10/21/2019 update: The House Ways & Means Committee is expected on Wednesday to mark up House Resolution 4742 sponsored by Representatives Thomas Suozzi (D-NY) and Peter King (R-NY). They both had sponsored the QUITS act, which we scored below.
Their new proposal is more detailed, and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es nicotine at $50.33 per 1,810 mg. That equals roughly $1.01 per nicotine-containing pod. The Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. has scored the bill and estimates a revenue effect of around $10 billion over a 10-year period. Our estimation of the tax increase is slightly higher, at $16 billion over 10 years. The Joint Committee on Taxation seems to assume a decline in consumption over time, which could explain the different estimates.
Both estimations would change significantly if the Food and Drug Administration (FDA) decides to ban flavored products, which make up most of the market.
Over the last few months, several lawmakers have called for a federal tax on e-cigarettes amidst reports of increased youth use.
Sen. Ron Wyden (D-OR) proposes a bill to introduce an e-cigarette excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. at the level applied to cigarettes, which is $1.01 per pack. A second Senate bill, sponsored by Sen. Mitt Romney (R-UT) and Sen Jeff Merkley (D-OR), bans most currently available electronic nicotine delivery systems (vapor) products and implements an excise of $1.01 per device and a similar tax on liquid containing less than 5 percent nicotine by volume.
The previously mentioned House bill, Quell Underage Inhaling of Toxic Substances Act of 2019 (QUITS), sponsored by Rep. Suozzi and Rep. King (R-NY), suggests increasing the cigarette excise tax to $3.03 per pack and increasing all existing categories and vapor products to the equivalent level.
How to Tax Nicotine Products
To the extent that legislators choose to tax vapor and tobacco products, they should design a principled excise regime focusing on raising revenue in a simple and stable manner.
The tax should be based on quantity. In terms of vapor, the obvious choice is taxing the liquid by volume (that is, per ml). It is the administratively simplest and most straightforward way for the federal government to tax a good as it doesn’t require valuation and as such doesn’t require expensive administration. Nicotine is not a good proxy as the differences in products and absorption are not captured by nicotine content alone.
Designing a tax for vapor is challenging because, unlike cigarettes, vapor products are not all similar. For instance, the pod systems typically have higher nicotine content than refillable systems. Legislators looking to accommodate this could consider establishing a tiered system, where open tank (lower nicotine) systems are taxed at a lower rate than pod-based systems. Such a system is already in place in Washington State.
Increasing taxes on nicotine to higher levels to deter young people from experimenting will hurt adult smokers, who are using the products to quit smoking. Further, increasing taxes significantly on a minority of Americans is bad policy. An additional tax bill would impact not only the large amount of small business owners operating around 20,000 vape shops all over the country, but also convenience stores and gas stations relying heavily on tobacco and vape consumers.
The risk of creating a new black market or fueling an existing one is significant. Untaxed and unregulated products would have significant competitive advantages over high-priced legal products. Cigarettes are already being smuggled into and around the country in large quantities and nicotine-containing liquid is moving around the U.S. from questionable sources. On top of not contributing to tax revenue–costing states billions–black market e-liquid and cigarettes have the added problem of being extremely unsafe. The stories about serious pulmonary diseases have prompted the FDA to publish a warning about black market THC-containing liquid, and reports of illicit products containing dangerous chemicals resulting in serious medical conditions have been published over the last months.
How Much Would the Tax Burden Increase?
As mentioned, there are three active proposals on the Hill. To provide a sense of how these proposals may increase excise tax burdens, we have scored two of the proposals. Sen. Mitt Romney and Sen. Jeff Merkley’s bill has not been scored, as it bans most of the currently available products.
One crucial piece of information is missing from the bills: how do you tax a product at similar rates to cigarettes, when the products are nothing alike–except for the fact that both produce nicotine for human consumption? This remains to be answered as the bills leave that up to the Department of Treasury.
There is a lack of available reliable data regarding the size of the U.S. vapor market and our estimations are limited by this. Some studies indicate average use to be 2.2 cartridges per day, whereas others indicate a much lower rate. We have chosen a more conservative estimate based on sales data from Nielsen for our calculations. Currently, JUUL is the most popular vapor product in the U.S., accounting for an approximated 40 percent of the total vapor market, which we estimate at about 1.8 billion pods. A pod is supposed to be equivalent to one pack of cigarettes, which for modeling purposes makes the tax level easy to calculate. As both bills implement a tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on estimated per use basis, we can assume that pod-based systems make up 100 percent of the market and would be taxed at $1.01 per pod for the Senate bill and 3.03 for the House bill. To estimate average tax burden, we have included use data from the Tobacco Use Supplement – CPS and the Center for Disease Control’s trend data.
In estimating the revenue effect, we also took into account the offsetting reduction in income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. revenue from increasing excise taxes.
Sen. Wyden’s bill levies a tax equal to cigarettes and does not increase other taxes. The total tax increase for taxpayers over a 10-year period is $16 billion. The tax is highly regressive, affecting the lowest-income Americans four times more than the average American and eight times more than high-income earners (household incomes of more than $240,000 a year).
If Sen. Wyden’s bill were to become law, a one-pod-a-day-user in a household with $39,000 in income would pay close to $370 in additional taxes per year. However, as not everyone in that income group vapes, we estimate that the taxpayers in this group would pay an average of $8 per year.
The House bill increases the cigarette excise tax 300 percent while simultaneously introducing a tax on vapor products at the same rate. The House bill also increases all other tobacco taxes to equal the new rate. These other tobacco categories are not included here due to limited access to reliable data. In effect our calculation underestimates the size of the tax increase from the House bill. Lastly, the bill introduces yearly inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. ary increases.
If the House bill were to become law, the increased tax burden for taxpayers would be $20.4 billion in 2020. Over 10 years that tax bill accumulates to $218 billion. That means a household with a $39,000 income would face an average additional $130 tax bill in 2020. A pack-a-day smoker or pod-a-day vaper would see a tax increase of about $1,100 per year.
Taxing at Reasonable Levels
A federal excise tax on vapor should not be at the same level as on cigarettes, as excise taxes are supposed to internalize the externalities connected to certain products. It is well-established that e-cigarettes are less harmful than cigarettes. A federal tax should respect the relative harm-reduction potential of vapor products.
Further, when determining tax levels, it is important to keep in mind that excise taxes are regressive in nature. Given this regressivity of excise taxes and their inherent instability, policymakers are well-advised to avoid relying on this revenue to fund broad-based government programs. The revenue should be used to cover the externalities associated with the excised good.
Finally, as smoking is more common among low-income Americans, lawmakers should take care to protect this group’s ability to switch from cigarettes to vapor products. Increasing the tax burden on smokers, dippers, chewers, snusers (those using moist snuff), and vapers with anywhere from $16 billion to $218 billion over a 10-year window certainly does not do that.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe