Colorado Bill Would Put Vapor and Cigarette Tax Increases on November Ballot

April 26, 2019

If Governor Jared Polis (D) has his way, Colorado voters will consider a cigarette tax increase and a new vapor tax on the ballot this November. House Bill 19-1333, introduced less than two weeks before the end of the 2019 legislative session, would ask voters to approve a vapor tax and more than triple the cigarette tax, with revenue divided between early childhood education and health programs.

Currently, Colorado’s cigarette tax is on the low side nationally, at 84 cents per pack of 20 cigarettes. If this proposal gets approved, the tax would increase to $2.59 per pack, higher than in all but 11 states and the District of Columbia. Vapor products are not currently subject to an excise tax in Colorado, but this proposal would tax all vapor products, as well as other tobacco products (OTP), at 62 percent of the manufacturer’s list price.

In 2016, a similar proposal was placed on the ballot to raise the cigarette tax to $2.59 per pack and increase the tax on OTP (vapor products not included) to 62 percent of the manufacturer’s list price. This ballot measure was rejected, with 53 percent of voters opposing.

Governor Polis described House Bill 19-1333 as a way to generate revenue while raising prices to discourage vapor use among minors. There is some truth to this assertion: a cigarette tax increase could be expected to bring a short-term increase in tax collections. Further, the basic principles of supply and demand hold that when the price of a good increases, the quantity demanded decreases, all else equal. What proponents fail to acknowledge, however, is the volatility, regressivity, and host of unintended consequences tobacco taxes create, as well as the studies showing the value of e-cigarettes as a harm reduction and smoking cessation tool.  

Decades of data show how volatile cigarette tax collections truly are. For the past six decades, across all states and in almost every instance of a cigarette tax increase, momentary bumps in revenue have been followed by collections declines in future years. These collections declines are primarily attributable to the decline in tobacco use that has occurred nationwide since the Surgeon General’s first report on smoking was released in 1965. Since that time, many smokers have quit on their own as public awareness about the risks of smoking has increased. Others, especially lower-income taxpayers more sensitive to price increases, have altered their purchasing habits as taxes (and therefore prices) have risen. What results is a vicious cycle: policymakers increase tobacco taxes to raise revenue while discouraging smoking. Tobacco tax increases contribute to the already existing decline in tobacco consumption. A decline in tobacco consumption leads to a decline in tobacco tax collections. Policymakers, concerned about the decline in collections, again raise taxes to raise revenue while discouraging smoking.

This is not to suggest that all excise taxes are unwarranted. In fact, a well-structured excise tax is a reasonable way to capture the negative externalities associated with a particular good or behavior. Therefore, to the extent cigarette use imposes costs on society (such as public health costs), an economically efficient excise tax could be used to capture that cost and allow it to be internalized by users rather than society or taxpayers at large. It is therefore reasonable to dedicate tobacco tax revenue to smoking prevention and cessation programs, as well as other related public health programs. However, when tobacco taxes are raised to levels beyond the actual public health costs created, and when the revenue is used to fund unrelated government services, the tax is no longer an economically efficient excise tax but a punitive “sin” tax. Sin taxes—or taxes intended more to deter behavior than to capture negative externalities—are narrow-based, nonneutral, and unstable, and are therefore not a good source of revenue to fund general government services.

When proponents assert vapor taxes will reduce vapor consumption among minors, they do not acknowledge the fact that price increases will impact not just underage users, but all users, including scores of adults turning to vapor products as a less harmful alternative to traditional cigarettes or as a tool to help them quit smoking altogether. In August of 2015, Public Health England, housed in the British Department of Health, found vapor products to be 95 percent less harmful than traditional cigarettes. If the goal of House Bill 19-1333 is to improve health outcomes, the reduced harm associated with these alternative products should be taken into account in deciding how they are taxed, if at all.

If approved by legislators and voters, a 62 percent state-levied vapor tax would be the fourth-highest wholesale rate in the nation, only slightly below California’s. The table below shows the vapor tax rates in the eight states and the District of Columbia that have a statewide excise tax on vapor. Additionally, local taxes are imposed in certain jurisdictions in Alaska, Illinois, and Maryland. As of March, Colorado also allows its statutory and home rule municipalities to regulate and tax products containing nicotine.

State Tax Rate
California 62.78% of wholesale
Delaware $0.05/ml
Kansas $0.05/ml
Louisiana $0.05/ml
Minnesota 95% of wholesale
New Jersey $0.10/ml
North Carolina $0.05/ml
Pennsylvania 40% of wholesale
West Virginia $0.075/ml
District of Columbia 96% of wholesale

As an ad valorem tax, the 62 percent tax proposed under House Bill 19-1333 would fall not only on e-cigarette fluid itself, but also on the delivery mechanism when the two are sold together. This has the effect of taxing single-use disposable e-cigarettes at a higher rate than rechargeable and refillable devices, which may hit lower-income individuals the hardest, since lower-income consumers may be less likely to purchase the higher-priced rechargeable devices.

If prevention of underage use of vapor products is policymakers’ goal, it would make more sense to enforce existing laws prohibiting the furnishing of cigarettes, vapor products, and other tobacco products to minors under the age of 18 than to impose a punitive tax on all users, especially adults using the products legally.

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