Indirect Subsidies

Sometimes the activities of the government can be truly mystifying when trying to understand. The whole subject of tobacco is one where nothing done makes sense. The product is both subsidized and taxed, subsidized so that the producers can make profits, and taxed to discourage people from the activity. The states simultaneously encourage people to quit smoking but depend on the tax monies generate from people smoking.

Moreover, in the 1990's, when lawsuits against tobacco companies by the states were popular as a way of recouping healthcare expenditures by the states, there were even more inexplicable complications. One company, subject to a lawsuit for the crime of selling a legal product to the citizens of a state, offered to stop selling the product in the state at all. The state responded by filing an injunction to force the company to conduct business while simultaneously suing them for conducting business.

The combination of supports to the activity and restrictions on the activity may seem puzzling, especially given the combination of subsidies and taxes. From an accounting point of view alone, removing both the subsidies and the taxes will result in savings through efficiency. The lack of subsidies will raise the price of tobacco to somewhere near the taxed price, but since the government isn't doling out money with one hand and collecting it with the other then there will be no transaction costs.

The reason this is not true though is because the layer of government that subsidizes the activity is not the same layer that taxes the activity.

In the federal system of the United States is that the states do not receive their income from the federal government but are instead responsible for their own budgets, their own revenue, and their own expenditures. Like any principle in modern government it is full out countless exceptions, most often in the form of directed funds for special projects, such as giving money for the construction of a community center. But unless there is a bailout of a state by the federal government, federal expenditures are not directed into the general fund of state revenues.

But if the federal government artificially lowers the price through subsidies, and the state government artificially raises the price through taxes, then the final effect is of the money being funneled through intermediaries to be received by the states. The consumer pays basically the same price, approximately, but a portion of that money is going to the states instead of to the farmer, and the federal government is paying the farmer so that the states can receive the money. So yes, the federal government does supply funds to the general revenue of the states, yet another way to prevent the states from gaining any ideas that they have any independence to stand up to the federal government when the federal government acts in an unconstitutional manner.