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Research & Commentary: Michigan Cigarette and Vaping Tax Would Do More Harm Than Good

April 23, 2019

Legislation would increase the excise tax on cigarettes by $1.50 to $3.50 per pack, and apply an 81 percent wholesale tax to e-cigarettes.

Michigan lawmakers have introduced legislation that would increase the state’s so-called sin tax on cigarettes and other tobacco products (OTP), and apply a tax on e-cigarettes and vaping devices. House Bill 4188 would increase the state’s cigarette tax by $1.50 from $2.00 to $3.50 per pack. The legislation would also increase the tax on OTP from 32 to 81 percent of the wholesale price and apply the OTP tax to e-cigarettes and vaping devices.

Sin taxes, also known as excise taxes, are highly regressive and disproportionately impact lower income persons. Moreover, e-cigarettes are a tobacco harm reduction product and should not be subjected to sin taxes, which are typically applied to discourage use of unhealthy products. Although lawmakers may believe taxing e-cigarettes will deter youth use, existing research on recently implemented taxes finds youth e-cigarette use has increased, even in states with high sin taxes.

Lower income persons are more likely to smoke than higher income persons. Americans with only a high school diploma smoke for a period “of more than twice as many years as people with at least a bachelor’s degree,” according to the Centers for Disease Control and Prevention.

Lower-income Americans also spend more of their income on cigarettes. From 2010 to 2011, Americans who earned less than $30,000 per year “spent 14.2 percent of their household income on cigarettes.” On the other hand, Americans earning $60,000 or more per year spent just 2 percent of their income on cigarettes during the same period. 

Moreover, Michigan currently uses very little tobacco money to help smokers quit. In 2018, the state received an estimated $1.2405 billion in tobacco settlement payments and taxes. However, Michigan spent only $1.6 million on tobacco prevention and cessation efforts.

Aside from the economic consequences of applying sin taxes to e-cigarettes, this misguided measure would also undermine smoking cessation efforts. An estimated three million American adults have used e-cigarettes and vaping devices to successfully quit smoking. Indeed, a 2019 study in the New England Journal of Medicine finds e-cigarettes to be “twice as effective as nicotine replacement therapy” in helping smokers quit.

Numerous public health groups have acknowledged e-cigarettes to be significantly less harmful than combustible cigarettes including Public Health England, the National Academies of Sciences, Engineering, and Medicine, and the American Cancer Society. The Royal College of Physicians, a respected and renowned public health organization finds e-cigarettes “an effective aid to quitting smoking,” and the health risks of e-cigarettes “is unlikely to exceed 5% of the harm from smoking tobacco.”

Kenneth E. Warner, professor emeritus at the University of Michigan School of Public Health, is an outspoken opponent of Michigan’s proposed tax on e-cigarettes. Warner says the “benefits of vaping in terms of increasing adult smoking cessation, substantially outweigh the risks of kids becoming addicted to nicotine.” Warner says “the tax on [e-cigarettes] should be sufficiently lower than a tax on cigarettes to encourage adults to consider e-cigarettes as an alternative to smoking.”

Further, taxes on vaping products do not deter youth use of e-cigarettes, according to recent results. In 2016, Pennsylvania enacted a 40 percent wholesale tax on e-cigarette. However, despite the enormous tax increase, youth e-cigarettes use increased after the tax was enacted.

According to the 2015 Pennsylvania Youth Survey (PAYS), 15.5 percent of middle and high school students reported using an e-cigarette within the past 30 days. In 2017, PAYS found this increased to 16.3 percent of middle and high school students reporting past 30 day use of e-cigarettes. Notably, e-cigarette use among 10th and 12th graders increased from 20.4 and 27 percent respectively, in 2015, to 21.9 and 29.3 percent of 10th and 12th graders reporting e-cigarette use in 2017.

Although Pennsylvania’s vaping tax did not deter youth e-cigarette use, it did shut down brick-and-mortar vape shops. One year after the Pennsylvania tax went into effect, an estimated 120 vape shops closed in the Commonwealth. This is problematic because vape shops generate significant revenue for state and local economies. One analysis estimates vape shops “generate annual non-online sales of more than $300,000 per store.” The global electronic cigarette markets “is estimated to reach $44,610.6 million by 2023.”

Rather than relying on cigarette and vaping taxes, Michigan lawmakers should reform how the state spends tobacco moneys. Cigarette taxes are inherently regressive and disproportionately impact lower income persons. Moreover, lawmakers should avoid placing sin taxes on tobacco harm reduction products because ample research indicates these products are significantly less harmful than combustible cigarettes. Furthermore, despite their intended purpose, sin taxes on e-cigarettes and vaping devices do not reduce youth use.

The follow documents provide more information on sin taxes and tobacco harm reduction.

Cigarette Taxes and Smoking
https://www.heartland.org/policy-documents/cigarette-taxes-and-smoking
In this study from the Cato Institute, Kevin Callison and Robert Kaestner suggest future  cigarette-tax  increases will offer relatively few public health benefits, and they say the justification given for future taxes should be based on the public finance aspects of cigarette taxes, such as the regressiveness, volatility, or the rate of revenue growth associated with those taxes.

Three Reasons to Avoid Tobacco Taxes
http://www.commonwealthfoundation.org/policyblog/detail/three-reasons-to-avoid-tobacco-taxes
Elizabeth Stelle of the Commonwealth Foundation examines Pennsylvania’s proposed tobacco tax hikes. Stelle argues they are the wrong prescription for the state, and she outlines several reasons why they are harmful.

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
https://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”

Vaping, E-Cigarettes, and Public Policy Toward Alternatives to Smoking
https://www.heartland.org/publications-resources/publications/vaping-e-cigarettes-and-public-policy-toward-alternatives-to-smoking
For decades, lawmakers and regulators have used taxes, bans, and burdensome regulations as part of their attempt to reduce the negative health effects of smoking. Recently, some have sought to extend those policies to electronic cigarettes. This booklet from The Heartland Institute urges policymakers to re-think that tax-and-regulate strategy. Policymakers should be mindful of the extensive research that supports tobacco harm reduction and understand bans, excessive regulations, and high taxes on e-cigarettes often encourage smokers to continue using more-harmful traditional cigarette products.

Research & Commentary: Randomized Trial Finds E-Cigarettes Are a More Effective Smoking Cessation Tool than Nicotine Replacement Therapy
https://www.heartland.org/publications-resources/publications/research--commentary-randomized-trial-finds-e-cigarettes-are-more-effective-smoking-cessation-tool-than-nicotine-replacement-therapy
In this Research & Commentary, Lindsey Stroud, a state government relations manager at The Heartland Institute, examines a study in The New England Journal of Medicine that shows e-cigarettes and vaping devices are twice as effective as nicotine replacement therapy (NRT) in helping smokers quit using tobacco cigarettes. Nearly 700 participants were studied during a 52-week period. Researchers found that 18 percent of e-cigarette users reported abstinence, compared to 9 percent of those using NRT. Stroud wrote that “these latest findings provide more valuable information on the public health role that e-cigarettes and vaping devices provide for the 38 million cigarette smokers in the United States,” and she implores policymakers to regulate these devices in a way that promotes, rather than prohibits, their use.

Research & Commentary: Vaping Taxes Do Not Deter Youth Use of E-Cigarettes
https://www.heartland.org/publications-resources/publications/research--commentary-vaping-taxes-do-not-deter-youth-use-of-e-cigarettes
In this Research & Commentary, Lindsey Stroud, a state government relations manager at The Heartland Institute, examines the effects of Pennsylvania’s 2016 40 percent wholesale tax on youth vaping. Using data from the Pennsylvania Annual Youth Survey, Stroud finds the tax did not curb youth e-cigarette use, and from 2015 to 2017, youth use of e-cigarettes increased in Pennsylvania. Stroud cautions lawmakers to avoid enacting taxes on e-cigarettes in an effort to address youth e-cigarette use.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, our Consumer Freedom Lounge, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, a state government relations manager at Heartland, at lstroud@heartland.org or 757/354-8170.

Author
Lindsey Stroud joined The Heartland Institute in 2016 as a Government Relations Coordinator. In 2017, Lindsey was named State Government Relations Manager.
lstroud@heartland.org