The Effects of E-Cigarette Taxes on E-Cigarette Prices and Tobacco Product Sales: Evidence from Retail Panel Data

Summary of Study

Bottom Line: E-cigarette taxes raise e-cigarette prices, reduce e-cigarette sales, and increase sales of traditional cigarettes, which are a direct substitute of e-cigarettes. E-cigarette taxes are also passed through to e-cigarette prices at more than a 100% rate. For every one standard e-cigarette pod of 0.7 ml no longer purchased as a result of an e-cigarette tax, 6.2 extra packs of traditional cigarettes are purchased.

E-cigarettes and traditional cigarettes are economic substitutes, meaning e-cigarette sales increase with traditional cigarette tax increases and traditional cigarette sales increase with e-cigarette tax increases.

Demand for e-cigarettes is elastic, with an estimated price elasticity of demand of -2.6, meaning that for every 10% price increase, sales fall by 26 percent. In contrast, the demand for traditional cigarettes is far more inelastic at just -0.6. A 1% increase in the price of traditional cigarettes increases e-cigarette sales by 1.19% while a 1% increase in the price of e-cigarettes increases traditional cigarette sales by 0.97%.

Every $1.00 increase in e-cigarette taxes reduces e-cigarette sales by -1,486 ml and increases traditional cigarette sales by 13,361 cigarettes.

The current bill before the U.S. Congress specifies a tax rate of $50.33 per 1,810 milligrams of nicotine (or $0.028 per milligram). If this bill were to become law, the tax would raise e-cigarette prices by $2.54 per ml. This price increase would reduce e-cigarette purchases by 3,188 ml per 100,000 adults, but would increase traditional cigarette purchases by 29,182 packs per 100,000 adults.

Therefore, a national e-cigarette tax will increase traditional cigarettes purchased by 6.2 extra packs for every one standard e-cigarette pod of 0.7 ml no longer purchased. Given that traditional cigarettes kill nearly 500,000 per year, policymakers should consider the public health tradeoffs associated with higher e-cigarette taxes.

Read the full study here

Feature Charticle

Map of e-Cigarette Taxes Per ml of Vaping Liquid in 4Q 2017

NBER

Findings:

  • E-cigarette taxes also passed through to e-cigarette prices at more than a 100% rate.
  • E-cigarettes and traditional cigarettes are economic substitutes, meaning e-cigarette sales increase with traditional cigarette tax increases and traditional cigarette sales increase with e-cigarette tax increases. 
  • A national e-cigarette tax will increase traditional cigarettes purchased by 6.2 extra packs for every one standard e-cigarette pod of 0.7 ml no longer purchased.

Read the full study here