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Research & Commentary: Proposed Colorado Cigarette and Vaping Tax Would Be Regressive, Unreliable, and Threaten Harm Reduction

April 29, 2019

Proposal would ask voters to consider a cigarette tax increase to $2.59 per pack, and a newly created 62 percent wholesale tax on nicotine products, including e-cigarettes.

In response to a request by Gov. Jared Polis, lawmakers have introduced legislation that would put cigarette and e-cigarette taxes on the November ballot. If passed, House Bill 19-1333 would ask voters to raise taxes on cigarettes by 8.75 cents per cigarette, to $2.59 per pack. The proposal would also apply a 62 percent wholesale tax on nicotine products, which would be defined as any product containing nicotine that can be “ingested into the body, whether by vaporizing, chewing, smoking, absorbing, dissolving, inhaling, snorting, sniffing, aerosolizing, or by any other means.”

Lawmakers intend for the newly generated revenue to be allocated evenly between health care and “preschool programs and expanding learning opportunities.” Proponents also believe the newly created tax on e-cigarettes and vaping devices will help deter youth use.

Lawmakers should refrain from relying on cigarette taxes as a source of revenue. They are highly regressive and extremely unreliable. Moreover, the draconian tax imposed on nicotine products such as vaping devices will negate the public health benefits these products provide and have little effect on curbing youth e-cigarette use.

Tobacco taxes disproportionately impact lower-income people, who spend a greater share of their income on tobacco products. For example, a Cato Journal article notes that 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 inherently unreliable, especially when used to fund newly created programs. While an increased tax on cigarettes and tobacco products might create short-term fiscal increases, these taxes eventually lead to long-term revenue shortfalls. The National Taxpayers Union Foundation found from 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased.” Pew Charitable Trusts revealed 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.”

Even more problematic is the proposal’s intention to tax e-cigarettes and vaping devices—tobacco harm reduction tools that have helped approximately three million American adults quit smoking. A recent study in The New England Journal of Medicine concluded their use is “twice as effective” as nicotine replacement therapy in helping smokers quit.

Moreover, as a nicotine product that is an estimated 95 percent less harmful than combustible tobacco cigarettes, the use of vaping devices can help relieve states’ budget problems, by reducing smoking-related health care costs. A 2017 study found Medicaid savings “will be approximately $2.8 billion per 1 percent of enrollees” over the next 25 years if 1 percent of Medicaid recipients were to switch from combustible cigarettes to e-cigarettes.

Although vape tax proponents believe it will help deter youth use of e-cigarettes, their belief is not backed up by recent evidence. An analysis on the effects of Pennsylvania’s 2016 40 percent wholesale tax found it did not deter youth e-cigarette use.

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. 

Frustratingly, policymakers seem keen on taxing products that have helped smokers quit, while allocating little funding to tobacco prevention and cessation. Of the $292.6 million in tobacco settlement payments and taxes Colorado received in 2018, the state dedicated only $24.2 million of the funds, about 8 percent, to tobacco prevention and education programs.

Lawmakers should avoid relying on tobacco taxes to fund programs other than those that help smokers quit. Moreover, policymakers should embrace the significant health gains e-cigarettes provide and refrain from enacting sin taxes that are meant to discourage their use.

The following documents 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 Lennie Jarrett, a state government relations manager at The Heartland Institute, at ljarrett@heartland.org or 312/377-4000.

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