Will a Cigarette Tax Increase Hurt Tobacco Securitization?The significant cigarette tax increases that have been recently proposed in California and other states have undoubtedly had an adverse impact on the interest rates and other terms of tobacco securitization bond sales across the nation. Investor expectations about future tax increases are important because (1) tobacco settlement receipts are the sole security for the tobacco bonds; (2) under the terms of the 1998 agreement between the states and cigarette companies, settlement payments are tied to national cigarette consumption levels; and (3) consumption levels can be reduced by tax increases imposed by states.
The expectation of future cigarette tax increases in California and other states were incorporated within the terms of California's first securitization bond sale, which was completed in January 2003, and these expectations will also affect the terms of the state's second sale, currently planned for later this spring. Once the bonds are sold, enactment of a tax increase would have no further impact on the state's ability to raise the planned $4.5 billion in cash. However, higher taxes and reduced consumption levels may affect (1) the amount of time it takes the state to retire the debt and (2) the amount of interest the state will have to pay in the future to retire the bonds.
Well, whether it effects the MSA or not, it DOES impact smokers............again! California smokers are paying the Tobacco Settlement Money 110%. NOT Big Tobacco and NOT the state of California. But the smokers!
I think it's time the state go after someone else for a change.