The voices of Tax Policy Center's researchers and staff
State and local governments often use taxes to influence consumer behavior. They subsidize conduct they like. California offers a rebate for buying zero-emission vehicles. And they penalize behavior they do not through corrective or sin taxes. The District of Columbia (DC) levies a 5-cent tax on plastic bags.
But what about e-cigarettes and other vapor products? These devices, introduced roughly a decade ago, provide nicotine without the tar and chemicals found in traditional cigarettes. Some view them as a way to quit smoking, while others warn they're merely a new way to hook kids on nicotine. The Center for Disease Control reports that 12.6 percent of adults and 16.0 percent of high school students have used e-cigarettes.
On May 5, the US Food and Drug Administration announced it would regulate e-cigarettes, suggesting the agency is concerned about the products health consequences. In contrast, Public Health England found e-cigarettes far less harmful than traditional smoking and a potential tool to end tobacco addiction.
Given the uncertainty about the health effects of vaping, states face a number of tough questions. Should they tax them at all, and if so by how much? Do they impose a unit tax on the vape/e-cigarette or the refillable nicotine cartridges or both? Or do they use a percentage-of-price tax?
There is also the matter of complexity. Many states already have different tax rates for cigarettes, snuff, and chewing tobacco. And some exempt premium cigars entirely. Should e-cigarettes get yet another rate or piggyback on one of these existing taxes?
And what about tax avoidance? Every state has a cigarette tax but per-pack taxes range from 17 cents in Missouri to $4.35 in New York (plus another $1.50 in New York City). The result: some consumers; dodge the highest state taxes by shopping elsewhere.
States also need to think about what to do with the revenue. Corrective taxes are often tied to popular spending programs (such as Philadelphia's proposed soda tax to fund early-childhood education)—although, the money is often diverted during a budget crunch.
Finally, and more importantly, what's the goal? Does the state want to eliminate e-cigarettes? Discourage their use but still leave vapor products as a cheaper alternative to traditional cigarettes? Or is the state only interested in new revenue?
Numerous states have debated taxing e-cigarettes but so far only four states and DC have passed specific excise taxes. Both DC and Minnesota choose to include all vapor-related products (vapes, refillable cartridges, etc.) in their definitions of "Other Tobacco Products" (OTP), and thus tax them at their OTP rates: 65 percent of wholesale price in DC and 95 percent of wholesale price in Minnesota. Because the OTP rates in DC and Minnesota are equivalent to or higher than their cigarette taxes, both effectively tag e-cigarettes as equally as bad as traditional cigarettes. As DC Councilmember Charles Allen said, "[W]e are treating [vapor] products the same way we treat nicotine products."
In contrast, Kansas, Louisiana, and North Carolina imposed per-unit taxes only on the refillable liquid nicotine cartridges: 5 cents per milliliter in Louisiana and North Carolina and 20 cents per milliliter in Kansas. If we assume one milliliter of vapor liquid equals half a pack of cigarettes, then these rates are all well below cigarette taxes in Louisiana (86 cents per pack), Kansas ($1.29), and North Carolina (45 cents). Thus, while theses state choose to push consumers away from vapor products with a tax, smokers still have an incentive to choose e-cigarettes over traditional packs. All of these taxes, and the Minnesota and DC taxes, go to general funds.
So what were the goals? DC and Minnesota clearly wanted to dissuade if not outright stop use of these products. As such, DC councilmembers should have welcomed news that their new tax helped close vape shops in the city. In Louisiana and Kansas, some policymakers were probably motivated by health concerns but it's important to note both taxes passed when these states were desperate for revenue to fill huge budget gaps. Meanwhile, North Carolina didn't have a budget crunch, but lobbying from tobacco companies helped the pass the vapor tax.
With these five taxes in place states have models for creating their own tax. But they still have questions to answer.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
In this Feb. 20, 2014 photo, Talia Eisenberg, co-founder of the Henley Vaporium, uses her vaping device in New York. Under a New York City law taking effect Tuesday, April 29, 2014, vaporizing devices will be treated the same as a tobacco-based cigarette. The New York ban, along with similar measures in Chicago and Los Angeles and federal regulations proposed last week, are again igniting debate among public health officials, the e-cigarette industry and users lon the future of the popular devices. (AP Photo/Frank Franklin II, File)