Taxing Nicotine Products: A Primer

Summary of Study

Bottom Line: Taxing e-cigarettes could be counterproductive to public health as there is consensus about the benefits of them as substitutes for non-combustible nicotine or tobacco products. If lawmakers decide to tax these products, they should design a principled excise regime, raising revenue in a simple, neutral, transparent, and stable manner.

From a public health standpoint, the justification for taxing e-cigarettes is weak because they are considerably less harmful than cigarettes, meaning substitution should be encouraged. However, current federal tax proposals seek to tax e-cigarettes at the same rate as traditional cigarettes.

E-cigarettes, along with a greater consciousness about the dangers of smoking, have prompted millions to give up smoking. This contributed to federal and state excise tax collections on tobacco products declining since 2010.

An excise tax on e-cigarettes should be specifically based on volume as this design is the simplest way to tax a good. Taxing the strength or by nicotine content uses the wrong proxy for the harm associated with vaping. In effect, this tax practice encourages higher consumption quantities of lower nicotine-containing liquids. The level of tax should be carefully considered by lawmakers and be relative to the harm.

The large black market for cigarettes should serve as a cautionary tale for lawmakers when designing e-cigarette products taxation. Inefficient taxation of nicotine products could lead to increases in illegal trade. This inefficiency increases when regional as well as global differences in tax levels get bigger.

Multiple levels of government are considering banning flavored products in all tobacco categories. Bans can be observed as infinite taxes and share high taxes’ unfortunate effects on adult smokers’ ability to switch from cigarettes to a less harmful product.

Policymakers should consider the potential of e-cigarettes to combat smoking of combustible tobacco products before supporting punitive taxes or bans. High levels of taxation hurt smokers’ ability to switch from cigarettes to harm reducing products as they would be more expensive. One way of getting the 24 million Americans who want to quit away from cigarettes is to offer less harmful nicotine alternatives as cessation tools.

Read the full analysis here. 

Feature Charticle

U.S. Smoking Rates Between 2002 and 2008

Tax Foundation

Findings:

  • From a public health standpoint, the justification for taxing e-cigarettes is weak because they are considerably less harmful than cigarettes, meaning substitution should be encouraged. 
  • The rise in popularity of e-cigarettes has contributed to a dramatic drop in the proportion of smokers in the country, especially among youth. 
  • High levels of taxation hurt smokers’ ability to switch from cigarettes to harm reducing products as they would be more expensive.
  • If lawmakers decide to tax these products, they should design a principled excise regime, raising revenue in a simple, neutral, transparent, and stable manner.

Read the full study here.