Tobacco Money--Hard Habit for States to Kick

By Pamela M. Prah, Stateline.org Staff Writer

States are discovering just how addictive tobacco can be. While a number are looking to hike the price of a pack of cigarettes to dissuade people from lighting up, states hooked on big money from Big Tobacco might be facing some withdrawal pains themselves.

As they begin drafting their budgets for fiscal 2008, many states are facing a shortfall in the tobacco settlement dollars they have used in recent years to balance budgets and bolster health programs. In exchange for agreeing not to sue cigarette manufacturers over health claims, states have received $53 million between 2000-2005 as part of the 1998 multi-state settlement.

Now, states are taking Big Tobacco back to court, claiming they were shortchanged $813 million in 2006. States are wary they could be stiffed $1 billion this year when payments are due April 15. The cigarette companies say the tobacco settlement allows them to pare back their payments under certain conditions, including loss of business to cigarette makers that haven't signed on to the pact. 

“This is the most important dispute between the states and the tobacco companies since the master settlement was signed in 1998,” said Washington state Attorney General Rob McKeena, who co-chairs the tobacco committee at the National Association of Attorneys General , the umbrella organization that spearheaded the litigation for the states. McKenna said he doubts the litigation will be resolved by the end of the year.

While the two sides duke it out, many states learned their lesson last year and already are bracing for a smaller tobacco windfall this year. Virginia, for example, received $21 million less than expected last year and had to reshuffle money to make sure the state Medicaid program wasn't cut, according to Ric Brown, director of the commonwealth's Department of Planning and Budget. While optimistic states eventually will win the legal wrangling, he said he's not banking on the money this year. “We can't spend it until we get it.”

Alabama last year found it was short nearly $11 million, forcing cuts in the Children's First Trust Fund , which provides grants to local children's programs, said Deborah Kennedy, assistant director of the state's Legislative Fiscal Office. Oregon received $9 million less than expected and had to reduce payments to human services programs.

“This is definitely an issue because states were beginning to rely on this source of revenue for a range of different projects and the shortfall will now force them to re-align their priorities,” said Sujit CanagaRetna, a state budget expert for the Council of State Governments .

Forty-six states are part of the original master tobacco settlement. Payments are based on how many cigarettes the tobacco companies sell in each state. (Four states -- Florida, Minnesota, Mississippi and Texas -- have their own agreements). States can use the money to fund anti-smoking and health care programs, but the master settlement doesn't require it and most don't. During recent lean years, many cash-strapped states used their tobacco money to balance their budgets.

“Instead of using the money for its intended purpose, the states have squandered billions of dollars on ‘pet projects,' such as golf courses and horse-breeding farms, roads and bridges, and state budget-deficit reductions – items completely unrelated to the stated purpose of the settlement funds,” R.J. Reynolds Tobacco Co. said on its Web site. The site includes a state-by-state  tally of tobacco taxes and settlement payments in 2005.

Eric Lindblom of the Campaign for Tobacco-Free Kids also faulted states for not spending more to reduce smoking. Only Maine, Delaware and Colorado fund tobacco-use prevention programs at levels the federal government suggests. The group says Mississippi used to be a national leader on this issue but “has fallen to dead last.” It blames Mississippi Gov. Haley Barbour (R), a former tobacco lobbyist. The group's recent report includes estimates of tobacco-use prevention spending for each state.

Arizona was the only state in 2005 to use all of its tobacco money for health issues, according to an April 2006 report from the U.S. Government Accountability Office , the congressional watchdog agency of Congress. The report includes a state-by-state listing of how states spent their tobacco money in 2005.

Of $5.8 billion received in 2005, s tates set aside only about one-third for health and less than 5 percent for tobacco-control programs, according to the 2006 GAO report.

Fifteen states -- including California, New Jersey, New York, Rhode Island, South Carolina and Wisconsin-- already have cashed in a big chunk of their share of the settlement, selling future tobacco payments to investors for an upfront lump-sum payment, known as securitization.

Some states are having second thoughts on how they have spent their tobacco funds. Wisconsin Gov. Jim Doyle (D) hopes to undo his state's securitization deal and refinance the bonds, with the money then being used to expand anti-smoking initiatives. A Colorado Senate panel recently approved a bill directing some of the state's tobacco settlement money to health programs. During the economic downturn, the state used about $20 million of the settlement for highway projects, The Rocky Mountain News reported.

Voters recently also had their say on how to spend the tobacco settlement. Last November, Florida and Idaho voters adopted measures requiring that 15 percent to 20 percent of their tobacco settlement be used for statewide tobacco education and prevention programs.

The original 1998 tobacco settlement involved four major tobacco companies: R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., Lorillard, and Philip Morris USA, whose parent company recently changed its name to Altria Group. The settlement led 46 states to drop a massive lawsuit against cigarette companies in exchange for sharing an estimated $206 billion over 25 years.  Phillip Morris made its full payment to the states last year, but won't say whether it will do the same this year.

2007 proposals for per-pack cigarette tax hikes:

• Connecticut – 49-cent increase by Gov. M. Jodi Rell (R) to pay for health insurance programs
• Delaware – 45-cent hike by Gov. Ruth Ann Minner (D) for programs to reduce infant mortality and improve children's health
• Indiana – 25-cent hike by Gov. Mitch Daniels (R) to fund health insurance coverage and anti-smoking programs
• Iowa – $1 increase by Gov. Chet Culver (D) to curb smoking and provide health insurance to needy children
• Maine – $1 hike by Gov. John Baldacci (D) to patch a hole in the budget
• Maryland – $1 increase by Delegate Peter Hammen (D) to provide health insurance to low-income workers and subsidies to small businesses that offer coverage
• Mississippi – $1 increase by Lt. Gov. Amy Tuck (R) to cut nearly in half the 7 percent state sales tax on groceries
• Oregon – 84.5-cent increase by Gov. Ted Kulongoski (D) to provide health insurance to uninsured children
• Pennsylvania – 10 cent increase on cigarettes and a new 36-cent tax on cigars and smokeless tobacco by Gov. Ed Rendell's (D) to help cover those without health insurance
• South Carolina – 30-cent increase by Gov. Mark Sanford (R) to offset a proposed cut in state income tax
• Tennessee – 40-cent increase by Gov. Phil Bredesen (D) for education programs
• Wisconsin – $1.25 increase by Gov. Jim Doyle (D) to pay for anti-smoking efforts and to offset the cost of tobacco-related illnesses

Source: Stateline.org. For an interactive