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Research & Commentary: South Dakota’s Proposed Tax on Vaping Would Damage Tobacco Harm Reduction Efforts

February 22, 2019

Legislation aims to apply a 35 percent wholesale tax to electronic cigarettes.

Legislation introduced in South Dakota aims to tax electronic cigarettes and vaping devices. H.B. 1209 would include “any noncombustible product containing nicotine that employs a heating source … that can be used to produce vapor from nicotine in a solution” in the state’s taxation of tobacco products, excluding combustible cigarettes. Vaping products would be subject to a 35 percent wholesale tax. 

Rather than imposing taxes on e-cigarettes, lawmakers should promote the use of tobacco harm reduction (THR) products, as they provide significant health benefits, can save states money on smoking-related health care costs, and create significant economic benefits.

South Dakota currently uses very little tobacco money to fund tobacco prevention programs. The first $30 million collected in tobacco taxes in South Dakota is earmarked to the state’s general fund. After reaching $30 million, the next $5 million is deposited into the state’s “tobacco prevention and reduction trust fund … and used to implement the tobacco prevention and reduction program.”

All revenue raised in excess of $35 million is allocated to the state’s general fund. Of the $87.6 million in tobacco settlement payments and taxes South Dakota received in 2018, only $4.5 million in state funds was allocated to tobacco prevention programs, about 5 percent of tobacco moneys and “just 38.5 percent of the Centers for Disease Control and Prevention’s annual spending target.”

With states providing little money to help tobacco users, consumers have turned to other products to help them quit smoking, including electronic cigarettes. E-cigarettes have emerged as an effective tobacco harm reduction product, providing consumers with nicotine without the associated harms that are found in combustible tobacco cigarettes.

Public health groups have extensively studied e-cigarettes and have found them to be significantly less harmful than combustible tobacco cigarettes. Public Health England, Royal College of Physicians, and the National Academies of Sciences, Engineering, and Medicine have all acknowledged vaping devices and e-cigarettes are less harmful than tobacco. The American Cancer Society noted in 2018 that based on the “currently available evidence, using current generation e-cigarettes is less harmful than smoking.”

E-cigarettes have proven to be effective smoking cessation devices. One study found 6.1 million to 9.2 million citizens in the European Union have quit smoking traditional tobacco cigarettes by using e-cigarettes. A 2019 study concluded e-cigarettes are “twice as effective as nicotine replacement at helping smokers quit.”

The use of e-cigarettes is also useful for state budgets. As a THR product, e-cigarettes can help negate the associated health care costs of combustible tobacco cigarettes. One study determined that if all Medicaid recipients that smoked combustible cigarettes had switched to electronic cigarettes, states could have saved $48 billion on Medicaid in 2012. A similar, smaller analysis of just 1 percent of the Medicaid population concluded Medicaid savings would be “approximately $2.8 billion per 1 percent of enrollees” over the next 25 years.

Lawmakers should also be aware of the potential benefits that e-cigarettes could bring to their state’s economy. Analyses on vape shops indicate these businesses “generate annual non-online sales of more than $300,000 per store” and average $26,000 in monthly sales. Additionally, the e-cigarette industry is expected to grow substantially, as the global market “is estimated to reach $44,610.6 million by 2023.”

South Dakota is already losing out on potential revenue from e-cigarette sales, as the state currently bans online sales of nicotine. Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million. Nine e-cigarette retailers were in “2018 Internet Retailer Top 1000 rankings.”

Burdensome taxes on vape products have shuttered the industry in other states. In 2016, Pennsylvania enacted a 40 percent wholesale retail tax on e-cigarettes. Within a year, an estimated 120 vape shops closed. Less than one year later, Pennsylvania state legislators attempted to reverse or reduce the scope of the tax because of the significant amount of harm it had caused.

Lawmakers should refrain from taxing THR products, including e-cigarettes and vaping devices. These products are significantly less harmful than combustible tobacco and they serve as an effective cessation tool that can provide savings for state governments. Moreover, the e-cigarette industry is profitable and will likely continue to grow and provide gains to states’ economies.

The following articles provide more information about tobacco harm reduction.

Podcast Series: Voices of Vapers
https://www.heartland.org/multimedia/podcasts?fromDate=&toDate=&q=voices+of+vapers
In this weekly podcast series, State Government Relations Manager Lindsey Stroud talks with researchers, advocates, and policymakers about tobacco harm reduction and electronic cigarettes. The series provides important information about the thousands of entrepreneurs who have started small businesses thanks to THRs and the millions of adults that have used electronic cigarettes and vaping devices to quit smoking tobacco cigarettes.

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: Vaping Taxes and Bans Hurt Smokers Trying to Quit
https://www.heartland.org/publications-resources/publications/research--commentary-vaping-taxes-and-bans-hurt-smokers-trying-to-quit
In this Research & Commentary, Heartland Institute Senior Policy Analyst Matthew Glans and State Government Relations Manager Lindsey Stroud examine vaping bans and taxes and consider how such measures block or limit what is for many smokers an effective method for halting the use of tobacco cigarettes.

Nicotine without smoke: Tobacco harm reduction
https://www.heartland.org/policy-documents/nicotine-without-smoke-tobacco-harm-reduction
This report aims to provide a fresh update on the use of harm reduction in tobacco smoking, in relation to all non-tobacco nicotine products but particularly e-cigarettes. It concludes that, for all the potential risks involved, harm reduction has huge potential to prevent death and disability from tobacco use, and to hasten our progress to a tobacco-free society. 

E-Cigarette Primer for State and Local Lawmakers
http://heartland.org/policy-documents/e-cigarette-primer-state-and-local-lawmakers
Joel Nitzkin provides evidence e-cigarettes work as a tobacco harm reduction modality and reviews the arguments against them. He closes with recommendations for actions state and local lawmakers should and should not consider regarding tobacco harm reduction and e-cigarettes. 

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.

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.

Author
Lindsey Stroud is a state government relations manager at The Heartland Institute.
lstroud@heartland.org