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E-cigarettes causing mayhem with State revenues

About the author
Oliver Kershaw

Oliver Kershaw

Founder of and co-founder of

In 1998, a decade long series of court cases was resolved when the tobacco Master Settlement Agreement was signed off. The cases had been fought by 46 State Attorneys General to reclaim the money spent on tobacco related diseases through the Medicaid program.  The agreement stipulated that the Tobacco Companies pay a fixed sum in perpetuity based on the number of cigarettes sold, as well as a minimum payment of $206 billion to be paid over 25 years.

To me, this represents nothing more than the “smoke ring” being entrenched in American economic politics. The “smoke ring” was a term coined by British journalist Peter Taylor to describe the relationship between governments and the tobacco industry; a relationship in which the taxes from cigarettes end up being so large that governments are perversely incentivized to keep people smoking or, at the very least, disincentivized from tackling the issue.

So, the MSA seemed like a huge victory for those opposed to the Tobacco Industry, but in fact it resulted in the world’s most insidious smoke-ring. Every single state in the United States is now dependent on annual cash payouts from the industry via the MSA. And yesterday, Reuters reported that as a result of declining cigarette sales and increasing sales of vaping products, MSA payments are declining also.

In a rational world, this would be seen as a good thing – fewer cigarettes being smoked means less injury caused. But in the world of complex financial instruments and investment strategies, it turns out to be something of a disaster.

As Reuters reports:

The rapid growth of electronic cigarette sales poses a rising but under-appreciated risk to holders of as much as $96 billion of bonds tied to payments tobacco companies 

Since many of these bonds are backed by revenues from states that issued them, one might assume there are some quite panicked Attorneys general out there. And, given these AGs have a pretty good insight into their state finances, one would assume this isn’t news to them…

Wait, what’s this? From last September: ““We ask the FDA to move quickly to ensure that all tobacco products are tested and regulated to ensure that companies do not continue to sell or advertise to our nation’s youth,” reads a Sept. 24 NAAG letter signed by 40 state and territorial attorneys general and sent to the FDA.”

Ah, of course: they’re worried about the children. Worried, that is, despite there being no evidence then or now that non-smoking children are using e-cigarettes, and in spite of increasing evidence that overall smoking prevalence in children is declining at record rates.

I’m sorry, but I don’t think so. It’s quite clear that the overwhelming concern is to State revenues, and that the concern-for-children argument is an incredibly potent emotional lever, and one being pulled cynically.

The reality is that the MSA always was a deal with the devil, and the tobacco industry played everyone like fools. We’re now in the perverse situation where the most promising tool in the fight against smoking prevalence is being fought by the self-same people who should be welcoming it with open arms.

This must stop, but as long as big money is in play, it won’t.