Tobacco’s Gift Keeps on Giving

Photographer: Davis Turner/Bloomberg

The 1998 multi-state tobacco settlement was a landmark example of multi-billion dollar corporate punishment. It was also a massive moneymaker for the states. Bloomberg’s Martin Braun today reports on how that money is still rolling in — and has put bonds backed by tobacco settlement money in the top ranks of state bond returns.

A bit of history is worthwhile here: When tobacco companies agreed to pay billions to settle claims, many states decided to take the money upfront and issue bonds backed by years of future payments. Most bondholders have gotten back years of payments.  Still, with cigarette sales and annual payments from tobacco companies falling, some of those bonds have drifted closer to default.

Last week, though, cigarette companies agreed to ante up another $4 billion of disputed payments. So now that stream, which recently appeared threatened, now looks like it’s  still not close to running dry after all. How much longer can it last? Maybe longer than you think; take a look at the chart below, which shows U.S. government data on rates of smoking in the U.S. broken down by age group.

In 2009, smoking fell, especially among the young, after cigarettes got hit with a 62-cent-a-pack federal tax. The big surprise here, however, may be that since then smoking rates have actually climbed a bit for some age groups. That’s not at all what The Market Now would have expected to see in the data.

Raising revenue from sin taxes is very much in vogue now in economics circles. In theory, the problem here is that if you cut the sin, the revenues fall too. Turns out, though, that smoking is an awfully resilient sin — an encouraging data point for state revenues and holders of tobacco bonds, but a discouraging one for public health.


A version of this post appeared earlier in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.

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