California the Latest to Propose Higher Vapor Taxes

May 11, 2020

When Governor Gavin Newsom (D) submits his revised budget proposal on Thursday, it will include a vapor tax increase. California currently taxes vapor products at 59.27 percent of wholesale value, but the proposal would impose an additional tax at a rate of $2 for each 40 milligrams of nicotine in the product. The tax would take effect January 1, 2021 and is forecasted to raise $32 million in FY 2021. Collections would be allocated to administration, enforcement, youth prevention, and health care workforce programs. The budget summary also stipulates that the governor supports a statewide ban on all flavored nicotine products (including menthol cigarettes).

The impetus for this proposal is increased youth vaping in the state. A nationwide survey of high schoolers, published in the fall of 2019, found that 27.5 percent of students had vaped at least once in the prior 30 days, though only 10 percent of students were considered regular users (defined as vaping 20 days out the prior 30). While youth uptake is a very real concern which deserves the public’s attention, punitive level taxes and outright bans could impede historically high smoking cessation rates.

California is the latest state to try to increase vapor taxes. This year, Kentucky, Utah, Virginia, and Wyoming have already passed increases to vapor taxes, which means 25 states and the District of Columbia now tax vapor products.

High Rates Could Hurt Smoking Cessation

Gov. Newsom’s proposal would, if the tax is passed on to the consumer, increase the price of a JUUL 4-pack by $8.25 (JUUL is the most popular vapor product)—not including the existing wholesale tax. Considering that cigarettes are taxed at $2.87 per pack of 20, the proposal means that nicotine users could lower their tax liability by switching from vaping to smoking. This inconsistency goes against the concept of harm reduction, which is the approach that it is more practical to reduce harm associated with use of certain goods than avoiding it completely through bans or punitive level taxation. In the context of vapor products and cigarettes, it is important because the risk profiles for the two products are wildly different. Public Health England, an agency of the English Ministry for Health, concludes that vapor products are 95 percent less harmful than cigarettes.

California Nicotine Tax Would Result in Significant Tax Increase
Proposed Tax Rate in USD Based on Nicotine Content in Vapor Products
Product Type Brand Volume Nicotine content Nicotine content (mg) Nicotine excise tax level

Vapor (closed system)

JUUL 4-pack 2.8 ml 59 mg/ml 165 $8.25

Vapor (open system)

Bottle 30 ml 30 ml 10 mg/ml 300 $15.00

Vapor (open system)

Bottle 10 ml 10 ml 5 mg/ml 50 $2.50

Vapor (closed system)

MyBlu 2-pack 3 ml 40 mg/ml 120 $6.00

Source: California governor’s budget; Tax Foundation calculations.

Harm reduction is connected to excise tax design because cigarettes and vapor products are economic substitutes. With excise tax policy, increases or decreases in tax rates of certain goods can affect consumption of other goods that might be substitutes. That is to say, the effectiveness of cigarette excise taxes goes up when cheaper substitutes are widely accessible—and vice versa. In fact, research that looked at the effect of vapor taxes in Minnesota concluded that 32,400 people who would otherwise have quit smoking traditional cigarettes still smoked them as a result of the tax.

Aside from harming public health, exceptionally high tax rates and flavor bans can create incentives for illicit activities. Cigarettes are already being smuggled into and around the country in large quantities, and nicotine-containing liquid is coming into the U.S. from questionable sources. Black market liquids and cigarettes have the problem of being extremely unsafe and cost governments billions in lost taxes. The recent serious pulmonary diseases, known as EVALI, have prompted the FDA to publish a warning about black market THC-containing liquid. 

On top of the dangers to consumers, the legal market would suffer, as untaxed and unregulated products have significant competitive advantages over a limited selection of high-priced legal products. This would impact not only the large number of small business owners operating vape shops around the state but also convenience stores and gas stations relying heavily on vapers as well as tobacco sales. Policymakers should not lose sight of these unintended consequences as they set tax rates for nicotine products—especially in light of the strain businesses are already under due to the coronavirus pandemic.

Tax Nicotine by Quantity

Separately from the issues related to the high rates proposed by Gov. Newsom, the tax base may also create some problems. An excise tax is supposed to internalize the externalities related to consumption of a product. With smoking and vaping, these externalities are the health risks connected to frequent use. Nicotine is the addictive substance in the products, but not the main harmful ingredient. In other words, the governor’s proposal does not target the harmful behavior. 

Taxing based on nicotine content would favor low-nicotine liquids and could encourage increased consumption in the quantity of liquid. For instance, a vapor pod that has a nicotine content of 3 percent and contains 1 ml of liquid would be taxed at $1.50 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 ml of liquid would be taxed at $2.50.

A tax on vapor products (and other recreational nicotine products) should be based on quantity. The obvious choice is taxing the liquid by volume (that is, per ml). It is the administratively simplest and most straightforward way for the state government to tax a good, as it does not require valuation and as such does not require expensive administration. Taxing based on nicotine content would require extensive testing, and enforcement would be expensive.

Designing a tax for vapor is challenging because  of the variety of vapor products. Nonetheless, lawmakers should consider taxing nicotine products relative to their harm—not taxing harm-reducing products higher than more harmful combustible tobacco products. As lawmakers thread the needle between protecting adult smokers’ ability to switch and barring minors’ access to nicotine products, they would be well-advised to remember the policy spillover effects. Tax policy is not conducted in a vacuum and limiting access to vapor products with high taxes could hurt tobacco-related public health priorities.

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