State, Federal Governments Dependent On Tobacco Tax Revenue, Strength Of Industry

Main Category: Smoking / Quit Smoking
Also Included In: Public Health
Article Date: 03 Sep 2008 - 9:00 PDT

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The New York Times on Sunday examined how a "growing reliance by the states and federal government on cigarette taxes -- as well as a popular proposal to increase federal taxes by 61 cents to an even $1 per pack to finance [SCHIP] -- provide a sort of insurance policy for the continued survival of menthol cigarettes." The National Conference of State Legislators last month said states were facing combined deficits of more than $40 billion in 2009, and increasing tobacco taxes "is one way some states are trying to make up the shortfall," the Times reports. Last year, states collected more than $19 billion in cigarette taxes. Ten states increased their cigarette taxes in 2007 and more states are considering increases this year. According to the Times, the government "has become a financial stakeholder in smoking, some would argue, even as public health officials warn people about its deadly consequences" (Saul, New York Times, 8/31).

Lawmakers are considering legislation (HR 1108) that would give FDA the authority to regulate tobacco products. The measure would ban flavored additives, while allowing -- but not requiring -- FDA to ban menthol flavoring. Some black anti-smoking advocates criticized the exemption, noting that many black smokers use mentholated cigarettes (Kaiser Daily Health Policy Report, 8/4). The Times reports that menthol cigarettes make up 28% of the market, and unless smokers "switched to other types of cigarettes, a menthol ban would cut nearly a third of the tax revenues for states and federal governments." According to Nik Modi, an analyst for UBS Securities, federal taxes on menthol cigarettes could generate enough money to purchase one year of health insurance for 682,727 U.S. residents. "The impact on states, which collect $5.5 billion in taxes from the sale of menthol cigarettes alone, would be even greater," the Times reports.

In addition, a ban on menthol flavoring "could deliver a mortal blow to Lorillard," which receives nearly 94% of its revenue from menthol cigarettes, "obviously a problem for its investors and employees, but not quite so obviously, a problem for state governments," according to the Times. Lorillard paid $894 million to states last year as part of the 1990s tobacco settlement, and losing that money "would be a particular problem for 17 states that have borrowed against their tobacco settlement money by issuing tobacco securitization bonds," the Times reports. According to the Times, "If Lorillard suffered, its payments could be interrupted or disappear altogether," which could cause states to default on those loans -- "a fact that some senators may have in the back of their minds if they vote on the tobacco bill next month" (New York Times, 8/31).

Reprinted with kind permission from http://www.kaisernetwork.org. You can view the entire Kaiser Daily Health Policy Report, search the archives, or sign up for email delivery at http://www.kaisernetwork.org/dailyreports/healthpolicy. The Kaiser Daily Health Policy Report is published for kaisernetwork.org, a free service of The Henry J. Kaiser Family Foundation.

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