Utah Contemplates 86 Percent Tax on E-Cigarettes

March 7, 2019

Utah’s cigarette tax rate hews closely to the national average; its smoking rate does not. Fewer than 9 percent of Utah adults are smokers, the lowest smoking rate in the country by a comfortable margin. And about half of them are trying to quit. But one harm reduction and (for some smokers) tobacco cessation option might become far costlier in Utah, should pending legislation on the taxation of e-cigarettes and vapor products be enacted.

Under House Bill 252, electronic cigarettes and other vapor products would be taxed at a rate of 86 percent of the manufacturer’s sales price, which would represent one of the highest taxes in the nation, and which is significantly out of line with taxation of traditional cigarettes. It is instead aligned with the tax on other tobacco products like chewing tobacco, snuff, and “dissolvables.” The tax is projected to raise $23.6 million a year.

Eleven states and the District of Columbia tax vapor products, three of which only have a local tax in select jurisdictions. Six states impose specific excise taxes, meaning that the taxes are denominated as a particular amount on a given unit of product—in the case of e-cigarettes, cents per fluid milliliter. The remaining states or localities (and D.C.) impose ad valorem taxes, meaning that the tax falls on the wholesale price of the product.

The table below shows the existing statewide excise taxes on vapor products. Additionally, local taxes are imposed in certain jurisdictions in Alaska, Illinois, and Maryland.

State Tax Rate
California 62.78% of wholesale
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

Excise taxes differ from the general sales tax inasmuch as they target specific products or transactions. This is typically justified as a user-pays model (as with the gas tax, which corresponds—if imperfectly—with a driver’s contribution to congestion and road wear-and-tear) or as a way to capture negative externalities, such as increased state health costs. In the case of those excise taxes often thought of as “sin taxes,” the tax, by increasing the cost of the product, is also intended as a disincentive, designed to reduce consumption.

E-cigarettes are relatively new, and states have struggled to determine if and how to tax them. When smokers shift to vapor products, this reduces cigarette tax revenue, but given that a stated purpose of most tobacco taxes is to improve health outcomes and reduce health-related expenditures, the harm reduction associated with these alternative products must be taken into account.

The scientific literature demonstrates that vapor products are a less harmful alternative to traditional cigarettes, and that they can thus serve as an important harm reduction option for existing smokers, or even as a pathway to giving up smoking altogether. If a major purpose of the tax is to improve health outcomes, one would expect e-cigarettes to be taxed less than traditional tobacco products, if at all (beyond the general sales tax). Under the legislation pending in Utah, however, the opposite would be true.

As an ad valorem tax, moreover, the tax contemplated under H.B. 252 would fall not only on the 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 rechargeable devices.

Finally, to the extent that Utah is counting on the revenue from an e-cigarette tax, sales of all tobacco products are declining, and there is little reason to believe that this trend won’t ultimately extend to vapor products as well—even if, for now, their market share is growing as consumers shift from traditional tobacco products. That transition to less harmful products, however, may be less pronounced (to the detriment of existing smokers) if the state chooses to impose a disproportionately high tax on the alternative.

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