Beginning in 1998, the cigarette manufacturers became a tax and fee collector with a growing list of “stakeholders.” Taxes and fees were 52-55% of the revenue received from cigarette sales. (This did not include income tax paid by the tobacco industry suppliers and employees.)
Tobacco companies increased prices more than enough to offset the added taxes and fees. Anticipating an industry payment in 1999 of about $10 billion, the tobacco companies raised prices $.45 a pack in November 1998, bringing in added revenue of $18 billion, almost twice as much as was needed to cover the MSA payments.
In addition, operating efficiencies helped lower their costs from 27% of sales to 16%, increasing tobacco profitability from 4% of retail sales to 12%. This was an amazing financial performance given the burdens of added tax and fee outlays and the decline in the number of cigarettes smoked, from 435 billion in 1999 to 263 billion in 2016.
Cigarette companies had tremendous pricing power. Their customers were willing to accept prices increases of 6.5% a year, from $2.20 to $6.39 a pack. The addictive nature of the product surely contributed to this – it is unlikely that any other consumer product could absorb such price increases.
The tobacco industry paid staggering sums each year to its various stakeholders – governments, farmers, and attorneys. The decline in smoking reduced the total take slightly beginning in 2009. However, the taxes and fees still exceed $40 billion per year.
With all this cash flowing into their coffers each year, recipients must have mixed feelings about promoting the demise of the cigarette business.
Since 1998, tobacco payments have totaled over $770 billion, and reasonable projections based on the original twenty-five-year commitments and the continuation of the industry for another twenty-five years give a final fifty-year tally of more than $1.7 trillion in payments.
The Tobacco Master Settlement Agreement committed the four major tobacco companies to make payments, forever, to state governments. In theory, this money sent to each state was to cover the costs of smoking-related illnesses and educate children about the dangers of tobacco. As often happens when money and politics mix, the reality did not measure up to the theory. The states spent less than half the money on the intended purposes