Seeing Through the Smoke
Why tobacco-settlement revenues are coming in lower than expected.

Mr. Bartlett is senior fellow at the National Center for Policy Analysis
March 14, 2002, 8:00 a.m.

new study from the Council of State Governments raises serious questions about the conflicting goals of the tobacco settlement. According to the report, falling cigarette consumption will cause state revenues from the settlement to come in 20% lower than expected. Through 2010, states will get $14 billion less from Big Tobacco than originally projected.

Predictably, the states are whining about the lost revenue, saying it will increase pressure to cut spending. This only goes to prove once again that the settlement was never really about reducing smoking. It was always about one thing: extorting money from the tobacco industry. Were it otherwise, the states would be jumping for joy at the great success of higher prices on reducing cigarette use. That is what they always said was their goal.

In theory, the principal purpose of the settlement money was to fund cigarette cessation and prevention programs. But a General Accounting Office report last year found that only 7% of settlement funds were in fact used for this purpose. The rest went for general government spending.

The truth is that the states never actually wanted smoking to fall. They wanted the money far more than they wanted healthier citizens. That is why no serious consideration was ever given to banning cigarettes altogether. After all, we ban any number of drugs whose negative health effects are
considerably less than those that cigarettes are said to cause. However, banned products yield no revenue to governments.

Whatever they secretly wanted, I think that few state officials participating in the settlement ever expected that cigarette consumption would fall as much as it has. They totally bought the anti-smoking lobby's argument that once hooked, smokers cannot quit. Hence, the fundamental rationale for extracting hundreds of billions of dollars out of the tobacco companies was that they had foisted a highly addictive drug — nicotine — on an unsuspecting public. Thus any health problems resulting from smoking were not the fault of smokers, but Big Tobacco.

But if nicotine is in fact much less addictive than the anti-smoking zealots asserted, then the decision to smoke is far more voluntary than we were led to believe. This means that
smokers themselves bear much of the responsibility for their condition. Personally, I have never seen what the attraction is. But smoker friends of mine report that smoking is very pleasurable and something they simply don't want to give up. They are well aware of the health risks, but see the benefits as outweighing them.

Although a grab for money was the main reason why states ganged up on Big Tobacco, there was another reason as well. Since ancient times, governments have tried to control the consumption of products considered unnecessary or extravagant. They enacted what are called "sumptuary" laws that primarily restricted food and dress. During the Middle Ages, these laws could be amazingly detailed, specifying precisely what people were allowed to wear according to their rank in society.

Sumptuary laws were justified by the need to keep the lower classes from wasting their money, but they also helped preserve class distinctions. I suppose it is not much fun being in the upper class unless members can advertise this fact and lord it over those below them. Fashion still fulfills this function today.

It was the Puritans who first used differential taxation of commodities for sumptuary purposes. A 1676 law in Connecticut appears to be the first that taxed luxuries at a higher rate primarily to reduce consumption, rather than for revenue purposes.

At least the Puritans were sincere in their desire to curb extravagance. When revenue came in less than expected, they considered it a success of their policy. The Puritan tradition lives on among those today who want heavy taxes on caffeine, guns, and even junk food in order to discourage their use. But they are aided and abetted by many others who just want the money. It is worth remembering that the states supported repeal of Prohibition in the 1930s in large part because they wanted the revenue from taxing legal alcohol consumption. Al Capone didn't pay any taxes.

Many states are now considering steep increases in tobacco taxes to close budget gaps. However, I believe that moderate rates will bring in more money. High rates encourage smuggling and reduce consumption too much, causing revenue to fall. Eventually, states will have to decide whether it is more important to reduce smoking or get more taxes to spend. When that time comes, some may actually cut their tax rates to raise revenue, as some European countries have already done.