NEW Tax Policy – Washington’s Vapor Tax Proposal Would Discourage Alternatives to Smoking

States continue to grapple with the taxation of vapor products, with Washington the latest to take up the issue. Under HB 1873, vapor products would be taxed at a 95 percent ad valorem rate, which would join Minnesota and the District of Columbia among the highest rates in the country. As traditional cigarette consumption continues to decline, and e-cigarettes and other vapor products grow as a share of the overall tobacco products market, states must weigh revenue, public health, and other considerations. Unfortunately, state approaches to vapor products do not always align with intended policy outcomes.

Cigarette taxes are an unstable revenue source, since smoking is in decline across the country. To the extent that tobacco taxes are intended to improve public health, this is a victory, even if only a portion of that reduced consumption is due to the taxes themselves. At the same time, however, it poses a revenue challenge for states, as many have come to rely on this declining revenue source.

The growing popularity of e-cigarettes and other vapor products makes them enticing targets from a tax standpoint: if smokers substitute an e-cigarette for a regular cigarette, the tax can follow them to the new product and the revenue isn’t lost. However, establishing special excise taxes on vapor products (especially if those taxes are as high as, or even higher than, the state’s taxes on regular cigarettes) cuts against the reason tobacco taxes exist in the first place.

Excise taxes, which are imposed on specific products or transactions, differ from the general sales tax, and are generally designed to change behavior or capture externalities. The gas tax, for instance, captures the negative externalities—congestion, road wear-and-tear, and pollution—associated with road use. It is not intended to penalize or discourage driving, but rather to price in these costs, so that they are borne by road users (the “user-pays” model). Cigarette taxes, by contrast, seek not only to internalize the public health costs of smoking, but also to increase the price of the product, thereby reducing consumption. This is why, colloquially, many refer to cigarette taxes as a “sin tax” but are unlikely to apply the term to gas taxes.

Studies show that e-cigarettes serve as a harm reduction and even smoking cessation tool, providing smokers with a less harmful alternative to combustible tobacco products, and in some cases helping them quit smoking altogether. As harm reduction products, it makes very little sense to tax them at exceedingly high rates (like 95 percent of the wholesale price), because the higher tax cost reduces the incentive for smokers to switch.

If the only motivation is revenue, the move makes a certain amount of sense: traditional tobacco products are declining, but some revenue can be recovered by extending to new markets. But if the only concern is revenue, what justification is there for singling out a product for such high taxes? The traditional justification is about health and societal costs—and here, the whole thing falls apart when vapor products are taxed like (or even more heavily than) cigarettes or other tobacco products. Heavy taxation of harm reduction products is likely to lead to worse health outcomes and greater public health costs.

As an ad valorem tax, moreover, HB 1873 would fall not only on the e-cigarette fluid itself, but also on the delivery mechanism when the two are sold together. This has the effect of taxing single-use disposable e-cigarettes at a higher rate than rechargeable and refillable devices, which may hit lower-income individuals the hardest, since lower-income consumers may be less likely to purchase rechargeable devices.

If lawmakers are concerned with health outcomes, they should be wary of a tax proposal which limits smokers’ options for pursuing less harmful alternatives.


Source: NEW Tax Policy – Washington’s Vapor Tax Proposal Would Discourage Alternatives to Smoking