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OCR Page 1 of 56TOBACCO-
B-D6CT
July 30, 1997
BUDGETARY IMPACTS OF TOBACCO SETTLEMENT
Overview
The following tables provide four alternative scenarios of the budget effects of the
tobacco settlement. There are some underlying assumptions that are common to
all four scenarios, and other assumptions that distinguish the scenarios from each
other. Some of the influences on the actual deficit would not be recognized for
purposes of enforcement of the Budget Act. There are some additional
considerations that could drive all of these results in one direction or the other.
Common assumptions. The tobacco settlement specifies that industry payments
should be devoted to numerous activities, some undertaken by the Federal
Government and some not. However, the settlement does not specify or create an
agent to collect and distribute these funds. Accordingly, the tables that follow
assume that the Federal Government fulfills that role. All of the tobacco industry
funds are therefore assumed to be Federal receipts in the first instance. Funds are
disbursed for the various activities specified in the settlement; the residual funds are
assumed to be the compensation for past Medicaid costs that motivated the States
to undertake their negotiations with the industry. It is assumed that those residual
funds are divided between the Federal Government, on the one hand, and the
States, on the other, according to the historical average matching rate for Medicaid
expenditures (approximately 57 percent Federal). The Federal Government is
assumed to spend all of its share of the residual funds. (Therefore, the deficit
effects would not be different if it were assumed that all of the residual funds were
distributed among the States, with no share for the Federal Government).
Other assumptions are identical across the four scenarios. For example, tobacco
purchases are estimated to decline by 22 percent, which reduces Federal (and
State) tobacco excise tax receipts. Civil suits are assumed to claim damages at the
maximum amount specified in the settlement.
Assumptions that differ across scenarios. The four scenarios differ according
to the budgetary treatment of the Federal Government's receipts, and the assumed
outcome for the youth smoking reduction targets. Each of these issues has two
possible outcomes; the two issues with two outcomes each yield the four scenarios.
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