Tobacco Settlement Scam

Here is a little exercise in Economic Understanding, courtesy of the Indianapolis Star.  The subject is the tobacco settlement that was the result of a lawsuit filed by states Attorneys General to “punish” the tobacco companies for selling a dangerous product and trying to lure new, young customers with cartoon characters and other marketing schemes.

Here is the history as they report it.  “Indiana was among 46 states that signed the master settlement agreement in 1998 with four of the largest manufacturers of cigarettes in the country. About 40 other tobacco companies later joined the settlement.

“Since 1999, Indiana has received more than $1.9 billion from the tobacco companies.

“The agreement requires tobacco companies to pay states annually. The money is intended to reimburse them for the health-care costs of cigarette smoking-related diseases, such as lung cancer and heart disease. The payments vary year to year and are largely based on how many cigarettes a manufacturer sells in each state.”

How is this different from imposing a higher sales tax on cigarettes?  The money comes directly from the tobacco companies making it look like a punitive measure.  The states receive money proportionate to sales.  But the tobacco companies get the money from their customers in the form of higher prices.  It’s not coming out of profits or out of the pockets of the “greedy” CEOs.

Look at this chart based on the financial information of Altria, the largest tobacco company, courtesy of the Motley Fool website.  It shows that profits (Net Income) for the past 4 years are basically rising.  The scale is in billions of dollars.  The profits for the same company since 1999 (courtesy of wikinvest.com) have dropped, but the pattern is more in line with the overall economy than with fines imposed by the settlement.  The big drop occurs long after the settlement, concurrent with the beginning of the recession.

The main difference between the settlement money collected by the states, which was taken indirectly from smokers by way of the tobacco companies, and a straight sales tax, which would have been collected by the states directly from the smokers, is the political credit the states got by taking on the big, bad tobacco moguls.  (Another difference is that a large amount of money was probably spent on lawyers for both sides and by the government to pay arbitrators.)  Economically speaking it’s pretty much the same effect, but the image of a settlement vs. a “sin tax” makes it look like a display of great courage, caring and child protection.

It just goes to show that even when they are trying to do a good thing politicians are hard-pressed to be totally honest.