Though I'm sympathetic to much of your political discussion, it should be noted that the tobacco settlement must be seen in context. It probably makes the industry better off, not worse.
The reason is that the industry was vulnerable to much higher costs in civil suits around the country. The states' attorneys-general permit a lower overall cost. Federal legislation that was proposed last year and may come back would have given the industry the ability to coordinate pricing and actually recoup more from the public than the settlement costs. There's a lot of web material on these issues (on both sides) for any who are curious.
Merits of the civil suit aside, I'd also like to note that industry payments, in the form of the settlement bounties or simply cigarette taxes are mostly a gratuitous, regressive penalty on working class people. The anti-smoking effect and associated benefits are arguably small compared to the tax burden.
The whole exercise is basically a way for the states and/or the Feds to get some easy money and circumvent the normal political constraints on raising general taxes. In both cases, part of the spoils will undoubtedly go for tax cuts.