Government Gets Hooked on Tobacco Tax Billions
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 the State Children’s Health Insurance Program, S-chip — provide a sort of insurance policy for the continued survival of menthol cigarettes.
The National Conference of State Legislatures reported last month that states were facing combined budget deficits of more than $40 billion in 2009. Raising cigarette taxes is one way some states are trying to make up the shortfall. In 2007, states collected more than $19 billion in cigarette taxes
The federal government, meantime, collects nearly $7 billion annually in cigarette excise taxes
and would have raised those taxes, effective this year, but for the presidential veto of the S-chip legislation, which House Democrats have said is near the top of their agenda for next year.
Omar Little’s hometown, Baltimore, does not collect city taxes on cigarettes, but some municipalities do, for a total of up to $600 million a year.
But taxes are not the only government revenue from cigarettes. Settlements in the late 1990s to end state lawsuits against tobacco companies mean that the cigarette industry is paying states nearly $250 billion over 25 years.
Under the agreement, those payments to states will continue flowing even beyond 25 years as long as the tobacco industry is healthy. But the payments would phase out as cigarette company profits decline and would ultimately disappear if people stop smoking.
All the states are counting on that settlement money for years to come, but losing it would be a particular problem for 17 states that have borrowed against their tobacco settlement money
by issuing tobacco securitization bonds.