Introduction: Earmarks of Tobacco State Excise Tax Revenues and the Distribution of Tobacco Settlement Agreement Payments
Each year, state governments receive significant revenues from the state excise taxes imposed on the sale of tobacco products within the state and from tobacco settlement agreement payments. For most states, much of these revenues are dedicated to important state programs such as Medicaid, services for the elderly, education, and tobacco control.
Collectively, in Fiscal Year 2021 (July 1st, 2020-June 30th, 2021), states received nearly $27.3 billion in combined revenues. The states received over $19.2 billion from Tobacco State Excise Taxes (SETs) and nearly $8.1 billion in Tobacco Settlement Agreement (TSA) payments.
Much of these revenues are dedicated and set aside (commonly called “earmarked”) for various important state programs and projects. These included funding for Medicaid and health services for the elderly, tobacco control, health related research, education, capital projects for the maintenance and construction of buildings, social service programs, allocations to cities and counties, debt payments, specific dedication to the state general fund, and other services and programs that are unique to each state.
The National Association of Tobacco Outlets (NATO) commissioned a Fiscal Year 2021 report on the SET revenues and TSA payment revenues received by the states and their dedicated use to these important state programs. Below are links to the full downloadable reports and a link to an interface to download individual state reports.
Tobacco State Excise Taxes (SETs)
In Fiscal Year 2021, the more than $19.2 billion collected by states in total SET revenues came from the sale of cigarettes and other tobacco products (such as cigars, moist smokeless tobacco, chewing tobacco, and electronic cigarette products). Of the SET revenues collected, over $9.3 billion – nearly half – was dedicated or earmarked and set aside for important state programs and projects as referenced above.
In Fiscal Year 2021, Health Care programs received over $4.8 billion from dedicated SET revenue – the vast majority of all SET revenues at 51.4%. Additionally, when Health Care and Medicaid are combined, they account for 61.8% of dedicated SET revenue – nearly $5.8 billion in total. Social Services is the second largest dedicated SET revenue category, which received 18.4% or over $1.7 billion.
Tobacco Settlement Agreements (TSAs)
As a result of lawsuits by various states against major cigarette manufacturers in the 1990s, the litigants negotiated Tobacco Settlement Agreements (TSAs) with the states. Forty-six states plus the District of Columbia and a number of U.S. territories signed on to the Master Settlement Agreement (MSA), while four states, including Florida, Minnesota, Mississippi and Texas, agreed to separate settlements prior to the MSA. The purpose of the settlement was ostensibly to compensate the states for alleged health costs related to cigarette smoking. However, the terms of the agreements did not designate how the funds were to be spent by the states. Additionally, future payments are subject to changes in inflation, future cigarette sales volumes, and several adjustments resulting from changes in market presence and further litigation.
In Fiscal Year 2021, the fifty states plus the District of Columbia received and spent nearly $8.1 billion in TSA payment revenues they received. Similarly to the SET revenues states receive, over 91% of the revenues were dedicated and set aside for important state programs and projects (as of all data available as of May 24, 2022). Just like the state programs and projects SET revenues are used for, TSA revenues are also dedicated to fund tobacco control, health related research, education, Medicaid and services for the elderly, health care related social services and programs, capital projects for the maintenance and construction of buildings, social service programs, allocations to cities and counties, debt payments, specific dedication to the general fund, and other services and programs that are unique to each state.
Most of the TSA payment revenues used in Fiscal Year 2021 were directed to state Debt Payments ($1.7 billion) and Health Care ($926.8 million). When Health Care and Medicaid are combined, they account for $1.5 billion of TSA Payment revenues used, or 24.5%. In fact, just 6.3%, or $382.8 million, was directed towards Tobacco Control efforts in Fiscal Year 2021, and TSA payment revenues specifically directed to state General Funds totaled about $581.3 million.
FDA Proposed Rules
The U.S. Food and Drug Administration has proposed two product standard regulations that would ban the sale of menthol cigarettes and prohibit the use of characterizing flavors in all cigars – thus banning these products as well.
According to a recent report issued by the Tax Foundation, a ban on the sale of menthol cigarettes in the U.S. could result in the following impacts at the state level:
- A decrease in state cigarette excise tax revenue by $2.6 billion dollars.
- A decrease in state sales tax revenue by $892 million dollars.
- A decrease in Tobacco Settlement Agreement payments to states by $1.2 billion dollars.
This means that the total revenue loss to all 50 states could be as high as $4.7 billion in the first year after the menthol cigarette prohibition is enacted.1 Excise tax and sale tax declines would be even higher when lost sales of flavored cigars are factored into the impact on state revenues. Many of these state programs and grants would be adversely impacted through funding reductions due to the estimated loss of up to or more than $4.7 billion in excise tax, sales tax, and Tobacco Settlement Agreement payments.
Reports on Earmarks of Tobacco State Excise Tax Revenues and Distribution of Tobacco Settlement Agreement Payments
The Earmarks of State Tobacco Excise Revenues (Fiscal Year 2021): Report
The Distribution of Tobacco Settlement Revenues (Fiscal Year 2021): Report
State Specific SET and TSA Reports (Fiscal Year 2021): Infographics
1 “Federal Menthol Cigarette Ban May Cost Governments $6.6 Billion,” https://taxfoundation.org/federal-menthol-cigarette-ban, The Tax Foundation (March 2, 2022).