October 2002

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Who Profits by Far the Most From Cigarettes? Government
By Tommy J. Payne

Tommy J. Payne is executive vice president of external affairs for R.J. Reynolds Tobacco Co. This commentary was published October 19 in the Orange County Register.


While corporate accounting scandals are currently grabbing the headlines, we need to remember who perfected cooking the books: state and federal government. Their seemingly limitless lust for revenue makes their corporate brethren look like a bunch of choir boys.

All levels of government have been known to engage in "creative accounting" to try to make the numbers add up. Most often, we associate this practice with Washington.

But this year's state deficits have been so big and so rampant that they've caused state legislators to elbow their federal colleagues aside in the dash for cash. Where can they go to get more money to cover the red ink that won't go away?

To cigarettes, of course. The golden goose of government including the Golden State's government.

State and federal governments have a virtual monopoly on the profits from the sale of cigarettes. They make more money on each pack of cigarettes sold than anyone in the business including the manufacturers.

And not by just a little bit, but by a long shot. In 2001, the government made $1.54 on each pack sold, more than 15 times the dime R. J. Reynolds Tobacco Co. made per pack. Of the average national price for cigarettes last year, $3.28, governments took 47 percent directly to their coffers.

California's smokers, who comprise only 17.2 percent of the state's population, paid more than $2.2 billion in cigarette-related revenue to the state in 2001. That's more than $6 million a day, or nearly $4,200 per minute.

In 1999, 2000 and 2001, smokers nationwide paid $88 billion in cigarette revenues. This year 18 states and New York City have increased cigarette excise taxes, netting them an additional $3.2 billion. It's the new math of tax policy: Forget soaking the rich, let's tax the politically incorrect. Just give the plaintiffs' lawyers and the politicians a little time and the Mac Tax is next.

And guess who pays the vast majority of the tab? The median income of a smoker in California in 2000 was $26,500. The government is "tax profiling" singling out those least capable of paying and taxing them at usurious rates. Smokers have become the serfs of the governments' feudal funding system.

This immeasurable level of hypocrisy has bred a rather tortured series of arguments in favor of increasing cigarette taxes.

"It's a voluntary tax," says the politician. If you don't want to pay the tax, quit smoking, and everyone will benefit. Were these the same politicians who have characterized smoking as addictive some saying as addictive as heroin?

Applying the same "voluntary tax" standard, should state legislatures ratchet up taxes on junk food, luxury lattes, alcohol, movie tickets for violent or graphic films? And why can't taxpayers apply the same rationale to paying state income taxes? After all, working is "voluntary," too.

"It'll keep our kids from smoking," says the politician. But the government's own numbers show only 0.5 percent of cigarettes sold at retail or via vending machines are consumed by kids.

How about enforcing the laws already on the books in all 50 states that make it illegal to sell cigarettes to minors? Or adopting laws like those for alcohol, which make it illegal for a minor to purchase or possess cigarettes?

"It's a sin tax," say tax supporters. Are smokers more "sinful" than people who choose to drink alcoholic beverages? To generate the same level of excise tax revenue the state of California receives from just one carton of cigarettes, you would need to purchase 77 six-packs of beer or 219 bottles of wine. Smoker payments to Sacramento were seven times larger than all state alcoholic beverage excise taxes combined.

"We'll spend the extra money on tobacco control," says the politician. According to the Centers for Disease Control, only six states met minimum guidelines for tobacco-control spending from settlement payments in 2001. California was not among them. Instead, cigarette revenues nationwide are buying irrigation systems for golf courses, horse-breeding farms, salmon fishery recovery projects, farm equipment and run-of-the-mill roads and bridges.

"We don't want prohibition," says the politician. Of course not. With billions of dollars hanging in the balance, prohibition would be politically and fiscally unpalatable.

Perhaps lawmakers don't recognize their own reliance on tobacco-generated revenue. Maybe smoke got in their eyes.

(c) 2002 California Taxpayers' Association