Government Smokes

The tobacco settlement

How are states using their tobacco settlement windfall? The Investor Responsibility Research Center (IRRC) recently surveyed state treasurers to find out. It found that seven states -- Texas, Connecticut, New Mexico, North Carolina, North Dakota, Utah, and West Virginia -- had taken millions of dollars intended to reimburse them for tobacco-related health expenditures and invested the funds in tobacco companies.

The IRRC findings were reported by the Cybercast News Service (CNS) in a series of stories in March. Doug Cogan, director of IRRC's Tobacco Information Service, told CNS that even beyond the investments -- Texas alone put $10 million into tobacco stocks -- very few tobacco-settlement dollars were being spent on preventing tobacco use. Cogan puts the figure at as little as 5 percent. (The General Accounting Office estimated last year that 7 percent of the settlement was being used for prevention programs.)

According to the terms of the settlement, 46 states will receive $206 billion from tobacco companies over the next 25 years, with no stipulation as to how the funds will be spent. Because some 95 percent of this money is being poured into general revenues, the states have actually become invested in the financial well-being of the companies.

Bob Levy, a senior fellow at the Cato Institute, told CNS that because "the states get their money only if the tobacco companies are healthy and making lots of money," the settlement has ended up as a "collusion between the states and the tobacco companies." According to Levy, "you now have a quadropoly of the four tobacco giants and nobody else is permitted to do business, and this is all maintained as an anti-competitive cartel by the states as a result of the settlement agreement."

Because the settlement has enriched the states, many of whom have enriched the tobacco companies by helping support their stock values, Levy concludes that the settlement "certainly has been a success for the attorneys general. It has certainly been a success for the tobacco companies." It was also a notorious success for the lawyers who engineered the settlement; they reaped billions of dollars in fees. What about the smokers, most of them bunched in the lower and lower-middle income brackets, who are paying astronomical prices? Never mind.