Issue Backgrounder
February 11, 1999
By Linda Gorman
Synopsis: Senate Bill 99-054 Synopsis: Senate Bill 99-054 is one of several bills dealing with revenues from the recent Tobacco Settlement. SB 54 is superior to most of the other bills, because it requires the revenue to be placed in a trust fund. But it is illegitimate for the legislature to keep any of the tobacco settlement money, since the money is a de facto tax increase on tobacco. Tobacco settlement revenues should be refunded to the people, either through a general tax cut, or through programs to compensate the alleged victims of the tobacco companies–namely the smokers.
What the Bill Does: This bill would create the Colorado Health Care Trust Fund to receive the funds from Colorados participation in the tobacco settlement. Investment earnings from the money in the fund would remain in the fund. Any unappropriated money in the fund would remain in the fund and would not revert to the general fund. The state treasurer is required to certify the funds balance each year. This bill would create the Colorado Health Care Trust Fund to receive the funds from Colorados participation in the tobacco settlement. Investment earnings from the money in the fund would remain in the fund. Any unappropriated money in the fund would remain in the fund and would not revert to the general fund. The state treasurer is required to certify the funds balance each year.
Each fiscal year, the legislature could spend up to 6% of the aggregate amount of principal in the Colorado Health Care Trust Fund. The amount of principal is defined as the amount in the trust fund on the September 1 prior to the fiscal year.
Discussion: Estimates of Colorados share of the tobacco settlement vary. One set anticipates $33 million this year, and $100 million each year from 2000 to 2025. This is a lot of money. The question is what the state should buy with it and whether it should be spent immediately or saved for later use. Estimates of Colorados share of the tobacco settlement vary. One set anticipates $33 million this year, and $100 million each year from 2000 to 2025. This is a lot of money. The question is what the state should buy with it and whether it should be spent immediately or saved for later use.
Most competing proposals would immediately spend the bulk of the income streams on some superficially worthy program that ostensibly reduces the harm the tobacco companies caused the citizens of Colorado. As cigarettes are generally assumed to be bad because they harm peoples health, many of these worthy programs have a health care emphasis. Most of these programs, such as proposals to fund health care for children, have nothing to do with smoking-related illneses.
As is always the case, people can come up with far more worthy causes than the state can afford to fund no matter how much money the tobacco settlement finally amounts to.
Though it has often been claimed that the state deserves this money because smoking related diseases increased its costs, proof is lacking. Estimates of the costs incurred by government at the national level suggest that on balance smokers pay more in taxes than they consume. The cigarette tax revenue that they generate, and the fact that their earlier deaths reduce pension expenses, more than makes up for any additional medical costs smokers are assumed to impose. Smokers, not the state, bear most of the costs of their habit.
Ironically, Colorados participation in the tobacco lawsuits was based on the claim that the cigarette companies had performed various actions (such as illegal collusion), which harmed smokers. Therefore, the tobacco settlement monies should be returned to the alleged victims of the tobacco companies–namely the smokers It is nothing less than legalized piracy for the state government to collect money from the tobacco companies because of harms done to third parties. Smokers, not the State of Colorado, were the victims.
If the real purpose in having extorted billions of dollars from legal businesses was to make reparations, the state would give the money to current smokers or to the estates of dead ones. Other possibilities include paying the medical bills of smokers, or using the money to offset tobacco taxes (thus returning the settlement money to the victims for whose benefit the settlement was supposed procured).
State government obviously has no intention of giving this undeserved money to people who truly suffer from smoking. At this point it is important to understand that more public spending does not necessarily mean more public good. If it did, the District of Columbias public schools would be the envy of the world.
Even government cannot repeal the law of diminishing returns. At some point, spending huge amounts of money on things like anti-smoking programs becomes simple waste. Current anti-smoking programs have done the job, with surveys showing that Americans actually over-estimate the dangers of smoking. In other words, the government propaganda campaigns have convinced most Americans, smokers included, that smoking is more dangerous than it really is. (Persons who smoke over 5 cigarettes a day throughout their lives have about a 1 in 3 chance of dying from a smoking-related illness; polls show that Americans believe that the risk is much larger.)
Intensified propaganda efforts now run the risk of attracting rebellious children to smoking. Is it just a coincidence that teenage and young adult smoking rates are rising in face of massive, hysterical anti-tobacco public education campaigns Rather than being increased through tobacco loot, the already over-funded anti-smoking programs run by the state should be reduced in size.
Additional spending on childrens health through state programs may also cause harm. Since 1992, the executive branch of Colorado state government has quietly taken more than $4.5 million in grants from the Robert Wood Johnson Foundation in exchange for using Colorado as a laboratory for health care reform. Programs include school-based health care centers that may encourage the inappropriate use of health resources and herding Medicaid clients into HMOs.
Another is the Childrens Basic Health Plan, an insurance program for children that replicates Robert Wood Johnson Foundation programs in other states. A nine-member board with complete authority to choose providers, set prices, and define benefits packages runs Colorados plan. It can accept private money from any source and meet in sessions closed to the public. Robert Wood Johnson experiments in other states have had poor results, including higher costs and a reduction in quality.
Poorly conceived programs propelled by a lot of money can do a lot of damage and the Childrens Basic Health Plan has not been tested in Colorado. Prudence would require waiting to see how the new childrens programs perform before committing large amounts of money to them.
Thus, Governor Owens proposal to spend much of the tobacco money on childrens health care runs a grave risk of empowering the socialist medicine bureaucracy which has already done so much damage to health care in the United States. Instead of expanding a bureaucracy which saves money by depriving people of medical care choices, the better approach would be to create a voucher program for childrens medical care.
The outline for a voucher system is already in place. Earlier this decade, the Legislature passed Mike Coffmans bill to create a voucher program for Colorado Medicaid patients. The program would have increased choices for the patients, while saving money for the state. Unfortunately, then-Governor Romer vetoed the bill. An Independence Institute Issue Paper by University of Colorado Economics professors Barry Poulson details how a voucher system would work. The paper, Privatizing Medicaid in Colorado, is available here.
The Governors proposal to spend hundreds of millions dollars on remedial reading programs for third graders is born of good intentions. But the government school system already gets thousands of dollars per year per pupil in state and local taxes. If the school system cant teach children to read in three years, maybe the problem is not a lack of money. Perhaps the problem is structural flaws in a quasi-monopoly system that is run for the benefit its employees, rather than for the students. Spending more money on a failed government school bureaucracy will just give us a more expensive failed government school bureaucracy.
Instead, why not create a voucher program for reading Students who failing at reading could be given vouchers to hire private tutors, or attend small private classes after school.
While vouchers for reading or health care are clearly superior to expanding the government bureaucracy model, it should be emphasized that vouchers only solve the efficiency problem–how to deliver services to particular beneficiaries. Vouchers do not cure the fundamental problem of spending the tobacco loot: the spending has nothing to do with compensating the victims in whose name the money is ostensibly being collected. It is not Philip Morriss fault that some third graders cant read, and it is not Brown amp; Williamsons fault that some people have children for whom they cannot afford to purchase health insurance.
Basing government programs on a temporary revenue stream is also a recipe for future tax increasesBasing government programs on a temporary revenue stream is also a recipe for future tax increases. Cutting any government program is difficult because vocal constituencies always mobilize in protest. As a result, using the tobacco settlement money for any purpose other than a general tax cut almost certainly condemns Colorado taxpayers to a tax increase when the payments stop. Furthermore, the Tabor Amendment suggests that the citizens of Colorado think that they have just about all the state government they can handle. Voters may not want to spend more on the kinds of things that government can provide.
S.B. 54 at least reduces the potential for harm by limiting the amount of additional money the state could spend to 6% of the principal in the Trust Fund.
A Tax Increase by Any Other Name: Earlier this decade, the Robert Wood Johnson Foundation funneled huge sums of money to the Colorado Department of Health in order to promote a citizens campaign for a tobacco tax increase. The new tax revenues would be used to fund various health-related programs. The voters of Colorado soundly rejected this tax increase. Unfortunately, the participation of the Colorado Attorney General in the tobacco lawsuits created an end-run around the will of the people. The tobacco tax increase which the voters rejected was imposed through the use of extortionate lawsuits. The tobacco settlement is not a reparation for any harm done to the State; it is simply a new tax, imposed in violation of our State Constitutions Taxpayer Bill of Rights, which vests the power to raise taxes belongs exclusively to the people. While legal fiction (the claim that the state is collecting damages from the tobacco companies) may save the tobacco settlement/tax from a TABOR lawsuit, nothing can shield the legislature from its moral responsibility to see that taxes are raised only when the people consent in a proper election. Commendably, S.B. 54 rejects the fiction that the tobacco revenues are damages; instead, S.B. 54 specifies that the tobacco revenues must be counted as part of the state revenue, whose total size is controlled by Article X, Section 20 of our State Constitution. Earlier this decade, the Robert Wood Johnson Foundation funneled huge sums of money to the Colorado Department of Health in order to promote a citizens campaign for a tobacco tax increase. The new tax revenues would be used to fund various health-related programs. The voters of Colorado soundly rejected this tax increase. Unfortunately, the participation of the Colorado Attorney General in the tobacco lawsuits created an end-run around the will of the people. The tobacco tax increase which the voters rejected was imposed through the use of extortionate lawsuits. The tobacco settlement is not a reparation for any harm done to the State; it is simply a new tax, imposed in violation of our State Constitutions Taxpayer Bill of Rights, which vests the power to raise taxes belongs exclusively to the people. While legal fiction (the claim that the state is collecting damages from the tobacco companies) may save the tobacco settlement/tax from a TABOR lawsuit, nothing can shield the legislature from its moral responsibility to see that taxes are raised only when the people consent in a proper election. Commendably, S.B. 54 rejects the fiction that the tobacco revenues are damages; instead, S.B. 54 specifies that the tobacco revenues must be counted as part of the state revenue, whose total size is controlled by Article X, Section 20 of our State Constitution.
While S.B. 54 is much more prudent than its competitors, Colorado legislators need to stop thinking about how to keep the tobacco tax, and start thinking about how to return the tax revenues to the taxpayers. When Alaska legislators received huge windfalls of oil money they decided that their constituents, rather than activists feeding at the government trough, could best decide how the money should be spent. They set up a trust fund that pays an annual dividend to every Alaskan citizen. If Colorado did that, state legislators really could argue that everyone would benefit.
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Prepared by Linda Gorman, Senior Fellow, and David B. Kopel, Research Director, Independence Institute
