U.S - Extras on Excise: Is “Vaping” Better than Smoking? The E-Cigarette Debate

Electronic cigarettes (e-cigarettes) have been the go-to product this legislative season for state legislatures looking to raise revenue while protecting consumer health. At the heart of the discussion is whether “vaping” is healthier than smoking, and whether e-cigarette taxes will encourage or discourage healthy behavior.

At least 15 states have pondered tax bills during the past two years that would impose new taxes on e-cigarettes, which have gone untaxed for the most part since they were introduced in the United States about a decade ago. Many bills have been unsuccessful because of the strong debate about whether e-cigarettes are a healthier alternative to smoking.

Supporters claim e-cigarette taxes will discourage the use of alternative nicotine products that may have harmful side effects. There is concern that long-term use could cause health problems that people are simply not aware of yet because e-cigarettes are so new. Scientific studies analyzing the long-term effects have been inconclusive thus far.

State legislators also argue that taxes will send a message to consumers that e-cigarettes are just as harmful as traditional cigarettes. In a U.S. Senate Finance Committee hearing on July 29, Michael Tynan, policy officer of the Oregon Public Health Division, said states want to avoid a problem with people who start vaping e-cigarettes and then switch to traditional cigarettes that have proven harmful health consequences. That would go against the efforts states put into anti-smoking campaigns.

Officials are also concerned about e-cigarette use among minors, which has been rising partly because of the lack of regulation.

Opponents argue that taxes will not deter smoking because they make e-cigarettes and other vapor products too expensive for consumers. For example, in Minnesota, when the tobacco tax is applied to the wholesale cost of e-cigarettes, they are generally taxed at a higher rate than traditional cigarettes, according to some estimates.

Producers and small businesses claim that e-cigarette taxes will only hurt state economies. Taxes on e-cigarettes are unlikely to raise significant revenue, according to Americans for Tax Reform (ATR). For example, the North Carolina tax is expected to raise only about $5 million in revenue starting in FY 2015-16. Producers and small businesses claim that taxes will increase the cost of products enough to decrease sales in businesses already struggling. Thirty percent of the estimated $2 billion e-cigarette retail market is through convenience stores, with an additional 17 percent through independent vapor product shops, according to a March 2014 Wells Fargo Securities report. With almost half of sales done through small businesses, the effects could be widespread if many states enact e-cigarette and vapor product taxes.

State legislatures are not letting a lack of scientific evidence stop them from taking preemptive steps to prevent a surge in e-cigarette use. States have begun adding terms like e-cigarettes, alternative nicotine products, nicotine vapor products and nicotine dispensing devices to the definition of tobacco products and enacting e-cigarette laws preventing the sale of e-cigarettes to minors and prohibiting e-cigarette use in public places.

Minnesota and North Carolina are the only states so far that impose an excise tax on e-cigarettes. Minnesota added the terms e-cigarettes and e-juice (the fluid inside e-cigarettes) to its tobacco product definition in 2013. By including e-cigarettes in the definition, e-cigarettes became subject to the state's tobacco tax, currently 95 percent of the wholesale cost. This past May, the North Carolina legislature enacted H.B. 1050, which imposes a tax of $0.05 per fluid milliliter of consumable product, much lower than the tax on traditional cigarettes of $0.45 a pack.

Ohio's mid-biennium budget review bill, H.B. 472, pending in the legislature, would impose a 41 percent wholesale tax on e-cigarettes starting this year and would increase the tax to 49 percent next year.

Not all states are rushing to treat e-cigarettes like traditional cigarettes though. In an opinion issued July 30, 2014, Arizona Attorney General Thomas Horne (R) concluded that electronic cigarettes are not subject to Arizona tobacco luxury taxes or Smoke-Free Arizona prohibitions because e-cigarettes fall outside of statutory definitions. Arizona does prohibit the sale of e-cigarettes to minors.

Regulation of e-cigarettes will be a growing issue in the coming months. Ronald J. Bernstein, President and CEO of Liggett Vector Brands LLC, the fourth largest cigarette manufacturer in the U.S., called e-cigarettes a “big question mark” in a July 29 U.S. Senate Finance Committee hearing because they are a new and unregulated product.

The FDA said as early as 2011 that it would regulate e-cigarettes like traditional cigarettes, but had taken no action until this year. In April 2014, the FDA proposed a new rule that would “deem” e-cigarettes and vapor products to meet the federal statutory definition of tobacco product, subjecting e-cigarettes to federal regulation. The new rule “is the latest step in our efforts to make the next generation tobacco-free,” said former Health and Human Services Secretary Kathleen Sebelius in a press release about the proposed rule. The comment period for the proposed rule ends Aug. 8.
August 29, 2014 by Michael Nicholson
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