Pennsylvania lawmakers finally broke the state’s budget impasse this week, reaching an agreement on new revenues to shore up a $31.5 billion budget. The plan increases the cigarette 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. by $1 per pack, extends the state 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 digital downloads, taxes lottery winnings, and legalizes online casinos, with other smaller changes. One such change is a new tax on e-cigarettes, also known as vapor products, at 40 percent of the wholesale price, becoming the sixth state to tax e-cigarettes.
This particular element of the final budget has many issues; it is poorly structured, ignores key health differences between vapor products and traditional products, and adds to a litany of other minor, specific taxes that make up Pennsylvania’s unstable general fund.
Pennsylvania’s tax treats vapor products disparately. There are two general categories of e-cigarettes, reusable and disposable. To treat both reusable and disposable e-cigarettes the same, a “specific” tax should be imposed on the volume of vapor liquid sold. Instead, Pennsylvania will tax the wholesale price. Disposable e-cigarette prices include the value of the plastic device as well as the value of the vapor liquid, thus a tax on price falls harder on single-use products than on reusable products.
Low-income smokers may prefer disposable e-cigarettes because they don’t require prior purchase of a personal vaporizer device. This means that the higher tax on disposable products would fall on low-income individuals, adding a regressive element to the non-neutral tax.
The tax also disregards the positive health benefits of vapor products. Several studies have touted the potential for e-cigarettes to reduce tobacco-related morbidity and mortality. Not only have they been shown to be a less risky alternative to traditional incinerated cigarettes, there is evidence that e-cigarettes aid in reducing overall cigarette consumption, even among individuals who are not seeking cessation.
Increasing the cost of vapor products could prohibit low-income cigarette smokers from a healthier alternative and a possible way to quit smoking. Lawmakers should give consideration to the vast differences between traditional and vapor cigarettes before imposing similar “sin” tax treatments on each product.
Finally, the e-cigarette tax will add to the patchwork of unstable revenue sources that comprise Pennsylvania’s general fund. Excise taxes on “sins,” such as cigarettes and alcohol, are narrow revenue sources that decline over time and they should not be relied upon to pay for essential government services. Adding an e-cigarette tax to the list and increasing the state’s cigarette tax by 63 percent does nothing to fix Pennsylvania’s structural revenue problem.
Pennsylvania joins Kansas, Louisiana, Minnesota, North Carolina, and West Virginia in taxing vapor products. Washington, D.C., Chicago, Illinois (and Cook County), and Montgomery County, Maryland, also tax these products.
Pennsylvania policymakers should focus on broad-based, structural tax changes instead of piling on poorly designed taxes, such as the new vapor product tax.
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