WINSTON-SALEM - State officials and legislators are reviewing proposed legislation that would require small tobacco companies that avoided the 1998 settlement with states to make some payments to the government.

The legislation would lead to increased prices for small-company brands and penalize distributors who sell the companies' cigarettes if the payments aren't made. "There's a matter of elementary fairness in the marketplace," said Senate Majority Leader Tony Rand, D-Cumberland. "The state's taking the money and delighted to have it from the [major] manufacturers, and we cannot place them at a competitive disadvantage." State officials and the major tobacco companies said that it's unfair to give smaller companies an advantage because they don't have to pay a share of the $206 billion owed to the states. With less debt, they could undercut the prices of discount brands by Philip Morris, R.J. Reynolds Tobacco Co., Brown & Williamson and Lorillard -- the major companies in the settlement. Officials of smaller companies said they shouldn't have to pay for the big companies' sins and a lawsuit that the little companies didn't lose. "We didn't do anything wrong -- didn't get sued and didn't feel we should pay any money to the states," said Everett W. Gee III, the general counsel to S&M Brands Inc., a company with 200 employees in south-central Virginia that makes Bailey's and Tahoe brand cigarettes. Gee says that S&M didn't even go into business until 1994, "about 30 years after the first cigarette warnings." North Carolina and other states adopted laws in 1999 to require companies that didn't join the settlement to pay into an escrow fund if they want to do business in the state. The fee amounted to 21 cents a pack last year, 27 cents a pack this year and next, and 33 cents a pack for 2003-06. The money is to be returned to the companies after 25 years. The N.C. attorney general's office said that almost all the money owed by the small companies -- $5.5 million out of $5.95 million -- has been paid. The state has sued just one company, CigTec Tobacco LLC of Charles City, Va., that initially didn't make payments. As cigarette prices have risen, industry officials said that the so-called "renegade" companies have gained market share, climbing from less than 2 percent of the domestic cigarette market to about 6 percent. As small tobacco's market share increases, major tobacco companies' payments to the states decline. Industry officials said that payments to the states have declined by $600 million since the 1998 settlement. Of that, they attribute $100 million to the growth of companies that aren't part of the settlement, and they said that the small companies that don't make escrow payments cost North Carolina about $2.5 million a year. "Because people are not buying the big companies' cigarettes, we're losing money," said Rep. David Redwine, D-Brunswick, a co-chairman of the House Appropriations Committee who is discussing proposed legislation with lobbyists. But Gee sees a joint effort by the big companies and the state to keep smaller competitors from growing. "What is happening is the states are clearly in business with the big tobacco companies," Gee said. "That's the evil genius of the master-settlement agreement, because it's putting the states in business with the big tobacco companies," he said. "The bad-doers are being rewarded by the state instead of being punished by the state."

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