Vermont Senate Bill 18 would ban the sale of all flavored tobacco products. The Fiscal Note accompanying the bill estimates a revenue loss of $5.6 million in the first full year following the ban. Our calculations show this is a major underestimate of the revenue loss. We estimate the annual effects of the flavor ban to be $15.6 million – $19.8 million (see table below), 250-350 percent of the estimate in the Fiscal Note.
Flavor bans primarily target menthol smokers. Vermont has one of the nation’s smallest shares of menthol cigarettes smokers. Nationwide, menthol-flavored cigarette sales comprise roughly one third of all cigarette sales. In the Green Mountain State, menthol cigarettes are only 18 percent of the cigarette market.
In 2022, Vermont collected more than $58 million in excise taxes from 18.9 million packs of cigarettes sold and a 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. rate of $3.08 per pack. Adding Vermont’s 6 percent sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. to these sales generated another $10.5 million.
Vermont also collected an additional $19.2 million from other tobacco products (OTP), including cigars, loose smoking tobacco, chewing tobacco, snuff, vaping products and e-cigarettes. While we don’t have a great estimate on the market price of those products, if sales taxes comprise roughly the same ratio to excise taxes as cigarettes (18.0 percent), the sales tax collections on OTP added another $3.5 million.
Our best estimate for how much consumption would fall from a flavor ban comes from neighboring Massachusetts. In 2020, Massachusetts banned the sale of flavored tobacco products. Prior to the ban, menthol cigarettes made up roughly 31.3 percent of the market in the state. After the ban, sales fell by 27.4 percent; roughly three quarters of menthol purchases disappeared from state sales, while the other quarter switched to nonflavored products.
Applying a similar forecast to Vermont, where menthol sales made up about 18 percent of market sales in 2022, we estimate that total cigarette sales would fall by 13.7 percent. The decline in cigarette sales would decrease 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. collections by $8.0 million and sales tax collections by $1.4 million.
The OTP category contains many products. Absent high-quality data on pre-ban flavor compositions of OTP in either Massachusetts or Vermont, we estimate a similar decline in OTP sales post-flavor ban in Vermont as we observed in Massachusetts. A 27.4 percent decline in Vermont OTP sales would decrease OTP collections by $5.3 million and sales taxes on OTP by $0.9 million.
Combining the effects of the decline in cigarette sales and OTP, we estimate Vermont tax collections would fall by $15.6 million. This is before we factor in losses from smuggling or cross border sales.
In 2021, Vermont saw an increase in cigarette sales of about one million packs. This was the first increase in sales in more than a decade and bucked the four-decade trend of declining sales. While we do not yet have the data to identify the exact cause of the increase in sales, the most likely source of the increase was an inflow of menthol smokers from neighboring Massachusetts that bought cigarettes in Vermont following the Massachusetts flavor ban. A flavor ban in Vermont would remove those Massachusetts menthol shoppers from the state and would send many Vermont shoppers to neighboring states that still permit flavored tobacco product sales.
If we attribute only 1 million packs to inflow from Massachusetts (assuming no change in Vermont from previous levels and ignoring the downward trend in sales), the decline in sales will have a serious effect on revenue. To calculate the impact, we subtract 13.7 percent of the million pack increase to avoid double counting from the previous estimate to get 860,000 packs. That represents a conservative estimate of an additional 4.57 percent decline in sales. For comparison, Massachusetts experienced a 6.6 percent increase in net inbound smuggling in 2020, with the flavor ban in place for only half the year.
The decline in sales from lost inbound smuggling would decrease revenues by $2.7 million and sales taxes by $0.5 million. That brings the total cost of a flavor ban in Vermont to $19.8 million.
Flavor bans are complex issues for legislatures to consider. In addition to unintended consequences, including increases in crime and black-market activity, they have significant effects on state budgets. Policymakers should carefully consider these consequences as they set rates and regulatory regimes for all tobacco and nicotine products and should have the revenue information they need as they make their decisions.
Vermont is a small state which shares a border with two states—New York and New Hampshire—which currently permit the sale of menthol cigarettes (though a flavor ban is under consideration in New York), and which is not far from other jurisdictions. Lawmakers must weigh the potential benefits of cessation for some smokers against increased smuggling (and related criminal activity), and a loss of tax revenue not commensurate with a decline in smoking.
| 2022 Tax Revenues | |||||
|---|---|---|---|---|---|
| Excise | Sales | Total | Source | ||
| 1 |
Cigarettes |
$58,076,000 | $10,458,882 | $68,534,882 |
Orzechowski & Walker (O&W) Tax Burden on Tobacco 2022, author calculation |
| 2 |
Other Tobacco Products and Vapor |
$19,220,733 | $3,461,454 | $22,682,187 |
O&W, For Sales tax calculation, we used ratio of (1) excise tax collections to sales tax collections (18.0 percent) due to lack of data on market price of OTP |
| 3 |
Total 2022 Collections from Tobacco and Vapor |
$77,296,733 | $13,920,336 | $91,217,069 | |
| 4 |
Vermont Menthol Share |
18% |
Boesen (2022) |
||
| 5 |
Massachusetts Menthol Share (pre-ban) |
31.3% |
Management Science Associates Inc. data, 2020 |
||
| 6 |
Massachusetts Decline in Sales Post Flavor Ban |
-23.9% |
O&W Monthly Data |
||
| 7 |
Mass-Vermont Menthol Market Ratio |
57.5% | (4)/(5) | ||
| 8 |
Vermont Estimated Sales Decline |
-13.7% | (6)*(7) | ||
| 9 |
Massachusetts Decline in OTP Sales post-ban |
-27.4% |
O&W monthly data |
||
| 10 |
Vermont Estimated OTP & E-vapor sale decline |
-27.4% |
MA used as a proxy due to lack of OTP flavor data |
||
|
Tax Revenue After the Flavor Ban |
|||||
|
Excise |
Sales |
Total |
|||
| 11 |
Cigarettes |
$50,093,797 | $9,021,370 | $59,115,168 | (1)*(1+(8)) |
| 12 |
OTP & Vapor |
$13,954,252 | $2,513,015 | $16,467,267 | (2)*(1+(9)) |
| 13 |
Total Tobacco and Vapor Tax Revenue |
$64,048,049 | $11,534,386 | $75,582,435 | (11)+(12) |
|
Tax Change from Flavor Ban |
|||||
|
Excise |
Sales |
Total |
|||
| 14 |
Cigarettes |
($7,982,203) | ($1,437,512) | ($9,419,714) | (11)-(1) |
| 15 |
OTP & Vapor |
($5,266,481) | ($948,438) | ($6,214,919) | (12)-(2) |
| 16 |
Total Change in Tobacco and Vapor Tax Revenue |
($13,248,684) | ($2,385,950) | ($15,634,634) | (14)+(15) |
|
Tax Change Including Smuggling |
|||||
| 17 |
Cigarette Smuggling Decline in Sales |
-4.57% |
Based on Smuggling data in Hoffer (2022) and O&W sales data |
||
| 18 |
Revenue Change from Smuggling |
$(2,651,830) | ($477,566) | (17)*(1) | |
| 19 |
Combined Loss with Smuggling Loss |
($16,778,159) | ($3,021,571) | ($19,799,730) | (16)+(18) |
| Sources: Boesen (2022), Hoffer (2022), state statute, and author calculations | |||||