Question

On May 23, 1994, Mississippi attorney general Mike Moore filed a lawsuit against the major US tobacco corporations and affiliated companies, seeking reimbursement for tobacco-related health expenditures (Evans, Ringel & Stech, 1999). By the fall of 1998, the legal effort had grown into one of the largest in US history, as more than 40 other states filed similar suits. The four largest US tobacco companies, nervous about a potentially devastating trial outcome, were signaling their interest in a settlement, floating numbers that would make this the largest civil settlement in US history. One of the settlement issues actively under discussion was a quantity-adjusted fine, effectively an excise tax on cigarettes. The rationale behind such a tax was stated succinctly by Mike Moore: "[The] lawsuit is premised on a simple notion: you caused the health crisis; you pay for it." Imagine you are negotiating this settlement on behalf of the various attorneys general. Do you agree with Moore’s reasoning regarding a proposed excise tax levied on cigarette firms?

Answer 1

Mike Moore's rationale for imposing an excise tax on tobacco companies is to make them pay for the health crisis their products have caused. While this generates revenue and acts as a sin tax, it has not significantly reduced smoking due to tobacco's inelastic demand. The debate includes contrasting views on the economic impact of smoking and the role of policy in addressing its externalities.

Step-by-step explanation:

Mississippi Attorney General Mike Moore's 1994 lawsuit against major US tobacco corporations marked the beginning of a significant legal and public health movement. This litigation eventually led to the largest civil settlement in US history, with the tobacco industry agreeing to compensate states for health-care costs related to smoking. The idea of imposing a quantity-adjusted fine, or an excise tax on cigarettes, was to hold the tobacco companies financially responsible for the health crisis caused by their products.

Mike Moore asserted: "[The] lawsuit is premised on a simple notion: you caused the health crisis; you pay for it." The excise tax was not just meant to recover costs but also to act as a sin tax to discourage smoking. Despite generating significant revenue, such taxes have not markedly reduced tobacco consumption as the product is relatively inelastic. This suggests that while consumers may grumble about higher prices, their purchasing behavior doesn't change significantly.

A contentious point, however, comes from a report cited by Philip Morris, suggesting that smoking can paradoxically bring economic benefits due to factors like increased excise duty and reduced health care and pension liabilities owing to early mortality. Yet, this perspective starkly contrasts with the well-established health risks of smoking highlighted by earlier epidemiological studies.

From a public policy standpoint, advocating for increased tobacco taxes is grounded in the desire to correct externalities caused by smoking. The varying state excise taxes, alongside federal taxes, contribute to the broader anti-smoking campaign that includes public health notices and advertising restrictions. The rationale for such measures aligns with the principle that those who cause negative externalities should help cover the resulting societal costs.