June 23, 2000

Tobacco windfalls savored by states

All the big lawsuits against tobacco companies are premised on the assertion that tobacco companies should reimburse states for the considerable health care costs associated with tobacco use. But here's the real reason states have jumped aboard the lawsuit gravy train without taking actions that would actually endanger tobacco companies' future viability: States make huge profits from tobacco, both in excise taxes and from budgetary savings created by premature tobacco-related deaths.

States will collect $233 billion in lawsuit settlement monies from tobacco companies during the next 25 years, but that's just the beginning.

A recent study in the Journal of Law and Economics chronicles the awful savings created by tobacco use. Even without the lawsuits, states enjoy "huge windfalls" from tobacco.

For example, in New York, which has the highest estimated tobacco-related health care costs, at eight cents per pack, premature deaths result in nursing home savings nearly equal to that amount. Insurance cost savings amount to another four cents per pack. The state's excise tax of 56 cents per pack therefore is pure budgetary profit.

At the other end of the tax scale, Virginia, home to tobacco growers and cigarette producers, imposes an excise tax on cigarettes of only 2.5 cents per pack. The state's estimated smoking-related medical costs are about 2.8 cents per pack. But premature deaths and net insurance cost savings amount to 12 cents per pack.

The bottom line, according to the study: Cigarettes are self-financing in every state, and on average provide states with about eight cents per pack in profit &emdash; before excise taxes are added. The federal government also saves big bucks &emdash; about 46 cents per pack &emdash; because premature tobacco-related deaths reduce Social Security, Medicare and Medicaid payouts, among other things.

Overall, tobacco is a very nasty business. And because it is so profitable for the states, legislatures are every bit as addicted to tobacco as a chain-smoker. Publicly, of course, state governments almost universally back anti-smoking public relations campaigns (the least effective, the better, from states' perspective). Privately, however, budget writers say, smoke 'em if you've got 'em.