Does Government Policy Really Influence Behavior Or is It Just a Tax On Stupid?

There has been a lot of talk in the media over the past few days about Romney’s speech at the NRA meetings, warning about the Administration’s below the radar plans to institute gun “control”. The government purports to regulate many things and through targeted taxation and tax breaks, they seek to influence and or mandate certain behaviors – but does it work?

Before Obamacare, one of the biggest government interventions into the use of a legal product was the lawsuits filed against the tobacco industry in the 1990’s by 40 state governments. Let’s take a look shall we? 13 years in, we should have some pretty good data to base a judgment on.

Wikipedia recounts the process:

In the early-to-mid-1990s, more than 40 states commenced litigation against the tobacco industry, seeking monetary, equitable, and injunctive relief under various consumer-protection and antitrust laws. The first was declared in May 1994 by Mississippi Attorney General Mike Moore. The general theory of these lawsuits was that the cigarettes produced by the tobacco industry contributed to health problems among the population, which in turn resulted in significant costs to the states’ public health systems. As Moore declared, “‘[The] lawsuit is premised on a simple notion: you caused the health crisis; you pay for it.'” The States alleged a wide range of deceptive and fraudulent practices by the tobacco companies over decades of sales. Other states soon followed. The state lawsuits sought recovery for Medicaid and other public health expenses incurred in the treatment of smoking-induced illnesses. Importantly, the defenses of personal responsibility that were so effective for the tobacco industry in suits by private individuals were inapplicable to the causes of action alleged by the states.

The individual states lacked the power to consolidate a settlement, so they turned to the federal government and found a willing partner in Congress. Republican senator John McCain lead the process and the result was the Master Settlement Agreement:

The Tobacco Master Settlement Agreement (MSA) was entered in November 1998, originally between the four largest United States tobacco companies and the attorneys general of 46 states. The states settled their Medicaid lawsuits against the tobacco industry for recovery of their tobacco-related, health-care costs, and also exempted the companies from private tort liability regarding harm caused by tobacco use. In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses. The money also funds a new anti-smoking advocacy group, called the American Legacy Foundation, which is responsible for such campaigns as The Truth. The settlement also dissolved the tobacco industry groups Tobacco Institute, the Center for Indoor Air Research, and the Council for Tobacco Research. In the MSA, the OPMs (Original Participating Manufacturers) agreed to pay a minimum of $206 billion* over the first twenty-five years of the agreement.

*The estimated number for collection is now estimated to be $246 billion in the first 25 years.

So how well is it working?

One of the proposed benefits was that the tax added to tobacco products would make them prohibitively expensive for many and a large percentage of the population would simply decide that they cannot afford to continue the habit (or addiction, if you prefer). Did that happen?


In actuality a perverse system of taxation has been created that has resulted in exactly the opposite of the original stated intent of the original state level lawsuits.

According to the Centers for Disease Control, the percentage of the total population who smoked was 23.3%. The 2000 census shows that there were 281,421,906 people in the US, giving a rough total of smokers of 66.3 million. In 2010, the percentage had dropped to 19.3% while population increased to 313,358,000 resulting in 60.5 million smokers, a reduction of 5.8 million.

So if we assume that the totals collected from the MSA and other taxes are roughly $20 billion a year (allowing for inflation), the states have collected about $240 billion in the 12 years up to 2010. That’s $41,400 each to cut smoking by 5.8 million people. A full year’s prescription of Chantix costs about $1,400 ($115 a month at Wal-Mart), perhaps that would have been a better solution.

So where does the money really go?

The Campaign for Tobacco Free Kids reports:

The states this year (Fiscal Year 2012) will collect $25.6 billion in revenue from the tobacco settlement and tobacco taxes but will spend only 1.8 percent of it — $456.7 million — on programs to prevent kids from smoking and help smokers quit. This means the states are spending less than two cents of every dollar in tobacco revenue to fight tobacco use.

The states have cut funding for such programs by 12 percent ($61.2 million) in the past year and by 36 percent ($260.5 million) in the past four years.

The second assumption is that it would be spent to offset state health care costs. So if it isn’t going to prevention, the balance must be going to healthcare, right? Not quite. As early as 2004, Assistant Professor Kelly H. Tiller of the Agriculture Department at the University of Tennessee found that the funds were already leaking to other “priorities”:

While the Master Settlement Agreement reached between 46 states and four major cigarette manufacturers did not stipulate eligible uses for settlement payments, general expectations were that the majority of the settlement payments would be used for tobacco prevention and control and to treat sick smokers. Many states rationalized that the payments were an opportunity to fund priority programs that had been unfunded or underfunded in the past because of excessive state expenditures to treat sick smokers. To date, nearly half of all MSA payments have been allocated to health and tobacco control programs, although these general categories encompass an extremely broad range of health-related uses. Only five states are meeting or exceeding CDC recommended minimum spending on tobacco control and tobacco-growing states are generally at the low end of the spectrum in this spending category.

Most (actually all if you include Tennessee which “intended” ag-related uses) major tobacco producing states have viewed the settlement as an opportunity to provide direct and indirect economic assistance to tobacco growers and communities facing declining tobacco related income since the tobacco settlement. The six major tobacco states have allocated a total of $1.4 billion to growers, quota owners, and ag communities since 1999. This includes $903.5 billion in direct payments from Phase II funds, $316 million in supplemental direct payments from Phase I funds, and $171.5 million in actual allocations to tobacco and rural communities for agricultural and economic development. These figures include only actual allocations to date and do not include allocations available for these uses but as yet unapproved. While these payments are a significant cash influx in the tobacco region, they still fall short of estimated income losses in the region due to declining tobacco income over the period. It is also important to note that some of the direct payments to tobacco growers have been transferred to quota owners as anticipated payments have been bid into escalating quota lease prices.

Finally, it is important to note that settlement payment allocations in states are generally subject to political tides. At least four states have elected to securitize their expected payments, opting for a discounted up-front payment. A number of states have established endowments, trusts, or foundations to receive and allocate future settlement payments. Sixteen states have also passed supplantation laws disallowing use of settlement monies to fund programs currently funded through recurring state revenue streams. Yet much of the experience to date has been during a period of economic growth. Recently, as economic conditions have deteriorated in many states, several states that had initially allocated money to health programs and other uses— including payments earmarked to endowments or trusts—have re-directed payments to recurring general expenses. Tennessee, Wisconsin, Maine, Ohio, Florida, North Carolina, and Missouri have all either recently used part or all of their settlement payments to plug holes in state general budgets or have considered it. Since decision making regarding settlement spending generally rests with political bodies, prior and current allocations are not necessarily an indicator of future uses.

The trend has not changed, if anything, it has accelerated as noted in this article from the Pittsburgh Tribune-Review in May of last year:

A General Accounting Office report analyzing $53 billion in tobacco fund spending in 46 states from 2001-05 found that 30 percent went toward health care and 3 percent toward tobacco use prevention, but the remainder plugged budget holes and paid for education or infrastructure. Pennsylvania was one of only a few states that initially dedicated the money to health care funds.

Only 1/3 of all the money (down from 1/2 in Dr. Tiller’s 2004 research) is going to where it was intended and now there is an incestuous relationship between state governments and tobacco companies – they now need that money for their budgets, so they have little incentive to stop smoking. If you think about it, if you only have to pay out 33% of the intake, it is a pretty damned good investment. It has basically become a federal level protection racket – the tobacco companies pay the governments to stay in business and the states now have a vested interest in seeing that they do to keep the cash coming.

The CDC also has determined that there is a strong relationship between the level of education and lower socio-economic status and tobacco use:

Smoking prevalence also varied by education level among adults aged >25 years. Adults who had a General Education Development (GED) diploma (44.0%) and those with 9–11 years of education (33.3%) had the highest prevalence of current smoking. Those who had an undergraduate or graduate degree had the lowest smoking prevalence (11.4% and 6.2%, respectively). By age group, the prevalence of smoking was lowest among those aged >65 years (8.3%), compared with those aged <65 years (persons aged 18–24 years [22.2%], aged 25–44 years [22.8%], and aged 45–64 years [21.0%]). Smoking among adults whose incomes were below the federal poverty level (28.8%) was significantly higher than those whose incomes were at or above this level (20.3%) (p<0.02).

Yet, I never seem to hear our “progressive” friends up in arms against what amounts to a regressive tax the people least able to pay it. It is essentially a tax on stupidity and poor earning ability…that’s about as regressive as it gets.

This is only one example but unfortunately is all too common in my opinion. Social Security is another, possibly the first and greatest scam in a long line of scams on the American people perpetrated by our elected officials.

Corrupt governments always have their own agendas, ulterior motives that are seldom visible and large sums of money tend to be too big of a temptation to politicians and policy makers. Be skeptical of every attempt to “influence” behavior, especially when you are told (as we were of Obamacare by Nancy Pelosi) that “we have to pass it to see what is in it”.

Kinda make you think that it is all about the money, doesn’t it?

16 thoughts on “Does Government Policy Really Influence Behavior Or is It Just a Tax On Stupid?

      • You may talk a while. I haven’t seen it, but I understand it to be about these trials (that was my assumption, anyway.)

        Oh, wait; are you saying that you’re puffin on a sweet Cuban cigar whilst you play poker in a seedy part of Scotland, and you can’t talk? I should’ve known!

  1. Good post, Utah. I’m not losing any sleep over the financial hit the tobacco cartel took. The hearings in which it was learned that the tobacco ads deliberately target kids wiped put any sympathy I may have had for the amoral basters that run these companies.
    But, as a deterrent and long-term plan to curb tobacco use, well, you show us how well that has worked. We need to stop subsidies to tobacco farmers, maybe short-term loans to help the, transition to a crop that doesn’t addict and kill its consumers..

    • I’ve never smoked, so I never got hooked but a salient point is that other than being charged with deceptive advertising, the tobacco industry was never found “guilty” of doing anything illegal. The products are still for sale and still generally available all over the US. If it is the health risk claimed, would it not have been better to totally ban the product?

      Do you really think that an 8% reduction over 10 years is a victory when there are still over 60 million smokers at a cost of over $200 billion?

      I didn’t count the other tobacco products, cigarette use was the easiest to track.

      • On the one hand the govt. only minimally got the FDA involved with cigarettes, so then it comes down to money for the govt. On the other hand, they pulled that drug for fat people, and that was making a lot of money. (I’ve gone blank on that drug…) Anyway, I don’t understand how they pick and choose…

        • I’ve seen the study that was used to “prove” the dangers of second hand smoke – the primary door through which govt. came after the t0bacco industry. The correlation numbers between cancer and milk were stronger, and those between cancer and peanut butter fell solidly in the govt. figures to make it a known carcinogenic.

          I think you have the right idea: it was intended to control behavior AND raise taxes – nothing more.

  2. If deceptive advertising is the evil here, why aren’t the same people going after the tobacco companies also going after all the Leftist organizations pushing socialist policies and class warfare?

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