Calculating State Settlement Revenues
Research provided by Bill Godshall
Smokescreen: June 11, 1999
By focusing on the 25 year baseline payment figures in the Master Settlement
Agreement (MSA), attorneys general, governors, state legislatures and the
media have mislead the public, and have almost certainly overstated the
amount of money that will be paid by tobacco companies to the States in
Probably the most common misconception about the tobacco company payments
to the States is that they will end after 25 years. In fact, under the
MSA, payments are scheduled to continue in perpetuity, which is a very
Another little know fact is that baseline payment figures are subject
to numerous annual adjustments that will almost certainly result in actual
payments that are far less than the baseline payments.
Besides Inflation, the baseline figures are subject to a Volume Adjustment,
Non Participating Manufacturers Adjustment, Non Settling States Adjustment,
Federal Tobacco Legislation Offset, Litigating Releasing Parties Offset,
miscalculations and disputed payments.
Of these adjustments, it appears that the Volume Adjustment (exhibit
E) will have the greatest impact in reducing future annual payments to
The reason for this is that the baseline payment figures in the MSA
presume that future cigarette consumption will remain the same as it was
in 1997. But the Volume Adjustment provision will cause future tobacco
industry payments to decline at almost exactly the same rate as cigarette
consumption declines (i.e. a 25% decrease in cigarette sales nationally
will result in a 25% decrease in payments to all states).
According to the Tobacco Institute, the amount of cigarettes consumed
in America (state taxes paid) decreased from 29.978 billion packs in 1982
to 23.045 billion packs in 1997, a 23% decrease over 15 years, with an
annual 1.54% average decrease.
If the goals of health advocates are achieved, cigarette consumption
will decrease even more rapidly in the future, perhaps by 3% or more annually.
Also, the $.40 per pack price hike by tobacco companies that occurred
in the past six months has been projected (by Wall Street analysts and
health advocates alike) to result in a one time cigarette consumption decrease
of 5%-7%. Thus, a conservative estimate is that cigarette consumption will
have declined by 7% between 1997 and 1999.
Given these widely accepted volume adjustment assumptions, following
are three projections of actual tobacco industry payments (including Initial
Payments, Annual Payments and Strategic Contribution Payments) based upon
three different scenarios of future cigarette consumption:
Baseline - Annual payments as listed in the MSA that assumes
future annual cigarette consumption remains the same as 1997.
Volume Adjustment 1 - A 7% decrease in cigarette consumption
between 1997 and 1999, and a 1% annual decrease thereafter.
Volume Adjustment 2 - A 7% decrease in cigarette consumption
between 1997 and 1999, and a 2% annual decrease thereafter.
Volume Adjustment 3 - A 7% decrease in cigarette consumption
between 1997 and 1999, and a 3% annual decrease thereafter.