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Research & Commentary: Oregon Cigarette and Vape Tax Would Vaporize Tobacco Harm Reduction

May 8, 2019

Multiple bills would increase cigarette tax by $2, apply a 95 percent wholesale tax to vaping products, and one bill would tax vaping products at two different rates.

In response to Gov. Kate Brown’s request to fund Oregon’s fledgling Medicaid program, lawmakers introduced legislation that would raise the Beaver State’s excise tax on combustible cigarettes. In the same session, Oregon lawmakers also introduced proposals that would apply an excise tax to e-cigarettes and vaping devices, despite these products’ potential to save states money by reducing smoking-related health care costs.

House Bill 2270 would increase the cigarette excise tax by $2, bringing the total tax to $3.33 per pack of 20 cigarettes. The funds collected will be “appropriated to the Oregon Health Authority for health-related programs.”

House Bill 2123 would tax vaping products at two different rates: a 95 percent wholesale tax would apply to “inhalant form nicotine that is sold separately from an inhalant delivery system,” and a 75 percent wholesale tax would be imposed on devices “containing inhalant form nicotine and does not require any additional components for use.”

House Bill 2159 would apply a 95 percent wholesale tax on vaping devices.

Both H.B. 2270 and H.B. 2159 would deposit generated revenue into the state’s general fund. No funds would be earmarked for tobacco prevention and cessation efforts.

Although generating funds to address smoking-related health care costs is laudable, lawmakers should not impose regressive cigarette and vaping taxes. Such taxes are unreliable and disproportionately impact lower-income persons. Moreover, applying taxes to tobacco harm reduction products such as e-cigarettes ignores the public health benefits these products provide to millions of smokers and unfairly punishes those who have quit smoking.

Lower-income Americans tend to spend a greater share of their disposable income on cigarettes, which means they are disproportionately impacted by cigarette tax increases. A Cato Journal article notes from 2010 to 2011, “smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”

Cigarette taxes are also notoriously unreliable revenue sources. Often, cigarette tax increases result in long-term revenue shortfalls. From 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased,” according to the National Taxpayer Union Foundation.  Moreover, a decline in cigarette consumption caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016,” Pew Charitable Trusts notes.

Even more vexing, Oregon lawmakers want to provide additional funding for Medicaid by taxing e-cigarettes, which save states money by reducing smoking-related health care costs.

Despite a never-ending fearmongering campaign, e-cigarettes are significantly less harmful than combustible cigarettes. In 2015, Public Health England (PHE), a renowned public health agency, declared e-cigarettes to be 95 percent less harmful than tobacco cigarettes. In 2018, PHE reiterated this, finding “vaping is at least 95% safer than smoking.” Other public health groups, including the Royal College of Physicians; National Academies of Sciences, Engineering, and Medicine; and the American Cancer Society have also acknowledged the reduced harm of e-cigarettes.

Smokers transitioning to e-cigarettes alleviate out-of-control state Medicaid budgets. One analysis estimated states’ combined Medicaid savings would have amounted to $48 billion in 2012 if all Medicaid recipients who smoked switched to e-cigarettes. A recent study estimated Medicaid savings to “be approximately $2.8 billion per 1 percent of enrollees” in Medicaid who switch from using tobacco to e-cigarettes over the next 25 years.

Unfortunately, proponents of vaping taxes and restrictions say these measures deter youth use of e-cigarettes, despite no evidence to support such unwarranted claims.

An analysis by The Heartland Institute examined the effects of Pennsylvania’s 2016 40 percent wholesale tax on vaping products. 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. 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 in 2017.

Perhaps most troubling about these proposals is that Oregon currently dedicates a very small amount of funding, relative to the amount of tobacco-related tax revenues received, to help smokers quit. Oregon spent only $8.2 million on tobacco prevention and cessation in 2018, despite receiving an estimated “$353.1 million in tobacco settlement payments and taxes” in the same year.

In short, Beaver State lawmakers should avoid relying on tobacco taxes to fund programs other than tobacco cessation and education efforts. Further, rather than applying “sin taxes” to products that have helped millions of smokers quit, lawmakers should celebrate the benefits of electronic cigarettes and vaping devices.

The following articles provide more information about 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 George Jamerson, Heartland’s government relations director, at gjamerson@heartland.org or 312/377-4000.