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Research & Commentary: Tobacco Tax Increases Would Hurt Low Income Persons, Vaporize Harm Reduction in Rhode Island

May 17, 2019

Legislation would increwould increase the cigarette tax by $0.25 from $4.25 to $4.50 per pack, increase the tax on cigars by $0.30 to $0.80 per cigar, and create a new 40 percent wholesale tax on e-cigarettes and vaping devices.

With a $160 million budget shortfall, Rhode Island lawmakers proposed increasing taxes on cigarettes and cigars, while imposing a new tax on electronic cigarettes and vaping devices. House Bill 5151 would increase the cigarette tax by $0.25 from $4.25 to $4.50 per pack, increase the tax on cigars by $0.30 to $0.80 per cigar, and create a new 40 percent wholesale tax on e-cigarettes and vaping devices.

Although taxes on tobacco products can lead to short-term revenue boosts, Ocean State lawmakers should not rely on them as steady revenue streams because they are extremely erratic and regressive. Moreover, excise taxes are often used to deter adults from using harmful products. However, e-cigarettes are excellent tobacco harm reduction tools and should not be subject to excise taxes.

Furthermore, overwhelming evidence shows cigarette taxes are highly regressive and disproportionately impact lower-income persons.  A Cato Journal article found from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes.” Smokers who earned $30,000 to $59,999 spent 4.3 percent, and those earning more than $60,000 spent just 2 percent of their income on cigarettes.

Additionally, cigarette taxes are inherently unreliable, and often 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.”

Lawmakers’ intent on taxing e-cigarettes and vaping devices is especially troubling because these products have helped an estimated three million Americans quit smoking. These products are also twice as effective as nicotine replacement therapy in helping smokers quit.

Despite fearmongering campaigns, e-cigarettes are significantly less harmful than combustible cigarettes. In 2015, Public Health England (PHE), a leading health authority in the UK, noted the use of e-cigarettes to be 95 percent less harmful than combustible cigarettes.

The Royal College of Physicians (RCP) is the same public health group that first linked cigarettes to cancer in 1962. In 2016, RCP echoed PHE’s claims, finding health-related hazards associated with e-cigarettes “unlikely to exceed 5% of the harm [caused by] smoking.” RCP noted “in the interests of public health it is important to promote the use of e-cigarettes.”

Moreover, the use of e-cigarettes can actually save states money by reducing smoking-related health care costs. State Budget Solutions concluded estimated Medicaid savings could have amounted to $48 billion in 2012 had smokers enrolled in Medicaid switched to e-cigarettes. In 2017, the R Street Institute analyzed the effects of “1% of smokers [within] demographic groups permanently switching.” Applying the analysis to Medicaid recipients, the R Street author estimated savings “will be approximately $2.8 billion per 1 percent of [Medicaid] enrollees” over the next 25 years.

Perhaps most troubling with the proposed tax increase is that Rhode Island spends little tobacco moneys on helping smokers quit. In 2018, Rhode Island collected an estimated $195.5 million in tobacco settlement payments taxes, yet only allocated $375,622 (less than 1 percent) on tobacco prevention and cessation programs.

Rather than relying on regressive, unreliable excise taxes for budget shortfalls, lawmakers should trim spending. Further, applying “sin” taxes to e-cigarettes discourages the use of these harm reduction products and negates public health gains.

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.

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