In a recent interview with Harvard Business Review, Harvard Business School’s Mihir Desai and Bill George gave some great insight on inversions, who really pays the corporate tax, profit shifting, and corporate tax...
- The Tax Policy Blog
- Washington State Proposes Tax on E-Cigarettes
Washington State Proposes Tax on E-Cigarettes
With the rise of e-cigarettes (or vapor cigarettes, as they are also known), states face new complications for their tax codes. Washington State may soon decide that e-cigarettes should be subject to tobacco taxes too.
Tobacco taxes have long ceased to merely compensate for the health risks associated with cigarettes, but have turned into major revenue raisers for states. As such, any decline in tobacco consumption can threaten to reduce state revenues. This pernicious dependence of government services on an officially discouraged behavior is something we have criticized before, and is one of the many problems with the so-called “sin taxes.”
The proposal in Washington State fundamentally alters the tobacco tax. Indeed, it actually redefines the nature of the tax, and changes it to not only any consumable tobacco, but also any electronic product that delivers nicotine. A non-electronic nicotine patch is just fine: but an electronic tobacco-free cigarette is apparently just not just fine. This major change to focus (inconsistently) on nicotine rather than tobacco is significant.
There are justifiable reasons for taxing some products at higher rates. If the consumption of a product imposes uncompensated costs on the rest of society (such as through unregulated pollution or noise) then it may be fair and economically efficient to impose an excise tax equivalent to the difference between the market price and the actual economic costs, or costs to society. The argument for tobacco is that the smoking population imposes costs on the rest of society in the form of shared medical costs of entitlement programs, which are funded by taxpayers, and also in the form of second-hand smoke, which is a cost borne by anyone who walks into a smokey bar.
Whatever the validity of those arguments, however, they have absolutely no application to e-cigarettes. E-cigarettes don’t cause damaging second-hand smoke and don’t include the harmful tar and chemicals that cause lung cancer. Insofar as they substitute for more damaging products, they may actually have positive externalities. Taxing e-cigarettes may make the people of Washington less healthy rather than more. If the relative price of e-cigarettes rises, fewer people will switch away from traditional cigarettes, which means more second-hand smoke and more lung cancer.
Taxing e-cigarettes this way does not make sense. It is rather cynical for legislators to, on the one hand, decry the damage caused by tobacco, especially on young people, and on the other hand add new taxes on a safer alternative.
Read more on cigarette taxes here.
Read more on Washington here.
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