Smoking Bans

Smoked Out

Arizona's unfortunate reliance on tobacco industry revenues to fund health insurance.

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Arizona has a major public health problem: Too few people are smoking.

That's not the only fiscal problem the state faces. But it's one of them. Like many states, Arizona's public finances are in miserable shape. And much of the state's budget trouble can be attributed to a decade-old decision to finance an expansion of low-income health insurance coverage with revenue dependent on tobacco industry profits.

A little more than a decade ago, the state grew its low-income health insurance rolls, claiming the new enrollees would be paid for by revenue from a deal with tobacco industry. Now, with smoking rates (and tobacco industry revenues) falling, a budget crisis brewing, and a growing number of individuals eligible for Medicaid, the state has chosen to pare back its health coverage for low-income adults.

Starting July 8, the state's Medicaid program will implement changes expected to reduce the program's rolls by 117,000 single, childless adults over the next year. After much delay, the Obama administration last week finally granted Arizona permission to go through with the cuts, but only grudgingly. "We regret the action Arizona is taking," a federal Medicaid official told The Arizona Republic.

But looking back on their Medicaid program's recent history, Arizonans may have some regrets of their own. Initially, the state was reluctant to join Medicaid, waiting until 1982 before entering the joint federal-state health insurance program for the poor and disabled.   

In 1998, the state signed onto the Master Settlement Agreement, a nationwide deal between state attorneys general and the major players in the tobacco industry. As part of the agreement, the tobacco industry agreed to compensate the public for years of health costs incurred by the public due to smoking-related illnesses through a series of payments to the states.

It was win-win for both sides: The tobacco industry got rid of its legal liability once and for all and the states created a new revenue source initially estimated to provide $206 billion during its first 25 years of existence—no tax hikes required. Arizona was entitled to 1.5 percent of the total.

The deal was sold to the public as a sort of financial justice. After decades of imposing billions in public health costs on taxpayers, the tobacco industry was finally forced to pay for its sins. But the practical effect was to make states partners with the very industry those states were ostensibly trying to punish.

Arizona was determined to put the partnership, and the revenue it was expected to provide, to use. In November 2000, the state's voters passed Proposition 204, which expanded Medicaid coverage to childless adults to 100 percent of the federal poverty line, up from the federal mandate of 34 percent.

Medicaid's crude fiscal incentives were too good to resist. The program is funded via a generous federal matching grant, so for every dollar that Arizona spent expanding Medicaid, the federal government would pitch in with an additional $1.96. There's no limit to the amount of matching funds a state can obtain, so the bigger the expansion, the more federal money a state can nab.

And it was all supposed to be free. Voters were promised in a "Fiscal Analysis" that the expansion could be "fully funded by Arizona's share of the Tobacco Settlement," according to columnist Robert Robb. A fact sheet distributed by the proposition's supporters said that it would use "no state tax money." The magic combination of tobacco settlement revenue and federal matching funds was irresistible for both the state's political class and its voters. In theory, the program would expand dramatically—and at no cost to taxpayers.

It sounded too good to be true—and it was. As Michael Greve, a senior fellow at the American Enterprise Institute, noted in a 2008 report, "it soon became clear that the MSA funds (and the federal dollars that they leverage) would not remotely cover Proposition 204's expansion of the Medicaid population and services."  

The state faced two problems. First, the actual price tag on the Medicaid expansion came in higher than expected. Second, smoking rates—and thus tobacco industry revenues—were on the decline; by 2002, states had already received 14 percent less in tobacco payments than projected.

And so the program's costs dipped further into the general fund. According to the state government, general fund revenue dedicated to Medicaid has increased by nearly 65 percent since 2009 alone. Now Medicaid accounts for around 29 percent of the state's total general fund spending, up from 8 percent when Prop. 204 passed.

The federal-match incentives that made expanding the program so tempting initially also made it equally difficult to cut. What politician would willingly cut three dollars in benefits to save just one dollar in the state budget?

Faced with a billion-dollar budget hole, however, Arizona Gov. Jan Brewer finally took the plunge this year, calling for cuts that are expected to save a half billion dollars, including an estimated $190 million this year.

The only question remaining is whether the state will be permitted to make the cuts. Despite promises that no state tax revenue would be used, Prop. 204's text says that in order to pay for the coverage expansion, tobacco industry funds "shall be supplemented, as necessary, by any other available sources including legislative appropriations and federal monies." Critics of the cuts have taken the state to court, arguing that it has an obligation to fund the expanded benefits through supplemental measures, regardless of MSA funding or other budgetary troubles.

So a law sold on a promise that health coverage would be expanded without state tax revenues is now being reinterpreted as an obligation to use additional state tax revenues to fund the coverage expansion—whether legislators want to or not. Where are the smokers when you need them?

Peter Suderman is an associate editor at Reason magazine. 

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76 responses to “Smoked Out

  1. Can I tax cigarettes to pay for my health insurance?

  2. In 1998, the state signed onto the Master Settlement Agreement, a nationwide deal between state attorneys general and the major players in the tobacco industry. As part of the agreement, the tobacco industry agreed to compensate the public for years of health costs incurred by the public due to smoking-related illnesses through a series of payments to the states.

    Of course those of us to remember the MSA and remember even more clearly the claims by proponents and supporters, with fewer people smoking, the state should be saving millions in healthcare costs. Remember, it wasn’t about revenue, it was about compensation for smoking-related health issues that was already being footed by the states. No smoking, no smoking-related health costs. Right?

    1. Right, the revenues from the tobacco companies should only be used to treat cancers due to smoking.

    2. that was the pitch.

    3. Paul, you also should remember that one of the “selling points” was that the revenue to the states was going to be earmarked for anti-smoking programs. That promise lasted about maybe fifteen minutes before the majority of states threw the tobacco money into general appropriations. Some states even issued “tobacco bonds” in which they borrowed money using their shares of the tobacco settlement as collateral.

      1. In 1998, I was working at a survey research center funded by public grants. One of the surveys we did was about the tobacco settlement, and the ways in which people thought the money should be used by the states. It was full of ideas for how to use that money, but nowhere in the rather lengthy survey was there a place for respondents to note that they objected to the settlement, didn’t think the states should get the money, and therefore didn’t think it should be used in any manner. People who objected to the settlement were the majority of refusals and non-completers, so they wouldn’t have showed up anywhere in the data.

    4. people who don’t die of smoking related diseases live forever! no, they live 20 years longer, hastening the bankruptcy of social security by living long enough to be a drain instead of an early dying smoker that is pure profit for SS, then they die of something else, incurring higher end of life costs than if they had died earlier of lung cancer.

  3. which is why jan brewer actually did start death panels

    1. I started death panels, dummy. And you WILL die. Sooner than you think!

  4. Ooooh, this is gonna piss off Team Blue.

  5. A classic case of ‘let’s spend the windfall rather than save it for a rainy day. Has any government every behaved differently? If they have money they spend it. The ONLY way to stop the spending is to cut off the source. Cut taxes.

    1. Actually, if you look at recent historical revenues vs. expenditures, at least at the Federal level spending increases have increased at the same pae regardless of flat revenues.

    2. No, taxes are just a way to internalize the cost of government. Spending is the problem.

  6. Like many states, Arizona’s public finances are in miserable shape. And much of the state’s budget trouble can be attributed to a decade-old decision to finance an expansion of low-income health insurance coverage with revenue dependent on tobacco industry profits.

    Well, they got their wish: People ARE smoking less!

    Bwa ha ha ha!!!!!

    1. Careful what you wish for?

  7. When I lived in Tempe there was an Indian reservation selling cartons of cigs for under $20 with no state taxes applied, less than a mile from my house. The Indians had a convenient fast food-style drive-thru. It’s probably still there, right where Scottsdale, Tempe, and Mesa meet. The state has chased away their tax revenue without even inconveniencing anyone in the university area. So is smoking really down in AZ or do the numbers belie smokers buying outside the state’s revenue generation scheme?

    1. You’re talking about On-Auk-Mor, I believe. I went there from time to time before I quit smoking a few years back. I think they do a tidy business but I’m doubtful if it’s enough to make a truly significant dent in tax revenue.

      Also, the reservation casinos still let you smoke indoors–I’m sure that idiotic busybody private-business smoking ban hasn’t helped, either. At least there are a few places in Arizona still free from the tyranny of the white man and his regulatory ways.

      1. If it’s “tobacco industry revenues”, that’s the money that the tobacco companies get (after the tobacco taxes get paid.) So the tobacco companies would get that even from tobacco the Indians sell, unless they grow it themselves on the reservation.

        If it’s really just tobacco taxes, that’s different – but the state could raise those, and say “We’re still getting a total of $X from the smokers, even though the tax per pack went up a buck, so that doesn’t count as really raising taxes, please don’t yell at us Grover!”

    2. Once the taxes get too high, you may see a thriving black market develop with all that this entails. So the decrease in smoking may be less than they think. They just aren’t buying legal, taxed tobacco.

  8. The state faced two problems. First, the actual price tag on the Medicaid expansion came in higher than expected.
    Noooooo!

    Second, smoking rates?and thus tobacco industry revenues?were on the decline […] states had already received 14 percent less in tobacco payments than projected.

    Darned people simply were to stingy and unpatriotic to smoke cancer-inducing smokes so cancer-ridden smokers could receive healthcare! Why, those miserable ingrates!!!

    You know, the states are actually facing THREE problems: One, underfinanced Medicare; two, not enough revenue; and three, politicians that lied about it!

    1. Damned tags…

      The state faced two problems. First, the actual price tag on the Medicaid expansion came in higher than expected.

      Noooooo!

      Second, smoking rates?and thus tobacco industry revenues?were on the decline […] states had already received 14 percent less in tobacco payments than projected.

      Darned people simply were to stingy and unpatriotic to smoke cancer-inducing smokes so cancer-ridden smokers could receive healthcare! Why, those miserable ingrates!!!

      You know, the states are actually facing THREE problems: One, underfinanced Medicare; two, not enough revenue; and three, politicians that lied about it!

  9. The federal-match incentives that made expanding the program so tempting initially also made it equally difficult to cut. What politician would willingly cut three dollars in benefits to save just one dollar in the state budget?

    You know you wants it, preciousss! You know you wants it!

  10. yes we “voted” to spend our “windfall” on the poor and disabled. When you get cancer you become poor and disabled! BTW it is a fact that Jan Brewer’s “death panels” prevented at least three people from receiving lung transplants, now they are dead!

    1. Nobody was prevented from getting lung transplants. They were prevented from forcing others to pay for them.

      1. how do you sleep at night you prick?The Arizona budget that previously provided transplants to people in need was $1.4 million. As there were 99 people on the waiting list for transplants at the time the cuts went into effect, the net result is that the State of Arizona valued each of these lives at something less than $14,000 a person.
        how do you sleep at night you dick?
        http://www.editedforclarity.co…..-97-to-go/

        1. Quite well, thanks. Fuck those people.

        2. Hoyt, I agree with you that it’s the government’s fault these people died. If they hadn’t made organ selling illegal and artificially boosted the cost of medicine, those three people might have been able to pay for their own transplants.

          1. How do YOU sleep, hoyt?

        3. TANSTAAFL. There ain’t no such thing as a free lung.

  11. Well, the solution is simple: Force everyone to smoke a pack a day. As MNG will tell you, it’s perfectly justified under the Interstate Commerce Clause

    1. No, you can only force them to buy a pack a day, not smoke them.

      1. FEED ME!!!

  12. Was wondering the greater cost….The cost of caring for a smoker who gets cancer at 60 – 65 and passes away a few years later, or the costs associated with taking care of someone well into their 80’s or even 90’s who never smoked?

    1. There was a study not long ago that established that smokers use fewer healthcare resources than non-smokers over their lifetime.

      1. let me guess a study sponsored by the tobacco industry? show the link. go exercise you freedom, smoke up! Your ass is only worth $14,000 anyway.

        1. Um, no; the National Institute for Public Health and the Environment in the Netherlands

          1. so lets see the study said “On average, healthy people lived 84 years. Smokers lived about 77 years…the thin and healthy group cost the most, about $417,000, from age 20 on.and for smokers, about $326,000. that means that for $13,000 per year you can have 7 more years of healthy productive life if we only follow the Netherlands socialized health-care model. check mate!

            1. Uhh, no. The leap in your “logic” is astonishing.

              1. Fucking socialists… how do they work?

            2. $13,000 per year per life. Thats not too bad, so write the check for your life and I’ll write the check for mine. As for those those who won’t their check, obviously they don’t value their lives enough to bother paying the thirteen grand a year so why should I?

    2. Re: Dan,

      Was wondering the greater cost…

      You have way too much time in your hands. There’s a world out there beyond the confines of your mommy’s basement, Dan…

      The cost of caring for a smoker who gets cancer at 60 – 65 and passes away a few years later, or the costs associated with taking care of someone well into their 80’s or even 90’s who never smoked?

      Why? Do you want to know who to murder and not feel guilty about it later? You sick fuck!

      1. The bigger cost difference is that by living longer, the non-smokers are going to use up more Social Security and private pension funds.

  13. Just buy the cigarettes and don’t smoke them… we need the money and we don’t want to hurt you.

    1. Hey, there’s an idea for Obama… force people to buy cigarettes, but make lighters and matches a thousand bucks a pop.

  14. What a shame that those anti smoking puritans have cause the poor people to lose out on medical care !!!

    1. Not to mention jobs and business. I think it’s great that the sweeping smoking bans caused all the working class, ma and pa shops to go out of business while the huge clubs didn’t suffer a bit.

      Way to go! Class War!!

      1. A “Ma and pa” shop is a dying business model. Even brick and mortar shops are dying business models.

  15. This reminds us of the Bay Area water consumers who had their water rates raised because they conserved too much. Yes, you read that correctly.

  16. Aha ha ha ha haha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha! (gasp)

    1. Ha ha ha ha haha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha haha ha ha ha hah!

      1. Eep!

  17. The magic combination of tobacco settlement revenue and federal matching funds was irresistible for both the state’s political class and its voters. In theory, the program would expand dramatically?and at no cost to taxpayers.

    How many problems might be solved if voters understood the term “opportunity cost”?

    1. How many problems might be solved if voters understood…anything.

  18. Ah well, we have our problems in Arizona, but we’re one of the few states actively flipping the bird to Obama and his band of fuckhead feds. Makes me proud to be a native.

  19. In theory, the program would expand dramatically?and at no cost to taxpayers.

    For values of “taxpayer” that don’t include people paying the cigarette tax, or people paying federal taxes, I suppose this is true.

  20. Smoke ’em if you got ’em.

    I can’t help – I quit last year 🙁 Sad face

  21. that means that for $13,000 per year you can have 7 more years of healthy productive life if we only follow the Netherlands socialized health-care model.

    Who said anything about a health productive life?

    And you don’t have any idea how the Netherlands does health care, do you? Hint: its not socialized.

  22. If you want more of something, subsidize it.

    It you want less of something, tax it.

    If you want the government to suddenly want more of something it previously wanted less of, make a tax on it a major source of that government’s revenue.

    Rush Limbaugh predicted this ages ago…

  23. Here in SC we sold bonds on this money so we’d have it in a big handy chunk, so we’re paying those bonds with the income. That income is tied to the tobacco companies profits though, so as users quit using, or are forced too financially by taxes, so does the income, it was part of the agreement for payment to the states. That means once the income falls below what we pay for the bonds we have to make up the difference. Very similar to the problem Arizona has create for itself.

  24. Low hanging fruit has been known to fall from the tree and spoil once in a while.

  25. This is just another example of what happens when governments think they can control human nature and change it to suit their needs and desires.

    This is why the climate mess will alway backfire and cause limitless problems, bankruptcies and perhaps an eventual civil war.

    I live it … without this sort of shit life would be too boring.

  26. If kids started smoking early like they did in the 70?s childhood obesity would not be a problem. Second hand smoke from parents is also very helpful. We were thin as rails and could play sports all day long. So give a kid a pack or blow smoke in their faces to bring those healthcare cost down. If everybody does their part we can knock out childhood obesity in no time at all. Get a bumper sticker that says smoking prevents childhood obesity. Its the right thing to do.

  27. The day the GOLDEN GOOSE DIED!

    HAHAHHAHAHAHA!

  28. The inconvenient truth is that the only studies of children of smokers suggest it is PROTECTIVE in contracting atopy in the first place. The New Zealand study says by a staggering factor of 82%.

    “Participants with atopic parents were also less likely to have positive SPTs between ages 13 and 32 years if they smoked themselves (OR=0.18), and this reduction in risk remained significant after adjusting for confounders.

    The authors write: “We found that children who were exposed to parental smoking and those who took up cigarette smoking themselves had a lower incidence of atopy to a range of common inhaled allergens.
    “These associations were found only in those with a parental history of asthma or hay fever.”

    They conclude: Our findings suggest that preventing allergic sensitization is not one of them.”
    The Journal of Allergy and Clinical Immunology
    Volume 121, Issue 1 , Pages 38-42.e3, January 2008
    http://www.jacionline.org/article/S0091-6749(07)01954-9/abstract

    .
    This is a Swedish study.

    “Children of mothers who smoked at least 15 cigarettes a day tended to have lower odds for suffering from allergic rhino-conjunctivitis, allergic asthma, atopic eczema and food allergy, compared to children of mothers who had never smoked (ORs 0.6-0.7)

    CONCLUSIONS: This study demonstrates an association between current exposure to tobacco smoke and a low risk for atopic disorders in smokers themselves and a similar tendency in their children.”
    Clin Exp Allergy 2001 Jun;31(6):908-14
    http://www.data-yard.net/30/asthma.htm

  29. Don’t fret over list of cancer ‘risks’
    http://www.dispatch.com/…/…r-list-ofcancer-risks.html

    [[“We are being bombarded” with messages about the dangers posed by common things in our lives, yet most exposures “are not at a level that are going to cause cancer,” said Dr. Len Lichtenfeld, the American Cancer Society’s deputy chief medical officer.
    Linda Birnbaum agrees. She is a toxicologist who heads the government agency that just declared styrene, an ingredient in fiberglass boats and Styrofoam, a likely cancer risk.
    “Let me put your mind at ease right away about Styrofoam,” she said. Levels of styrene that leach from food containers “are hundreds if not thousands of times lower than have occurred in the occupational setting,” where the chemical in vapor form poses a possible risk to workers.
    Carcinogens are things that can cause cancer, but that label doesn’t mean that they will or that they pose a risk to anyone exposed to them in any amount at any time.]]

    Now,Im glad to see the ACS admitting to the dose response relationship finally!

    So now we understand why the following is factual:

    [[are hundreds if not thousands of times lower than have occurred in the occupational setting,” where the chemical in vapor form poses a possible risk to workers.]]

    Regulatory Toxicology and Pharmacology, Vol. 14, No. 1. (August 1991), pp. 88-105.

    [[ETS between 10,000- and 100,000-fold less than estimated average MSS-RSP doses for active smokers]]

    http://www.citeulike.org/user/vmarthia/article/7458828

    [[OSHA the components in tobacco smoke are diluted below existing Permissible Exposure Levels (PELS.) as referenced in the Air Contaminant Standard (29 CFR 1910.1000)?It would be very rare to find a workplace with so much smoking that any individual PEL would be exceeded]]

    JUST AMAZING ISNT IT

    Then this just 3 days ago:

    Wednesday, July 6, 2011
    Non-smokers’ lung cancer may be different
    Researchers discovered lung cancer is different in people who smoke compared to non smokers who develop cancer.

    This should send ASH and the rest of tobacco control running for the leaking DIKE!

    Whats the backbone of the smoking ban, the claim that shs/ets causes cancer in non-smokers!

    If thats totally disproven, the basis for the bans is MOOT!

  30. I think this is great news overall – and yes, we need to find a more sustainable way to finance the costs of the program. But ultimately it is great news that people are smoking less – great news for them, great news for the health care system, great news for us nonsmokers who have to hold our breath walking down the street, great news for our planet which is now overburdened by the seemingly innocuous cigarette butt – which is, in fact, classified as the second most toxic form of pollution on the planet – that washes off of our roadways and sidewalks into our waterways to pollute our most precious and scarce natural resource – our fresh water.

    So let’s look for a solution folks – any good ideas? How about legalizing and taxing medicinal marijuana? Hitting up Bill & Melinda Gates? Who’s got the money? Where is there a sustainable surplus that can be tapped into? Tech? Energy?

  31. Why does people love to cigarette specially smoker’s even though we all know that this is dangerous, particularly to the children? Stop it! love your self as you love your society, it is pretty simple to that. STOP SMOKING

  32. That’s actually pretty neat! I, for one, choose not to smoke though. Seen a lot of my friends suffer from bad health cause of it (duh).

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