The Illinois Supreme Court's ruling stimulated the market for ``tobacco-revenue munis.'' Those are municipal bonds backed by tobacco revenue streams resulting from a real fraud -- the Master Settlement Agreement. In 1998, 46 states conspired to seize $246 billion from companies that sell products made from a commodity -- tobacco -- the cultivation of which was then subsidized by the federal government. Tobacco subsidies totaled $528 million from 2000 through 2004; then the government paid $10.1 billion -- that number again -- to terminate the tobacco quota system.
Under the MSA, the states are scheduled to get their portions of the pot over many years. But deferral of gratification is un-American, so some states, eager to get their loot, have ``securitized'' their expected portions. Securitization involves selling bonds backed by the anticipated revenues.
The MSA is a deal struck between the state attorneys general and trial lawyers. For the latter, it was a financial windfall, netting about $13 billion in fees that sometimes amounted to tens of thousands of dollars per hour of work. For the former, it was a political windfall, enabling their states to finance this and that with billions paid by smokers, who are disproportionately low-income people.
The MSA rests on the fraudulent claim that smoking costs the states huge sums, principally because of health care costs. Actually, smoking makes money for governments, for two reasons. Cigarettes are the world's most heavily taxed consumer product (state taxes range from 5 cents to $2.46 per pack; the federal tax is 39 cents). And many smokers die prematurely from smoking-related illnesses, curtailing their receipt of entitlements for the elderly.
There is one problem with the states' plans to divvy up the money extorted from the tobacco industry: The MSA may be declared unconstitutional. The U.S. Constitution says (Article I, Section 10): ``No state shall, without the consent of Congress, ... enter into any agreement or compact with another state.'' A federal district court is being asked to declare that 46 states have done just that.
The states' ability to continue treating the tobacco industry as a ``budgetary Alaska'' -- the last frontier for exploitation -- depends on brisk sales of cigarettes far into the future. So all 50 states, which in 2004 reaped $12.3 billion in cigarette taxes, have an incentive to carefully calibrate these taxes so as to maximize revenues. They want high taxes, but not high enough to cause large numbers of smokers to quit the habit that is so lucrative to states.
The state governments seem to be calibrating cleverly: The adult smoking rate has not fallen much recently. So we have here a rarity -- a government success story. Of sorts.