Jon Hanson
The smoking-related costs that the states have had to bear seem indistinguishable from the sort of external costs that efficiency-oriented policy analysts typically recommend should be borne by the party creating them. When a chemical manufacturer routinely spills toxic chemicals into a city’s water supply, the economic case is simple and strong for requiring the manufacturer to pay for (or "internalize") the costs of the harms caused by that pollution. Doing so ensures that the manufacturer prevents avoidable spillover costs. From that deterrence perspective, the states appear to have a legitimate claim against cigarette manufacturers.

Professor Viscusi rejects that external-costs analogy as inapt. Adopting a "no harm, no foul" norm, he concludes that the tobacco industry should, regardless of its conduct, not have to pay for any of the smoking-related costs borne by states. According to his calculations, smokers represent a net savings to state budgets. For example, although smokers, while alive, may draw more than non-smokers from state Medicaid budgets, smokers’ shortened life expectancies cause them to draw less overall from state budgets. A proper economic accounting, the argument goes, would look at both the costs and "benefits" of smoking to the states. Kyle Logue and I have argued that Professor Viscusi’s analysis is, in numerous ways, flawed. For instance, under Professor Viscusi’s preferred policy, manufacturers would be rewarded for killing rather than just injuring consumers. A deterrence analysis that disregards the dangers of such an incentive is, at best, incomplete.

The simplest way to glimpse the problems with Viscusi’s policy calculus is to take it seriously. If the death-benefit approach is sound, then cigarette manufacturers should be subsidized and otherwise encouraged to manufacture cigarettes that would kill a higher percentage of smokers at retirement age. Outside the cigarette context, the calculus would lead to similarly ghoulish policy prescriptions, such as disallowing parents from receiving tort compensation for the wrongful death of their young children. And it is not clear how the government might justify investing in, say, AIDS research or breast cancer research — that is, without first weighing the foregone "benefits" of such life-saving research.

W. Kip Viscusi
The social objective of legal liability is principally cost-effective deterrence. Any valid claim by the states must demonstrate a net loss, or there is no harm to be deterred. All states now earn a net financial profit from cigarettes rather than incurring a loss. If fewer people smoked, insurance costs to the states would rise, not fall.

The self-financing status of cigarettes holds even if one counts all smoking-related cost effects, not simply those due to alleged wrongful behavior, such as deceptive advertising. My calculations for the country and for each individual state indicate that smokers pay their own way. For example, in every state the excise taxes collected by the state exceed the increased medical costs associated with smoking. Because smokers do not live as long as non-smokers, the reduced nursing home costs they generate also exceed the increased medical costs. Moreover, the reduced cost of retirement pensions exceeds the increased medical cost in every state as well. From the standpoint of society as a whole, the pension and Social Security savings alone is at least $1 per pack. The state lawsuits not only do not calculate such net costs, but also inflate the increased medical costs due to smoking by charging smokers for medical costs that they would have had if they had non-smokers’ life expectancy. Smokers consequently pay for costs as if they died twice. These are hypothetical costs the states never have paid but for which they will nevertheless receive compensation.

If there were cigarette costs, the "legislative market" can address them by imposing a charge on cigarettes at the time of purchase, not retrospectively. Doing so will also give smokers proper incentives, whereas liability awards do not. Setting excise taxes to reflect net cigarette costs is a superior approach.