The taxation of traditional cigarettes has promised healthy revenues for several states, but as more smokers go electronic, the trend has caused other state governments to scramble for the bandwagon. The debate over taxation of e-cigarettes has been a hot topic in Washington D.C., especially since an array of local and state governments and states across the country are interested in pursuing the issue.
In some states, e-cigarettes are taxed at a state sales tax level but there’s no federal oversight. In more than 24 states, lawmakers are up in arms in a push to regulate this trend that’s here to stay because it presents a veritable cash cow.
The money might come in the form of an additional excise tax, which is basically a luxury tax and what some observers like to call a “sin tax.” In other words, if it’s pleasurable but not necessary for health or sustenance, you should have to pay extra for it.
Others argue that e-cigarettes aren’t necessarily a “luxury” at all, but a necessity for lowering health risks and abiding by etiquette because its users no longer subject anyone (not the smoker or passersby) to the harmful toxins of burning tobacco.
Minnesota has emerged as the biggest advocate
for regulation, and it stands alone as the only state with a tax policy just
for e-cigarettes. Its legislature acted in 2012, to make e-smokers pay a 95
percent tax tacked on to the product.
The state’s Department of Revenue declared that
e-cigarettes are a “tobacco product” and therefore should fall under
Minnesota’s tobacco tax regulations. The distributers in the state must pay the
tax or risk losing their license.
Similarly, Minnesota retailers who sell vapor
cigarettes can only purchase from distributors licensed by the state and must
“collect and remit sales tax on e-cigarette sales.”
There’s plenty of debate about whether
e-cigarettes actually qualify as tobacco products or not. There are a variety
of different types of “vapes” on the market and their composition is not
exactly equivalent to the contents of “real” cigarettes.
However, Minnesota boasts that the tax will
bring in an astonishing $1.16 billion in total tobacco sales for 2014, so it’s
not likely the policy will change when state officials are expecting such a
handsome payoff just around the corner.
Not surprisingly, other states have noticed what
Minnesota’s doing and want a piece of that pie. The governor of New Jersey,
Chris Christie, has come up with a 2015 budget proposal that includes a big
hike on the overall price of e-cigarettes, complete with
a tax of $2.70 per pack.
Supporters of the proposal claim the price will
discourage use by teens and kids, but that argument has been applied to
traditional cigarettes with less than perfect results. Others say that treating
e-cigs the same as regular cigarettes will harm the small businesses that sell
them, and discourage smokers from using a great alternative that will help
them segue to quitting altogether.
The president of the Americans for Tax Reform,
Grover Norquist, said on March 11, 2014 that “Small businesses like convenience
stores and especially brick and mortar vape shops will be hardest hit by this
$35 million tax increase.” He went on to say that raising e-cig taxes will
“significantly decrease in-state sales, resulting in increased cross-border tax
Recently, up to 40 percent of all the cigarettes
smoked in New Jersey were actually smuggled in to avoid taxes, which meant a
$500 million loss in uncollected tax revenue each year.
“By making New Jersey uncompetitive in
e-cigarette pricing, the state would encourage smuggling, which will cost New
Jersey small businesses tens of thousands of dollars,” Norquist asserted.
Assemblyman Dan Benson of New Jersey responded that taxing e-cigs represents
fiscal responsibility and it sends a warning to potentially future smokers.
“If e-cigarettes are taxed less than regular
cigarettes, we’re sending a message out there that they’re somehow safer, and I
think the jury is out on that,” Benson said.
Research that supports the healthier aspects of
e-cigs has been savaged by critics, but the results should speak for
themselves. Less tar, less nicotine, and less smoke mean fewer harmful toxins.
Recently, a Washington state proposal that was
very similar to New Jersey’s was killed by the legislature. It would have
changed the definition of vapor products, labeling them “tobacco products,” and
turn them into a legal tobacco product.
Lawmakers who supported passage were enthused
about the 95 percent taxation, which would have represented $40 million in new
revenue per year, but it didn’t pass.
The Centers for Disease Control and Prevention
(CDC) is a watchdog for all things health-related. The CDC has reported that
e-cigarettes have “far fewer of the toxins found in smoke compared to
traditional cigarettes,” but that hasn’t satisfied some critics.
Both cigarettes and e-cigs contain nicotine, but
the levels in the vast majority of vapor-based products are far lower. The
CDC’s Director of Smoking and Health, Tim McAfee, has gone on record to say
that it’s “reasonably certain” that when someone switches to e-cigs from
traditional cigarettes, there’s a health benefit.
At the heart of the taxation debate is the fact
that it’s challenging at best to establish a mechanism for taxing e-cigs. But
if you can, it promises such a hefty revenue stream that state governments find
it hard to ignore.
Plus, there’s the specter of settlements
relating to tobacco companies dishing out billions to aid for health care costs
related to smoking. Consider the 1998 Philip Morris settlement, in which the
tobacco giant agreed to pay $3.5 billion every year in “penance” for its part
in misleading consumers about smoking issues.
The arguments over e-cigarettes and taxation go
on, with DC, North Dakota, Utah, and the City of Los Angeles banning vapor cigarettes
indoors, and others states such as Tennessee, Colorado, New York, and Wyoming
already placing e-cigarettes firmly in the “tobacco product” category.