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Study: Most States Get Short End of Tobacco Settlement

Twenty-nine states would have been better off passing a $4 excise tax on a carton of cigarettes rather than signing multibillion-dollar tobacco settlements, a study concluded.

As part of the landmark 1998 Master Settlement Agreement, major tobacco companies agreed to make about $206 billion in annual payments over more than two decades. Four states made separate deals in the '90s worth roughly $40 billion -- which are combined with the MSA for the purpose of the study, according to a report by the Associated Press.

Under the MSA, Philip Morris USA and other large cigarette companies have paid about $4 for every carton they sold. But Jeremy Bulow, the Stanford University economics professor who wrote the report, says states don't get $4 for each carton sold within their borders. Rather, the MSA allocates percentage shares, which are purportedly based on each state's smoking population, related health care costs and other considerations.

Bulow says the settlement is really a national tax in disguise -- and one that results in many states receiving less than their fair share. The deal was structured so that smokers would have to pay this "tax" even if their states didn't sign on -- one reason some attorneys general felt compelled to join the MSA.

Under Bulow's calculations, for example, Virginia's adjusted share of the agreement is 1.71 percent, even though about 3.6 percent of the nation's cigarette sales in 2003 took place in the state.

With a state excise tax, Virginia would have received $4 per carton sold within the state. But the state only got the equivalent of $1.91 per carton.

In total, Virginia lost about $143.3 million relative to an excise tax -- and that's just in 2003, the study says. Virginia ranked behind Kentucky and North Carolina on Bulow's losers list. Kentucky lost $172.8 million in 2003 compared to the tax, while North Carolina lost $170.2 million.

In Bulow's study, New York received $12.21 per carton from the MSA and gained the largest dollar-sum amount, $550.6 million, relative to a state excise tax. California got $6.85 per carton and a $340.5 million benefit. Ranked by per-carton revenue, Washington, D.C., fared the best -- with $15.52.

Rob Wilkey, a Kentucky legislator and general counsel for tobacco company Commonwealth Brands, says one problem with Bulow's analysis is that it is based on states' cigarettes sales, which do not necessarily reflect consumption in individual states.

Tobacco-producing states like Virginia and Kentucky had boasted rock-bottom cigarette taxes until recently. As a result, they attracted many buyers who snapped up cigarettes to avoid high taxes in other states, Wilkey said.

About one-third of cigarettes sold in Kentucky, for example, weren't smoked by residents in 2003, he said. "You can't look at those numbers in a vacuum," said Wilkey.

Wilkey also says the MSA already allocates states' shares of annual payments based on smoking consumption, population and health-care costs. Thus, he said, it makes sense that populous states like New York and California and those with higher tobacco-related Medicaid costs get more money.

But Bulow says a set of individual state taxes rather than a national tax -- which the MSA effectively created -- would have been based on sales rather than a formula that no one has fully explained to the public. With a state excise tax, every time a consumer bought a carton of cigarettes in Virginia, the tax would go to that state, he said.

Even if you buy the argument that the states' settlement shares should be based in part on Medicaid data, Bulow adds, those figures are questionable. Estimates on tobacco-related Medicaid costs are rough and woefully outdated, he said.

Furthermore, states like Virginia, which keeps a tight rein on Medicaid expenses, may want to ask whether they are subsidizing states with higher expenditures.

"It's really a political thing," Bulow said. "If you look at the data, it doesn't hold up very well."

An official with the National Association of Attorneys General, which serves as a liaison between states and tobacco companies, said it wasn't clear whether Bulow's analysis took into account the MSA's public health benefits. As part of the agreement, the large manufacturers also agreed to restrict marketing and to fund smoking-cessation efforts.

Bulow said he did not include fees awarded to trial lawyers -- among the MSA's biggest beneficiaries. Unbeknownst to many Americans, the attorneys were able to receive billions of dollars from the MSA. They will continue to receive about $500 million annually for years.

"Were the deal constructed more transparently, voters and consumers would likely have rebelled," wrote Bulow.
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