactment in the following nominal amounts:
YearNominal amount(billions of dollars)114.4215.4317.7421.05 and thereafter23.6
The nominal amount of each annual payment would be increased annually for inflation at a rateequal to the greater of 3 percent or the increase in the CPI, beginning with the fourth year afterenactment.  Beginning with the seventh year after enactment, the amount of each annual paymentwould be further adjusted, either up or down, to reflect changes in sales volume compared to asales volume in a base year of 1996.

	S. 1415, as reported, would not provide for a credit against the annual payment foramounts paid as a result of a participating tobacco manufacturer's civil liability.

	Annual payments under S. 1415, as reported, would be required to be made in three equalinstallments on March 1, June 1, and September 1 of the year to which the payments relate.  If,for example, S. 1415 were to be enacted in September of 1998, the first annual payment wouldbe made with respect to 1999.  One-third of the payment would be due from the industry onMarch 1, 1999; one-third would be due on June 1, 1999; and one-third would be due onSeptember 1, 1999.

	Each payment would be allocated between the participating manufacturers in proportionto their share of tobacco products sold in the domestic market for the most recent availablecalendar quarter, as determined by the Secretary of the Treasury not more than two months, andnot less than one month, before the payment is due.  A civil penalty equal to $100,000 for eachday any annual payment is delinquent would be assessed if the payment was not made within 60days of the date it was due.

	Any participating manufacturer that manufactures and distributes to consumers less than 3 percent of cigarettes in any calendar year, that had resolved tobacco-related civil actions withmore than 25 States before 1998, and that provided to all other States the opportunity to enterinto similar agreements would be exempt from making any annual payment.  Only onemanufacturer is able to meet these standards.   

Look-back assessment

	S. 1415, as reported, provides that a look-back assessment would be imposed on theparticipating manufacturers if certain targets for the reduction of underage smoking are not met.  The targets are as follows:
Year after enactmentReduction in underageuse of cigarettesReduction in underage use of smokeless tobacco3 and 415%12.5%5 and 630%25%7,8 and 950%35%10 and thereafter60%45%
In each case, the underage usage of the tobacco product would be measured by the results of theUniversity of Michigan's National High School Drug Use Survey "Monitoring the Future."  Therate of reduction would be measured compared to the rate of usage in 1996.

	The assessment to the industry would be determined by the Secretary of Health andHuman Services ("HHS") and would be based on a sliding scale that depends upon the number ofpercentage points by which the targeted reduction in underage use is not achieved.  In the case ofcigarettes, the assessment would be $80 million for each of  the first 5 percentage points, $160million for each of the next 5 percentage points, and $240 million for each percentage point inexcess of 10, subject to an annual maximum of $3.5 billion.   These amounts would be indexedfor inflation beginning in the fourth year after enactment. The assessment would be allocated bythe Secretary of HHS among the manufacturers by market share.  Any manufacturer with lessthan 1 percent of market share would be exempt from payment unless HHS determined that suchmanufacturer's brands were used by underage individuals at a rate equal to or greater than themanufacturer's total market share.  In the case of smokeless tobacco, the surcharge would bedetermined through a comparable procedure.  Additional penalties, including removal of theannual aggregation payment limitation, may apply if the District Court for the District ofColumbia determines that a manufacturer has failed to comply substantially with the terms of thelegislation or has taken any material action to undermine achievement of the targets. 

	The surcharge would be assessed by May 1 of the subsequent calendar year and wouldhave to be paid by July 1 of the year in which it is assessed.  HHS would be  authorized toestablish an interest rate of up to three times the prevailing prime rate for late payments.  S. 1415,as reported, does not provide for the abatement of any portion of the surcharge, nor does itprovide for adjustment of the surcharge to prevent double counting persons whose smoking hasalready resulted in an imposition of the surcharge in previous years.  

	S. 1415 specifically provides that the surcharge is not deductible, as an ordinary andnecessary business expense or otherwise, for Federal income tax purposes.  

Other payments

	S. 1415, as reported, would  require additional payments to be made to the TobaccoCommunity Revitalization Fund and the International Tobacco Control Trust Fund.  

	Industry payments to the Tobacco Community Revitalization Fund would equal $2.1billion for each of fiscal years 1999 through 2008 and $500 million for each of fiscal years 2009through 2023.  An amount sufficient to offset certain Department of Agriculture costs related totobacco would be required to be paid in later years.  The industry payment would be allocatedamong tobacco product manufacturers and importers according to market share.  Participatingmanufacturers would be allowed a credit equal to the amount of their annual payment.

	A licensing fee equal to $1.00 per thousand cigarettes manufactured or distributed for saleby a domestic concern either directly or through its foreign affiliates would be assessed to fundthe International Tobacco Control Trust Fund.

**Overview of expenditure provisions**

	S. 1415, as reported, includes provisions requiring the use of a portion of the paymentsreceived from the participating manufacturers.  Generally, these provisions involve thedesignation of moneys to trust funds or specific agencies for various purposes.  Payments of$196.5 billion would be required to be made to the States in installments over 25 years.  Afterthat time, one-half of all annual payments would be transferred to the States.  Certain additionalamounts, including a portion of all surcharge payments, would also be transferred to the States. States that do not choose to resolve their civil actions in accordance with the legislation, or toenter into the Master Settlement Agreement, would not be eligible to receive their share of thesepayments.

**Other provisions of S. 1415, as reported by the Commerce Committee**

Regulation of the tobacco industry

S. 1415, as reported, would mandate a significant restructuring of how tobacco productsare manufactured, marketed, and distributed in the United States.

Civil liability

S. 1415, as reported, would limit any participating manufacturer's exposure to civilliability arising from the manufacture and sale of tobacco products.  All suits brought by theStates, and all Castano Civil Actions, would be settled legislatively.  An annual aggregate cap of$6.5 billion on the amount that could be required to be paid by all participating manufacturerswould be established.  All settlements, judgements and payments are required to be registeredwith the Secretary of the Treasury.  A mechanism to allocate payments between claimants inyears where the total payment would otherwise exceed $6.5 billion would be established byregulation.

**D.  Description of Proposed Finance Committee Amendment Relating to Tobacco Taxes and Trust Fund**

**Increase in tobacco products excise tax rates**

	In lieu of the payments (including the initial $10 billion payment) required of tobaccomanufacturers under S. 1415, as reported by the Commerce Committee, the current Federalexcise tax rate on small cigarettes would be increased by $1.10 effective on January 1, 1999. 

The tax rates on all other taxable tobacco products would be increased proportionately tothe increases specified for small cigarettes.  In addition, the effective date for imposition of taxon "roll-your-own" tobacco and of certain compliance provisions regarding exported cigarettesenacted in 1997 would be accelerated to January 1, 1999, and the compliance provisions wouldbe modified as necessary to conform to similar anti-smuggling provisions of S. 1415, as reported.

	On each January 1 beginning in calendar year 2000, all tobacco excise tax rates would beadjusted for inflation, as measured by changes in the CPI occurring during the 12-month periodending on the preceding August 31.

	Floor stocks taxes comparable to those imposed when tobacco excise tax rates previouslyhave been increased would be imposed on each tax increase date.  Floor stocks taxes would berequired to be paid no later than July 1 of the year of tax increase.

	As stated above in the description of present law, the current tobacco products excisetaxes apply to tobacco products manufactured in, or imported into, the United States.  Solely forpurposes of these increased tax amounts, the term United States would include U.S. possessionsas well as the 50 States and the District of Columbia.  Accordingly, no amount of the increasewould be covered-over to U.S. possessions under Code section 7652. 

**Impose penalty excise tax for failure to meet underage smoking reduction goals**

Both the Proposed Resolution and S.1415, as reported by the Commerce Committee,would establish goals for the reduction of underage smoking and would impose lookback"surcharges" or "assessments" on tobacco manufacturers if these goals are not met.  In lieu of thelookback surcharges or assessments, the Finance Committee amendment would impose a non-deductible penalty excise tax on all manufacturers and importers of cigarettes and smokelesstobacco. 

	All manufacturers and importers of cigarettes and smokeless tobacco would be subject tothe penalty excise tax.  Imposition of this penalty excise tax would be governed by the smokingreduction goals and imposed at the rates specified in S. 1415, as reported by the CommerceCommittee.  In addition, the determination of whether underage smoking goals are met would bedetermined under rules prescribed by the Secretary of the Treasury (in consultation with thePublic Health Service).(6)  Beginning in that year, the Secretary of the Treasury would be directedto publish by February 15 of each calendar year the amount of tax allocated to each cigarette andsmokeless tobacco manufacturer and importer based on their prior year's excise tax liability.

	The penalty excise tax would be payable in full no later than April 1 of each calendaryear.  Cigarette manufacturers and importers would be jointly and severally liable for payment ofthis tax imposed with respect to cigarettes, as provided in the Proposed Resolution and S. 1415,as reported.  Smokeless tobacco manufacturers and importers similarly would be jointly andseverally liable for payment of tax attributable to smokeless tobacco.  Other Code administrativeand enforcement provisions applicable to excise taxes generally would apply to this tax.  

**Deletion of Federal requirements relating to "pass through" of payments**

	Those provisions in S. 1415, as reported by the Commerce Committee, requiring thattobacco manufacturers use their best efforts to pass through to consumers the amount of anypayments on a per unit basis would be deleted.

**Deletion or modification of miscellaneous "fees" contained in S. 1415**

	The provisions of S. 1415, as reported by the Commerce Committee, that impose separate"fees" to support the Tobacco Community Revitalization Trust Fund programs, the "fees" andoperative Trust Fund provisions related to international tobacco control, and the "fees" and "assessments" on nonparticipating manufacturers would be deleted from the bill.

	The Finance Committee amendment would provide that, notwithstanding any otherprovision of law, all charges or user fees imposed under the titles of the bill other than therevenue title must be set in amounts that recover only costs attributable to providing services tothe party paying the fees (i.e., must be true, or cost-based, user fees rather than disguised taxes).

**Establishment of National Tobacco Trust Fund**

In lieu of the four separate Trust Funds provided for under the Commerce Committeetitles of S. 1415, as reported, a National Tobacco Trust Fund (the "Tobacco Trust Fund") wouldbe established in the Treasury Department pursuant to provisions enacted into the Trust Fundprovisions of the Code.  Amounts equal to the net revenues(7) from the changes made by this amendment would be deposited in the Tobacco Trust Fund.(8)  That is, the amounts deposited inthe Tobacco Trust Fund represent monies received by the Treasury after accounting for theprovisions relating to health insurance tax benefits. The balance of the net revenues from theFinance Committee amendment would remain in the General Fund of the Treasury.  TheTobacco Trust Fund further would receive amounts equal to all penalties imposed under S. 1415. Amounts in the Tobacco Trust Fund would be available for expenditure as provided insubsequently enacted appropriations Acts.(9)

	Amounts in the Tobacco Trust Fund generally would be available for expenditure for theprogrammatic purposes established in S. 1415, as reported by the Commerce Committee.	Aseparate account, the State Share Account, would be established in the Tobacco Trust Fund toadminister distribution of  Trust Fund monies to States.  The State Share Account would receiverevenues equal to 40 percent of the total net revenues from the tobacco tax increases.  Theserevenues would not be available to finance any other Trust Fund expenditure purposes.  Stateswould be eligible for payments from the State Share Account and the Tobacco Trust Fundgenerally only if they waived their rights to any State settlements with the tobacco manufacturersor importers.

	Each State would be eligible to receive the portion of the monies appropriated from theState Share Account shown in the table entitled "Distribution of Funds to States" below.  Ingeneral, there would be no requirements or restrictions on the use of funds appropriated to theStates from the Tobacco Trust Fund; however, the Medicaid cost recovery provisions wouldapply to States that use Tobacco Trust Fund payments in their Medicaid programs.  Costrecovery would be waived for States that use Tobacco Trust Fund monies for other purposes.

	Expenditures for all of the referenced purposes would include those purposes as in effecton the date of the Finance Committee amendment's enactment.  Provisions further would beincluded ensuring that no tax revenues are deposited into the Tobacco Trust Fund if any moniesare spent other than as authorized under these provisions.

General administrative provisions applicable to Code Trust Funds would apply to theTobacco Trust Fund, except no interest would accrue on unspent balances in the Tobacco TrustFund.  As with other Code Trust Funds, the Tobacco Trust Fund would not be permitted toborrow from the General Fund.

**Distribution of Funds to States**
StatePercentageAlabama1.237Alaska	0.400Arizona1.709Arkansas0.954California			8.695Colorado		0.990Connecticut		1.548Delaware	0.400D.C.			0.474Florida			4.768Georgia		2.735Hawaii		0.800Idaho			0.400Illinois			3.930Indiana			1.490Iowa			0.932Kansas		0.800Kentucky		1.664Louisiana		1.723Maine			0.800Maryland	1.425Massachusetts		3.802Michigan		3.586Minnesota		1.246Mississippi			1.701Missouri		1.701Montana		0.400Nebraska		0.400Nevada		0.400New Hampshire		0.400New Jersey		3.755New Mexico		0.800New York	          12.812North Carolina		1.977North Dakota		0.400Ohio			4.205Oklahoma		0.800Oregon			1.353Pennsylvania		4.421Rhode Island		0.800South Carolina		1.090South Dakota		0.400Tennessee		2.851Texas			5.930Utah			0.400Vermont		0.400Virginia			1.348Washington	1.726West Virginia		0.782Wisconsin		1.841Wyoming		0.400
**II.  OTHER PROVISIONS**

**A.   Deductions for Health Insurance Expenses**
**Present Law
**In general**

Under present law, the tax treatment of medical insurance expenses depends on whetherthe individual is self employed, an employee with employer-provided health coverage, or anemployee without employer-provided health coverage. For purposes of the tax provisionsrelating to medical insurance expenses, subject to certain dollar limits, premiums for long-termcare insurance generally are treated the same as premiums for health insurance.
**Deduction for health insurance expenses of self-employed individuals**
	Under present law, self-employed individuals (i.e., sole proprietors, partners in apartnership, and more than 2-percent shareholders of S corporations), are entitled to deduct aportion of the amount paid for medical insurance for the self-employed individual and theindividual's spouse and dependents. Self-employed individuals may deduct the amount paid forhealth insurance as follows: 45 percent in 1998 and 1999, 50 percent in 2000 and 2001, 60percent in 2002, 80 percent in 2003 through 2005, 90 percent in 2006, and 100 percent in 2007and all years thereafter.
	The deduction is not available for any month in which the taxpayer is eligible toparticipate in a subsidized health plan maintained by the employer of the taxpayer or thetaxpayer's spouse. This rule is applied separately to long-term care insurance and healthinsurance. In addition, no deduction is available to the extent that the deduction exceeds thetaxpayer's earned income from the trade or business with respect to which the health insurance isprovided. Expenses for health insurance in excess of the deductible amount may be taken intoaccount in determining whether the individual is entitled to an itemized deduction for medicalexpenses. The deduction does not apply for self-employment tax purposes.
**Exclusion from income and wages for employer-provided health care**
	Under present law, employer contributions to an accident or health plan, includingemployee salary reduction contributions under a cafeteria plan, are excludable from anemployee's income. This exclusion for employer-provided health coverage also generally appliesto coverage provided to former employees. In the case of a self-insured medical reimbursementplan, the exclusion is conditioned on the coverage being provided under a plan meeting certainnondiscrimination requirements. Insured health plans are generally not subject tonondiscrimination rules. Employer-provided accident or health coverage is generally excludablefrom wages for employment tax purposes without regard to whether the coverage is provided ona nondiscriminatory basis.
**Itemized deduction for medical expenses**
Under present law, individuals who itemize deductions may deduct amounts paid duringthe taxable year, including expenses for medical insurance (if not reimbursed by insurance orotherwise) for medical care of the taxpayer, the taxpayer's spouse, and dependents, to the extentthat the total of such expenses exceeds 7.5 percent of the taxpayer's adjusted gross income("AGI").
**Description of Proposal**
The proposal would permit all individuals (including self-employed individuals) who arenot eligible to participate in an employer-subsidized health plan to deduct 100 percent of theamount paid for insurance which constitutes medical care for the individual, the individual'sspouse and dependents. The deduction would not apply to amounts paid by the individual forMedicare Part B premiums. The deduction would apply to premiums for long-term careinsurance (subject to the present-law limits).
	As under the present-law self-employed health deduction, the deduction would not beavailable for any month in which the individual is eligible to participate in an employer-subsidized health plan maintained by an employer (or former employer) of the individual or theindividual's spouse. This rule would be applied separately to long-term care insurance and healthinsurance. An employer subsidy would include pre-tax contributions through salary reduction.An individual with health care continuation coverage (under sec. 4980B of the Code) would notbe considered to be receiving employer subsidized health care if the employee is charged at least100% of the applicable premium as defined in section 4980B.
	Any amount taken into account for purposes of this deduction could not be taken intoaccount for purposes of the itemized deduction for medical expenses. The deduction would notapply for self-employment tax purposes. 
**Effective Date**
The proposal would be effective for taxable years beginning after December 31, 1998.
**B.  Trade Provisions**

**1.	Ban on distribution of tobacco products produced by child labor.**

	Present Law: Section 307 of the Tariff Act of 1930 prohibits the import of productsproduced by forced or indentured workers.

	Settlement: None.

	Commerce Committee Bill: Section 1107 would amend Section 307 to prohibitimports of tobacco products produced in a foreign country by child labor.  

	Proposed Finance Committee Mark:  Modify language in Commerce Committee billto prohibit imports of tobacco products produced by forced or indentured child labor.

**2.	Limits on the authority to promote the exportation of tobacco.**

	Present Law: FY98 Commerce, State, and Judiciary Appropriations Act include arider which prohibits the President from promoting the sale or export of tobacco products andfrom seeking the reduction or removal of trade barriers relating to tobacco exports.

	Settlement: None.

	Commerce Committee Bill: Section 1133 would prohibit the use of appropriatedfunds to promote or encourage the exportation of tobacco.  Allows President to seekelimination of barriers that are applied in an unjustifiable and arbitrary manner and that havebeen certified by the Department of Health and Human Service as not being a reasonablemeans of protecting public health.

	Proposed Finance Committee Mark: Codify the current appropriations rider,clarifying that no ministerial functions performed by agencies (e.g., processing customsdocumentation on exports at a port) are prohibited and that the President may seek thereduction of discriminatory barriers to U.S. tobacco exports.

**3.	Report on impact on U.S. international obligations.**

	Present Law: None. 

	Settlement: None.

	Commerce Committee Bill: Section 1134 would require USTR to report within 90days of enactment of the legislation on any provisions that it deems to be inconsistent withour international obligations, such as the NAFTA and the WTO.  

	Proposed Finance Committee Mark: Strike.

**4.	Anti-smuggling Provisions/Prohibition on imports except under a permit.**

	Present Law:  None.

	Settlement: None.

	Commerce Committee Bill:  Section 1141-47 create a broad licensing scheme thatwould apply to all sales of tobacco.  Section 1145(a) expressly prohibits the importation oftobacco products except under a permit. 

	Proposed Finance Committee Mark: Clarify that licensing requirements in the billapply to all sales of tobacco products, including imports to avoid allegations that provisionsviolate WTO obligations.

**5.     Prohibition against sales of tobacco products in duty-free shops or forwarding         through or manufacture in foreign trade zones.**

	Present Law: None.

	Settlement: None.

	Commerce Committee Bill: Section 1147 would ban the sale of any tobacco productsin duty-free stores or the use of any foreign trade zone for the distribution or manufacture oftobacco products.

	Proposed Finance Committee Mark: Clarify that the sale of tobacco products in dutyfree stores and through FTZs are subject to all applicable U.S. laws, including laws relatingto sales of tobacco products to minors.

**C.  Medicaid Provision**

**Present Law**

	States have the authority to exclude certain drugs or restrict coverage for them.  Amongthese are agents when used to promote smoking cessation.

	S. 1415, as reported, removes "agents when used to promote smoking cessation" fromthe list of drugs which may be subject to state restriction.  S. 1415 also prohibits states fromexcluding or restricting nonprescription drugs when used to promote smoking cessation.

**Description of Proposal**

	The proposal deletes the provision in S. 1415.  Federal reimbursement for these agentsare allowed under current law.

1.   This document may be cited as follows: *Description of Present Law and ProposalsRelating to Tobacco Tax and Trust Fund and Other Provisions* (JCX-35-98), May 14, 1998.
2.   S. 1415 was reported by the Senate Committee on Commerce, Science, and Technologyon May 1, 1998 (S. Rept. 105-180).
3.   The term United States includes the 50 States and the District of Columbia.
4.   A significant majority of taxable cigarettes, and of taxable tobacco products, is smallcigarettes.
5.  The specified payments are Phillip Morris Incorporated, $6.58 billion; Brown andWilliamson Tobacco Corporation, $1.73 billion; Lorillard Tobacco Company, $710 million; R.J.Reynolds Tobacco Company, $660 million; and United States Tobacco Company, $320 million. 
6.   These rules could be, but would not be required to be, based on the University ofMichigan's National High School Drug Use Survey, "Monitoring the Future."
7.   The term "net revenues" means the gross payments received less an income tax offset.  
8.   These amounts would be reduced by any refunds or tax previously paid that wereproperly allocable to revenues deposited into the Tobacco Trust Fund.
9.   As reported by the Commerce Committee, S. 1415 provides that spending for certainprograms is to be direct spending.  This provision in the Finance Committee amendmentsupersedes those direct spending provisions.**