E-Cigarettes Could Be Taxed By States Missing Out on Tobacco Revenue

  • At least 29 states considered a tax, four approved so far
  • Vaping market projected to triple to $15.9 billion in 2019

To the average user, everything about e-cigarettes and vaping devices -- the look, the smell, the taste, the satisfaction -- feels as good or better than the traditional match-lit version. But to cash-craving states, there’s one important thing missing: taxes.

U.S. cigarette smoking rates are falling, and the number of Americans who vape is on the rise. While the long-term public health effects aren’t certain, the impact on state budgets is clearer. After peaking at $17.1 billion in 2011, state cigarette tax receipts fell to $16.3 billion in 2014, according to a report from the Orzechowski & Walker market research firm posted by the Federation of Tax Administrators. Four states have already approved levies on e-cigarettes and related products, and the West Virginia legislature is considering its own tax.

“It does provide revenue when the state needs that increase,” said Chris Stadelman, a spokesman for Democratic West Virginia Governor Earl Ray Tomblin, who proposed the measure to fill a $270 million budget gap. “There’s also a health aspect, especially for young people, to discourage use.” 

That may be just a whiff of what’s to come. Kansas, Louisiana, Minnesota and North Carolina, along with cities including Washington and Chicago, have approved taxes on vaping products and e-cigarettes. At least 23 states have considered such measures, according to the Tax Foundation, a policy research organization in Washington, and its March analysis didn’t include Utah, where lawmakers considered and dropped a bill, or West Virginia.

“Will there be more legislation? Most likely, yes,” said Karmen Hanson, a health policy analyst at the National Conference of State Legislatures. “I would anticipate if a state has already tried it, they’ll come back and try again.”

Less Risky?

The e-cigarette and vapor market is expected to more than triple between 2015 and 2019 to $15.9 billion, according to Bloomberg Intelligence. The Centers for Disease Control and Prevention has warned the habit is becoming more popular among middle and high school students.

In many states, taxes make up a large portion of what cigarette smokers pay when they buy a pack at the corner store. At Green Gourmet, a New York City deli, a pack of Altria Group Inc.’s Marlboro cigarettes costs $14.25. That also covers a federal tobacco tax of $1.01 and state and local levies of about $4.35, according to the Campaign for Tobacco-Free Kids, an advocacy group. An e-cigarette at the same store, Imperial Brands PLC’s disposable Blu brand, costs $11.91 -- with no tobacco tax. Both prices include state sales tax.

U.S. government health officials haven’t said vapor products are less risky than traditional cigarettes, nor that they can be sold as smoking-cessation devices. Some e-cigarette and vape product makers point to key distinctions that they say make their offerings safer than, or at least different from, cigarettes. 

Nicotine Liquids

Taxes on e-cigarettes and vapor products target the nicotine liquids that may be sold with or separate from inhalant devices. Typically, a battery in the devices heats the liquid and produces an aerosol that, according to the CDC, can also contain heavy metals, ultra-fine particles and cancer-causing agents. While the nicotine in the liquid is derived from tobacco, it isn’t considered to be made from the plant.

Fontem Ventures, the subsidiary of Imperial that owns the Blu brand, opposes a tax, according to Marc Michelsen, a spokesman. R.J. Reynolds Vapor Co., maker of Vuse cartridges, supports a 5-cent-per-milliliter tax on the product, now in place in North Carolina and Louisiana, according to a spokesman for the unit of Reynolds American Inc.

“As these products do not contain tobacco nor do they involve the burning of tobacco, they should be taxed at a much lower rate than cigarettes,” he said. 

Federal Direction

From a regulatory standpoint, e-cigarettes are coming of age. The U.S. Food and Drug Administration brought electronic cigarettes and vape products under its control earlier this month, mandating that the majority of manufacturers seek FDA permission to remain on store shelves. That may have given states the justification they need to begin taxing the products.

“States wanted to see what the federal government was going to do,” said Mark Meaney, an attorney at the Tobacco Control Legal Consortium at the Mitchell Hamline School of Law’s Public Health Law Center in Minnesota. “Because they’re now defined at the federal level as tobacco, it might incentivize states to tax them the same as other tobacco products.”

Raise It for Health North Dakota failed in an effort to increase cigarette taxes and create a tax on wholesale prices of nicotine liquid for vapor products. Now it wants to take the question directly to the state’s voters in November. The group has teamed up with U.S. military veterans, and funds from the tax go to benefit ex-soldiers with unmet medical needs, said Kristie Wolff, program manager for tobacco control and advocacy at the American Lung Association in North Dakota.

“Having the veterans and health advocates come together could do incredible things for tobacco prevention,” she said in a telephone interview.

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