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Research & Commentary: Montana Should Avoid Unnecessary and Regressive Tobacco and Vapor Tax Increase

March 30, 2017

Montana is considering a massive $1.50-per-pack increase on cigarettes and an increase on other tobacco products including vapor products.

[Photo: Lindsay Fox at Flicker and ECigaretteReviewed.com.]

Montana is considering a massive $1.50-per-pack increase on cigarettes sold in the state, which, added to existing taxes, would make the $3.20-per-pack tax the fifth highest in the nation. It would also increase the tax on “other tobacco products” (OTP) from 50 percent to 74 percent of the wholesale cost. The proposal would extend the OTP tax to e-cigarettes and other vapor products. Only half of the estimated $70 million in increased tax revenues would be dedicated toward health-care-related expenses.

Although reducing smoking rates may be a noble goal, raising tobacco taxes rarely works as intended and frequently has many negative effects. Sin taxes have a strong detrimental effect on local small businesses; when they are implemented, retailers and wholesalers find themselves with decreased sales, as consumers seek to avoid the tax by purchasing products outside the county, city, or state imposing the tax.

Montana’s current per-pack tobacco tax of $1.70 is already higher than each of the rates imposed in neighboring states. The OTP tax on e-cigarettes would make Montana the eighth state to impose an excise tax on these products. Increasing these taxes would raise the likelihood businesses will lose consumers and tax revenues across state borders and to online purchases.

While sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures, which often cannot be supported by the tax over the long term, thereby creating budget shortfalls. According to the most recent data from the U.S. Census Bureau, state revenue from tobacco product taxes fell in 2013 by 0.9 percent, to $17 billion. That decrease followed a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.

Expanding the tax to e-cigarettes is even more problematic. Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit through traditional methods such as nicotine gum, the nicotine patch, and medication. Imposing excise taxes on vapor products is not justified from a public health perspective, and it removes a prime economic incentive for smokers to improve their health by switching to e-cigarettes.

The American Association of Public Health Physicians has concluded e-cigarettes “could save the lives of 4 million of the 8 million current adult American smokers who will otherwise die of a tobacco-related illness over the next 20 years.” 

Increasing and expanding the OTP wholesale tax to include vaping products would not only deter smokers from switching to these products, it would also be fiscally unsound. If the rationale behind the tax is to tax the negative externalities of the products, which itself is questionable, then lawmakers would be better off basing the tax on the percentage of nicotine in the fluid.

A similar vaping tax was passed in Pennsylvania in 2016 and has already caused notable harm for small businesses and consumers, costing hundreds of jobs and reducing the attractiveness of a less-harmful alternative to smoking.

These sin taxes are highly regressive and overwhelmingly fall on middle- and lower-income individuals. Increasing taxes on these products would only further contract the market over time and create budget deficits taxpayers will eventually have to fill with additional tax increases.

The following documents provide additional information on tobacco taxes and other “sin” taxes.
 

Cigarette Taxes and Smoking
https://www.heartland.org/publications-resources/publications/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.

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.

Qualitative Study on E-cigarettes Shows More Evidence of Tobacco Harm Reduction
https://www.heartland.org/publications-resources/publications/qualitative-study-on-e-cigarettes-shows-more-evidence-of-tobacco-harm-reduction?source=policybot
In this Research & Commentary, Heartland Institute Government Relations Coordinator Lindsey Stroud examines a study, published in The International Journal of Environmental Research and Public Health in June 2016, that provides additional evidence showing e-cigarettes and vaporized nicotine products (VNPs) are an effective tobacco harm-reduction tool.

Ten Principles of State Fiscal Policy
https://www.heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
This Heartland Institute booklet provides policymakers and civic and business leaders a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.” 

Sin Taxes: Size, Growth, and Creation of the Sindustry
https://www.heartland.org/publications-resources/publications/sin-taxes-size-growth-and-creation-of-the-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, although advocates of sin taxes claim those taxes are justified because the “sinners” impose costs on society, taxing “sins” for general budget revenue contradicts that argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being targeted results in unproductive lobbying aimed at preventing new industries from being considered “sinful.”

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://www.heartland.org/news-opinion/news/five-things-to-consider-before-raising-tobacco-taxes-a-review-of-the-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.”

Peering Through the Mist: Systematic Review of What the Chemistry of Contaminants in Electronic Cigarettes Tells Us about Health Risks
https://www.heartland.org/publications-resources/publications/peering-through-the-mist-systematic-review-of-what-the-chemistry-of-contaminants-in-electronic-cigarettes-tells-us-about-health-risks
Electronic cigarettes are generally recognized as a safer alternative to combusted tobacco products, but there are conflicting claims about the potential health concerns these products warrant. This paper reviews the available data on the chemistry of aerosols and liquids of electronic cigarettes and compares modeled exposure of vapers with occupational safety standards. 

Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
The nonpartisan National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”

Vapor Products and Tax Policy
https://www.heartland.org/publications-resources/publications/vapor-products-and-tax-policy
Scott Drenkard of the Tax Foundation examines vaping products and the numerous tax policies that affect the industry. Drenkard concludes vaping products “likely have much lower externalities than traditional cigarettes, and it follows that the excise taxes on the products should be lower or nonexistent. Punitive taxes on vapor products could inadvertently close out options for cigarette users looking to quit.”
 

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, 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 John Nothdurft, Heartland’s director of government relations, at jnothdurft@heartland.org or 312/377-4000.

Author
John Nothdurft joined the staff of The Heartland Institute in May 2008 and left in January of 2019.
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR