More states are keen on taxing e-cigarettes

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Nineteen states and the District of Columbia have now approved taxes on e-cigarettes, a trend expected to grow as the relatively young multibillion-dollar industry expands despite worsening criticism of its public health impact.

Kroll Bond Rating Agency took stock of the emerging taxation of "vape" products in a report released Monday. This comes as recent headlines have highlighted the health risks associated with vaping, and analysts believe that states could be adopting taxes to discourage vaping as well as to generate revenue.

“It’s still very early stages in the industry and judging by other sin taxes, eventually a balance is struck between capturing revenue and not affecting usage in ways that are counter to public policy priorities,” said William Cox, a senior managing director at KBRA.

Early revenue estimates show vaping taxes bring in far less money than the much older and larger traditional tobacco market, and supporters of those taxes have so far focused on the public health benefit they could generate by discouraging use.

Health risks associated with vaping have recently sparked attention. Last week, an Illinois resident died of respiratory illness after a vaping, the latest example of what the Illinois Department of Public Health said was an "alarming" spate of severe illnesses to occur following vape pen use.

The vape products industry, valued at $3.42 billion in 2018 and still growing, is a fraction of the $236.7 billion traditional cigarette market. There is currently no federal excise tax on vapor products.

“In this policy vacuum, some states and localities decided to enact vapor excise taxes at varying rates, relying on unique policy rationales that classified vapor products as tobacco products,” Kroll analysts said.

KBRA expects more states to enact their own vapor taxes, and also believes some localities that don’t have a state vapor tax will do the same.

States can decide to tax a percentage of e-cigarettes' wholesale price, tax per unit or milliliter of e-liquid, or a combination of both approaches.

New York is one of the latest states to implement a tax, which will be effective on Dec. 1 and is estimated to bring in $19 million for fiscal year 2021, according to Kroll.

Wisconsin will impose its tax on vapor products on Oct. 1 on distributors and consumers at a rate of five cents per milliliter of the volume of the liquid or other substance.

Its projected revenues are $2.3 million in fiscal year 2020 and $3.2 million in fiscal year 2021, according to the Wisconsin Legislative Fiscal Bureau. Tobacco taxes comparatively are projected to be $90 million and $94 million during those same two years.

In a June budget summary paper, the state noted its rationale for taxing vapor products, chief among them being health concerns.

“Proponents argue that an excise tax on vapor products would discourage their use among young people, and curb the growing trend of adolescent exposure to these products,” according to the summary. “Supporters of a tax on vapor products are especially concerned that their increasing popularity among young people will negate longstanding public health efforts to discourage people from smoking.”

Opponents of the tax in Wisconsin argued that e-cigarettes could be an effective tool for habitual smokers looking to quit conventional cigarettes.

Kroll noted concerns over the reliance on e-cigarette tax revenue streams such as long-term consumption trends and shifts to the black market.

“Further, if the tax does discourage vaping, it will ultimately reduce the size of tax collections,” analysts said.

John Hicks, executive director at the National Association of State Budget Officers, expects more states to take on taxes on e-cigarettes, noting that about nine did so in the past year.

“As government catches up to the societal and cultural changes, I think this is one where the states are catching up and recognizing that there are these issues to be addressed,” Hicks said.

Part of the increase in states looking to tax is that health piece, but also equity since similar products such as cigarettes are taxed, Hicks said.

“It is not a surprise to see a new product like that, that is somewhat of a replacement or an addition to an existing product, be taxed similarly,” Hicks said.

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