“The only thing more addictive than nicotine … is money to the legislatures of this nation”
Christine Gregoire, the Washington State Attorney General 2002
In 1998, the Tobacco Master Settlement Agreement committed the four major tobacco companies to make payments to state governments. The Government Accountability Office reported that for the six years 2000-05 the MSA paid the states $150 billion. The table below shows how states spent the money.
The states spent less than half on the promised health and tobacco control. The tobacco control portion, the MSA cornerstone to prevent children from smoking, got a paltry 5.7% of the money. Politicians spent over half the money on vaguely defined categories like Shortfall, Unallocated, and Infrastructure. This spending history gives every appearance of a giant piggy bank for dispensing pork.
The avowed objective was Saving Children, yet few states kept their promise to fund for tobacco prevention programs. The spending pattern may have changed in later years as more pressure from anti-smoking groups revealed how the states were spending the money, but the early results for the first six or seven years were not promising. A few states committed zero money to fight smoking. New York got approximately $800 million every year and spent about $40 million on tobacco education, or 5%.
Specific Examples of MSA Fund Expenditures, New York Times 2014
$100 million to defend cops accused of planting drugs and guns on suspects
$42 million to market tobacco and modernize the tobacco curing process NC.
$24 million for a county jail and office building.
$3.5 million to renovate shipping docks
$700,000 for a sprinkler system at a public golf course.
$200,000 for Carolina Horse Park, an equestrian center near Pinehurst, N.C
North Carolina MSA Money
50% – Gold Leaf Fund. A fund for whatever economic advantages could be had, mostly for Eastern North Carolina enterprises.
25% – Tobacco growers. To build barns and other improvements in farming
25% – Public Relations. A firm that published information on the evils of smoking to educate children. An implied quid pro quo was that the firm is considered for public relations for specific candidates who were in election contests.
When the Republicans took control of the NC state legislature, the Gold Leaf Fund continued, the party in power now seeing its use as a political advantage.
The Center for Disease Control recommended that states spend $3.3 billion per year on tobacco prevention and education, but the states budgeted only 42% of that amount for tobacco prevention.
A California study found that every dollar spent on smoking prevention saved $3.62 on health care. Yet anti-tobacco groups said that California committed just a “modest” amount of its money to such anti-smoking programs.
The MSA did not spell out where the funds should go, leaving that to the states. This ‘loophole’ was a windfall for politicians. The state attorneys general who brought the suits against the tobacco companies said they were disappointed at the spending pattern and that the promises they made had not been met, but the spending was in the hands of the state legislatures. State legislatures and attorney general offices, filled with lawyers, to say nothing of the army of attorneys who negotiated the MSA on behalf of the states, did not spot this loophole. Perhaps it was convenient not to look too hard for it.
To make matters worse, many of the states could not abide by having to wait to collect their riches over a twenty-five-year period. After all, they might not be in office in a quarter-century. So why not get the money now? To accelerate their cash flow, they sold the public a very creative debt instrument – a tobacco bond. In principle, the bond functioned like any other bond. The buyer put up a given amount of money today in exchange for payment each year for some fixed period, in this case, twenty-five years. For the buyer to make a return on this investment, he must pay less today than the expected cash coming back to him. Typically, these bonds returned about six percent a year, conveniently state income tax-free, thanks again to the generosity of the state legislatures. Of course, bankers everywhere were eager to help them in this financing, for a hefty fee of course.
The buyers did take some risk since their payments would be dependent on how many people kept smoking – the fees to make the payments came from cigarette sales. But the state governments got their money immediately. The tragedy was that with the discounting, the governments took in only about $.45 for every $1.00 they would have gotten over the life of the bond contract. Any politician would tell you that he had made a great deal – $.45 to bestow on his constituents now is far better than $1.00 in the future when he might not be around to take the credit. Never mind that government deficits continue to grow at the state level, as well as the federal level.
No matter how noble its objective, the Master Settlement Agreement is a classic example of a government shakedown of private industry. The MSA turned the tobacco companies into a cash cow for state politicians, who extracted billions of dollars that they spent on pet projects.
All these taxes and fund payments incentivize governments to be hypocritical: the more people smoke, the more money the government gets to spend on whatever it wants. The politicians have every reason to talk a good game about putting the tobacco companies out of business, while at the same time quietly taking the money.
Not much has changed since the days of King James I and Peter the Great, anti-tobacco men who nevertheless were avid tobacco tax collectors.
Spencer Chretien. “Up In Smoke: What Happened to the Tobacco Master Settlement Agreement Money?” The WasteWatcher, December 12, 2017. https://www.cagw.org/thewastewatcher/smoke-what-happened-tobacco-master-settlement-agreement-money
Jim Estes. “How the Big Tobacco Deal Went Bad,” The New York Times, October 6, 2014. https://www. nytimes.com/2014/10/07/opinion/how-the-big-tobacco-deal-went-bad.html