Big Tobacco, Big Money

How the Money Flows In, Out, and Around Big Tobacco

Big Tobacco, Big Money
April 20, 2015

While the tobacco industry has taken plenty of legal and monetary hits over the past twenty years, it remains a huge moneymaking industry. The Tobacco Atlas estimated that in 2013, the total revenue for the top six global tobacco companies was $342 billion, resulting in $44.1 billion in profits. To put things in perspective, if the industry were a country (the Republic of Tobacconia?), its revenue would be more than the 2012 GDP of countries like Greece, Denmark, and Portugal.

Let’s take a look at other cash flows regarding the “Republic of Tobacconia,” both direct and indirect.

  • Costs – According to the Campaign for Tobacco-Free Kids, using data from the Department of Health and Human Services, the annual tobacco-related health care costs in the U.S. are approximately $170 billion and the costs to businesses in lost productivity are around $156 billion. The $170 billion in health care costs include many taxpayer-funded sources, including Medicaid ($39.6 billion), Medicare ($45.0 billion), and $23.8 billion from other sources such as the VA system.

    The total estimated burden on taxpayers from smoking-related government spending is over $112 billion, or $956 per American household, per year. Even worse, those numbers do not include pipes, cigars, or smokeless tobacco.

    How about costs from the consumer perspective? There are approximately 42 million smokers in the U.S. and their costs average anywhere from $1,500 to $4,000 per year, according to various sources. See the next category for one of the main reasons why.

  • Tax Revenues – Governments are in a unique position with respect to tobacco — through aggressive non-smoking policies and prevention/cessation programs, governments are attempting to throttle one of their better sources of tax revenue.

    According to data from the Tax Policy Center, the state and local tobacco excise tax revenue for the years 2008-2012 held at between $17 billion and $17.6 billion annually, comprising a little over 2% of all state tax revenues ($794.6 billion) in 2012. Combine that with another $4 billion in state sales taxes and $14.1 billion in federal excise taxes, and the total tax take from cigarettes approaches $36 billion.

    R.J. Reynolds is quick to point out that in 2013, the governmental profit per pack of cigarettes was $3.80, greater than six times RJR’s profit on that same pack. Of course, the government has to cover billions of dollars in health care costs, so it’s not exactly profit.

  • Lawsuits – While the industry has faced constant lawsuits, significant successes began in the 1990’s. Perhaps the most well-known is the settlement (known as the Master Settlement Agreement) between four tobacco companies and the attorneys general of 46 states. Along with other settlement terms, the companies agreed to pay a minimum of $206 billion to the states over the first 25 years of the agreement to cover smoking-related health care costs.

    The Florida Supreme Court ruling in 2006 opened the door for a new wave of individual lawsuits by throwing out a class action suit, but simultaneously ruling that the tobacco companies understood that they were selling dangerous products and hid the true risks from consumers. Thus, tobacco companies are paying billions in annual settlement payments from all directions. R.J. Reynolds listed over $8.5 billion in settlement payments in 2013 alone.

    The Florida suits continue—one widow was awarded $23.6 billion in July 2014. While that judgment is being appealed and will certainly be reduced, it is indicative of the troubles of the industry and the much higher costs of doing business these days.

  • Marketing and Lobbying – The tobacco industry spends an estimated $9.6 billion annually within the U.S. for marketing efforts. As part of the 1998 settlements, they cannot target children with direct advertising efforts, yet approximately 2,800 children try their first cigarette each day.

    Meanwhile, there is plenty of tobacco money floating around Washington, DC. Congressional lobbying efforts by the industry run to about $16.6 million annually.

The tobacco companies may be embattled but they are likely to survive, and as they embrace alternative products such as e-cigarettes, they may well thrive. However, expect continued challenges, higher cigarette taxes, more lawsuits and higher judgments as time goes on. The Republic of Tobacconia deals with too much cash and affects too many lives for it to fade quietly into the background.

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