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InsiderOnline Blog: November 2010

Somebody Remembered the Compact Clause

Can state governments in collusion with big business and without any act of Congress impose national taxes and regulations that restrict competition in an industry? So far, the answer is yes, because that’s exactly what the 1998 Master Settlement Agreement between the tobacco companies and 46 states did. Under the MSA, participating states receive billions every year in payments from tobacco companies while the participating tobacco makers maintain their profits through state regulations that prevent non-participating tobacco companies from undercutting their prices.

The Competitive Enterprise Institute, however, has been trying to get the courts to take seriously a provision of the Constitution called the “Compact Clause,” which says: “No State shall, without the Consent of Congress …enter into any Agreement or Compact with another State, or with a foreign Power … .” Now CEI has taken its argument to the Supreme Court, asking that the MSA be thrown out. CEI’s petition, filed Monday, explains:

The MSA is as undemocratic as it is anticompetitive. Congress and the state legislatures have ample authority to tax and regulate tobacco. But this should be done the old-fashioned way: by passing taxes and restrictions subject to the democratic scrutiny of the people – not by enforcing sweetheart deals drafted by industry, imposed on the entire nation without congressional involvement, and carefully insulated against repeal or democratic review.

Unfortunately, the MSA has escaped judicial as well as democratic scrutiny, by virtue of strained interpretations of antitrust immunity and Compact Clause limitations that ignore the important limits this Court has placed on those doctrines. The sheer magnitude of the private and governmental interests backing the MSA – contrasted with the relative powerlessness of the consumers and small companies injured by it – has seemingly discouraged the serious and searching judicial scrutiny one would expect of an agreement of such economic and political importance. Forty-six of the States reap billions of dollars every year as a result of the MSA, and the tobacco industry giants reap billions more. It seems too good to be true – unless you are a consumer or a small company trying to compete with the Majors and other participating manufacturers. … [T]he courts have given a perfunctory back of the hand to challenges to the MSA. Without careful analysis or explanation, immunities have been stretched far beyond their proper scope and the Compact Clause has been rendered a redundancy.

A few years back, Christopher DeMuth summed up the interstate compact issue thus:

The requirement of Congressional approval is unqualified and it is fundamental. For a gang of states to go off on their own and set up independent governing regimes is, politically, a form of partial secession. [“Unlimited Government: Doing Too Much Badly,” The Insider, Summer 2006.]

Posted on 11/09/10 12:03 PM by Alex Adrianson

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