Settlement vs. Taxes

Study claims states would fair better with an excise tax than the MSA

RICHMOND, Va. -- Twenty-nine states would have been better off passing a $4 excise tax on a carton of cigarettes rather than signing multibillion-dollar tobacco settlements, a recent study concludes, according to a report from the Associated Press.

By far, the largest of the pacts is the Master Settlement Agreement (MSA). As part of the landmark 1998 accord, major tobacco companies agreed to make about $206 billion in annual payments to the states over more than two decades. Four states made separate deals in the 1990s worth roughly $40 billion. [image-nocss] Those deals were combined with the MSA for the purpose of the study conducted by Stanford University.

Under the MSA, Richmond, Va.'s Philip Morris USA and other large cigarette companies have paid about $4 for every carton they sold.

But Jeremy Bulow, the Stanford University economics professor who wrote the report, says states don't get $4 for each carton sold within their borders. Rather, the MSA allocates percentage shares, which are purportedly based on each state's smoking population, related health-care costs and other considerations.

Bulow says the settlement is really a national tax in disguise, and one that results in many states receiving less than their fair share. The deal was structured so that smokers would have to pay this "tax" even if their states didn't sign onone reason some attorneys general felt compelled to join the MSA.

Under Bulow's calculations, Virginia's adjusted share of the agreement, for example, is 1.71%, even though about 3.6% of the nation's cigarette sales in 2003 took place in the state. With a state excise tax, Virginia would have received $4 per carton sold within the state. But the state only got the equivalent of $1.91 per carton.

In total, Virginia lost about $143.3 million relative to an excise tax, and that's just in 2003, the study says.

Virginia ranked behind Kentucky and North Carolina on Bulow's losers list. Kentucky lost $172.8 million in 2003 compared to the tax, while North Carolina lost $170.2 million. Ranked by per-carton, Kentucky received the lowest amount$1.58making it a two-time loser. In Bulow's study, New York received $12.21 per carton from the MSA and gained the largest dollar-sum amount, $550.6 million, relative to a state excise tax. California got $6.85 per carton and a $340.5 million benefit. Ranked by per-carton revenue, Washington, D.C., fared the best with $15.52.

Rob Wilkey, a Kentucky legislator and general counsel for tobacco company Commonwealth Brands, says one problem with Bulow's analysis is that it is based on states' cigarettes sales, which do not necessarily reflect consumption in individual states.

Tobacco-producing states such as Virginia and Kentucky had boasted rock-bottom cigarette taxes until recently. As a result, they attracted many buyers who snapped up cigarettes to avoid high taxes in other states, Wilkey said. About one-third of cigarettes sold in Kentucky, for example, weren't smoked by residents in 2003, he said. "You can't look at those numbers in a vacuum," Wilkey said.