The Master Settlement Agreement and cigarette tax policy

The Master Settlement Agreement (MSA) of 1998 between U.S. states and tobacco companies was a significant development in tobacco tax policy both in its scope and magnitude. However, formal investigations of the impacts of this deal are relatively scarce. Using a panel state-level data, this paper examines the impact of the MSA on cigarette tax policy at the state level in a political-economy context. The data cover the 1991-2004 period and include all the payments under the MSA that the states have received through 2004. Our results show that both economic and political factors have important influences on state cigarette taxes. Specifically, state cigarette taxes have gone up with greater MSA payments, for the 46 states that signed the Agreement and with individual income. States also tend to ratchet their taxes up when federal excise taxes go up. In contrast, the political considerations of greater number of smokers and tobacco producers seem to have a moderating effect on taxes. Finally, the considerations of revenue leakages to cross-border sales induce states to keep their tax increases smaller than those of their neighbors. Policy implications are discussed.