Strapped States Eye Tobacco Funds As Downturn Leads to Budget Woes
States appear unable to resist the temptation of tobacco dollars as the cooling economy results in serious budget pressures.
The National Conference of State Legislatures says a handful of states are poised to use at least a portion of their legal settlements with tobacco companies to shore up strained finances. In Tennessee, lawmakers are mulling spending $560 million to bolster the state's budget for the next 12 months. Wisconsin plans to "securitize" its future tobacco payments from cigarette makers by selling them to investors in exchange for a smaller lump sum up front.
Critics argue that using money from the 1998 tobacco settlement, whereby cigarette makers agreed to compensate states for smokers' health-care costs, offers merely a quick fix. Without serious budget reform, states could be right back where they started next year, but with less settlement money available to bail them out.
And antismoking groups claim states aren't keeping promises to pour large sums into smoking-cessation programs. In Tennessee, for example, two legislative committees had recommended splitting tobacco dollars between rural economic-development and health-care initiatives, including antismoking programs. Now that work may be "completely rendered null and void," says John Williams, a Nashville lobbyist representing the American Heart Association and other groups.
But the lure of tobacco money has intensified. Roughly half of the 46 states receiving these funds have grappled with lackluster sales- and capital-gains-tax receipts or other weakening revenues. Meanwhile, the annual payments from tobacco companies have been piling up while states decide what to do with them. Why raise taxes or cut spending, some legislators and finance officials argue, with untapped fortunes in the bank? By 2024, tobacco companies are expected to have paid out $206 billion.
Lawmakers in Tennessee, one of nine states that don't levy a personal income tax, have been struggling since 1999 to identify new revenue sources. They narrowly averted a government shutdown two weeks ago by passing a $19.4 billion temporary budget that slashed spending dramatically and relied on $188 million in tobacco dollars. But with the quest for new revenue still stalled, it now appears the state will have to draw down even more tobacco money from savings.
This week, the Legislature was seriously mulling a budget that would exhaust $560 million in tobacco funds -- several years' worth of payments -- in one year. Even lawmakers who said they would vote for such a plan acknowledged it's far from ideal. Republican Gov. Don Sundquist, who has pressed for an income tax, termed the move a "disaster" and indicated he might veto such a measure because it doesn't represent substantive tax reform.
Not every state is succumbing to the allure of tobacco dollars. Earlier this year, Virginia legislators resisted Republican Gov. Jim Gilmore's push to securitize his state's stream of tobacco payments to help repeal an unpopular car tax. But Wisconsin, hoping to avoid raising taxes and help pay for its two-year, $47 billion budget, is scheduled to securitize its tobacco settlement next year.
Under Gov. Scott McCallum's proposal, the 30-year deal would generate a one-time windfall of between $1.25 billion and $1.8 billion. Roughly $350 million would be set aside to bolster the budget. And some dollars would be funneled toward smoking-cessation programs. "If we use these dollars as a bridge to get to more sound fiscal management, then that is appropriate," says Wisconsin Administration Secretary George Lightbourn.
Still, there is concern about what resorting to special revenue sources might say about a state's financial condition. Moody's Investors Service gave a relatively strong rating to Wisconsin's bonds in a May report while noting a "negative outlook," meaning the state's rating could change for the worse if budget imbalances continue.
Selling the stream of future tobacco payments might offer a financial respite, Moody's noted, but finances still could be strained "should economic weakness increase or become prolonged."