The Public Health Funding Paradox: Why the Institutions That Fight Smoking Are Funded by Cigarette Sales

Every time a smoker in the United States buys a pack of cigarettes, a portion of the purchase price flows to the state government—not as a tax (though those apply too), but as a payment under the Master Settlement Agreement of 1998, the landmark settlement in which the major cigarette companies agreed to pay the states over $200 billion over twenty-five years to compensate for the Medicaid costs of treating smoking-related disease. The money was supposed to fund tobacco control programs: smoking prevention, cessation support, public education campaigns. **Most of it didn't.** The states, facing budget pressures and competing priorities, diverted the MSA funds to general spending—roads, schools, tax cuts, anything but tobacco control. Today, the states collect approximately $6-7 billion annually in MSA payments and tobacco taxes, and spend less than 3% of it on tobacco control. The rest goes into general revenue. The states have become addicted to cigarette money. And the addiction creates a perverse incentive: **the more smokers quit, the less money the states receive.** The institutions that are supposed to reduce smoking are funded by the smokers they're supposed to help quit.

**The MSA created a structural conflict of interest** that was visible from the moment the settlement was signed. The settlement payments are calculated based on cigarette sales volumes—when sales go down, payments go down. The states, by accepting this structure, effectively became partners in the cigarette industry's continued profitability. A state that aggressively reduces smoking loses MSA revenue. A state that does nothing to reduce smoking keeps the revenue flowing. The incentive is not subtle, and it has shaped state tobacco control policy for twenty-five years. The states that have invested most heavily in tobacco control—California, Massachusetts, New York—have done so despite the fiscal incentive, not because of it. The states that have done the least—the tobacco-growing states of the Southeast, the low-tax states of the Midwest—have aligned their tobacco control efforts (or lack thereof) with their fiscal interests. **The MSA transformed the states from adversaries of the tobacco industry into stakeholders in its continued revenue generation.**

**The securitization of MSA payments made the trap even deeper.** Many states, facing immediate budget pressures in the early 2000s, sold their future MSA payments to investors in exchange for lump-sum payments—essentially borrowing against the cigarette revenue stream. The securitization deals were complex, expensive, and often unfavorable to the states, but they provided immediate cash. The catch: the states that securitized their MSA payments are now legally obligated to maintain the cigarette revenue stream to service the debt. **A state that has borrowed against future cigarette sales cannot afford for those sales to decline too quickly.** The bondholders—large institutional investors—are now, in effect, stakeholders in the continued profitability of the cigarette industry. The financialization of the MSA has created a class of investors whose financial interests are aligned with continued smoking—a class that did not exist before the MSA and that is entirely invisible to the public.

**The solution is simple in concept and almost impossible in practice.** The states need to be separated from cigarette revenue—the MSA payments need to be replaced with a funding mechanism that is not tied to smoking rates. The obvious alternative is a cigarette tax that is dedicated to tobacco control, with the revenue placed in a trust fund that is insulated from the general budget process. California's Proposition 99 (1988) and Proposition 56 (2016) created such a structure, and California has one of the best-funded and most effective tobacco control programs in the country as a result. But California is the exception. In most states, the political will to dedicate tobacco revenue to tobacco control does not exist—because the revenue is needed for other priorities, because the tobacco industry lobbies against dedicated funding, and because the public does not understand the MSA well enough to demand that the money be spent on its intended purpose. **The MSA is a monument to the unintended consequences of well-intentioned litigation—a settlement that was supposed to fund the fight against smoking and instead created a structural dependency on the very behavior it was designed to eliminate.**

**The funding paradox extends beyond the MSA to the global level.** The FCTC encourages member states to raise tobacco taxes to reduce smoking—and the revenue from those taxes, in many LMICs, has become a significant source of government funding. The governments that depend on tobacco revenue face the same conflict of interest as the MSA states: reducing smoking reduces revenue. The FCTC's guidance on 'economically viable alternatives' to tobacco is aspirational, not operational—it doesn't tell governments how to replace the revenue they'll lose when smoking declines. The result is a global tobacco control framework that tells governments to reduce smoking while depending on cigarette taxes to fund their budgets. The contradiction is not sustainable—and it is a primary reason why tobacco control implementation in LMICs has been so slow.

**💬 Were you aware of the MSA and the funding paradox?** Does it change how you think about tobacco control—the idea that the states trying to reduce smoking are also dependent on cigarette revenue? What would a better funding model look like?