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Research & Commentary: Virginia Should Not Raise Taxes on Tobacco Products or Levy New Taxes on Tobacco Harm Reduction Products

March 4, 2020

Proposal would increase cigarette taxes to $0.60 per pack, double the other tobacco products tax, and create a new tax on liquid nicotine at $0.066 per milliliter.

Virginia Lawmakers are considering an amendment to the 2020 State Budget Bill that would increase the excise tax rates on cigarettes and other tobacco products, as well as enact a new excise tax on electronic cigarettes and vapor products.

The amendment would increase the tax rate on cigarettes from $0.30 per pack to $0.60 per pack. The legislation would also double the tax on other tobacco products, including moist snuff and loose leaf. Finally, the amendment would apply a new tax to components of vapor products, and would tax nicotine-containing e-liquid at a rate of $0.066 per fluid milliliter. The funds generated by the tax would be deposited to the Virginia Health Care Fund.

Although lawmakers are seeking to recoup costs attributable to smoking-related health issues, excise taxes on tobacco products are inherently regressive. Moreover, as e-cigarettes and vapor products are tobacco harm reduction tools, lawmakers should avoid taxing such products as it may deter current smokers from switching to a safer alternative.

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. 

Further, cigarette taxes are unreliable sources of revenue. 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.”

Ironically, funds generated by the proposed tax would be deposited into the Virginia Health Care Fund, which, in 2018, diverted the funds to the Commonwealth’s Medicaid program. Virginia lawmakers should be aware that the use of e-cigarettes can actually help reduce the Old Dominion State’s Medicaid burden.

For example, State Budget Solutions 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.

Deeply problematic with the proposed excise tax on vapor products is that the proposed rate disproportionately impacts different types of vaping devices. Per milliliter taxes have been enacted in numerous states, including Delaware, Kansas, Louisiana, North Carolina, and West Virginia, with rates ranging from 5 cents per milliliter to 7.5 cents per milliliter.

Although lawmakers may feel that a tax of $0.066 is relatively low, later-generation open-system “mods” are disproportionately affected as the e-liquid used in these types of products is often in large quantities compared to closed, cartridge systems. For example, a $0.066 tax on a 120-milligram bottle of nicotine-containing e-liquid would amount to a total tax of $7.92, but a pod system containing 0.5 milligram of nicotine would only be subject to a $0.033 tax per pod.

Further, lawmakers should understand that consumers can avoid the tax by adding their own nicotine to e-liquid solutions. One company that sells a “concentrated nicotine additive” advertises its product by stating “Don’t lose business because of outrageous nicotine taxes.” In essence, an adult consumer can purchase e-liquids with zero nicotine and only pay a tax on a 1 milliliter packet used in any size of e-liquid. Due to federal regulations, vape shop owners are forbidden from helping a customer mix these, and there could be problems associated with consumers’ lack of knowledge of how to properly mix the correct amount of nicotine.

Lawmakers should refrain from relying on regressive cigarette taxes that disproportionately burden lower income persons. Further, policymakers should avoid taxing tobacco harm reduction products, especially when intending to use the tax generated to fund health care programs. Evidence continues to find these products are significantly less harmful and their use should be promoted, not taxed.

The following documents provide more information on cigarette taxes and tobacco harm reduction.

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.

Tobacco Harm Reduction 101: Virginia
https://www.heartland.org/publications-resources/publications/policy-tip-sheet-tobacco-harm-reduction-101-virginia
Heartland State Government Relations Manager Lindsey Stroud provides an analysis of the vaping industry in Virginia, including economic data, state health department findings on vaping-related lung illnesses, youth e-cigarette use, tobacco retail compliance checks, and state funding dedicated to tobacco control programs.

Tobacco Harm Reduction 101: A Guidebook for Policymakers
https://www.heartland.org/publications-resources/publications/latest-heartland-policy-booklet-addresses-vaping-myths
This booklet from The Heartland Institute aims to inform key stakeholders on the much-needed information on the benefits of electronic cigarettes and vaping devices. Tobacco Harm Reduction 101details the history of e-cigarettes, including regulatory actions on these products. The booklet also explains the role of nicotine, addresses tax policy and debunks many of the myths associated with e-cigarettes, including assertions about “popcorn lung,” formaldehyde, and the so-called youth vaping epidemic.

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.

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.

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.

Research & Commentary: Study Finds E-Cigarettes Would Prevent 6.6 Million Premature Deaths
https://www.heartland.org/publications-resources/publications/research--commentary-study-finds-e-cigarettes-would-prevent-66-million-premature-deaths
Heartland Institute State Government Relations Manager Lindsey Stroud examines an October 2017 Tobacco Control study that found electronic nicotine delivery systems (ENDS) might help extend life for millions of people. The authors of the study found there was an estimated 6.6 million fewer deaths and more than 86 million fewer-life-years lost over a ten year period because of ENDS products. Stroud concludes the use of ENDS could also help improve the budgets of numerous state programs, including Medicaid.

Research & Commentary: Public Health Officials Urge Use of Electronic Nicotine Delivery Systems
https://www.heartland.org/publications-resources/publications/public-health-officials-urge-use-of-electronic-nicotine-delivery-systems
Heartland Institute State Government Relations Manager Lindsey Stroud notes the importance of NHS Health Scotland’s joint statement encouraging the use of electronic nicotine delivery systems (ENDS) as an alternative to tobacco products. NHS Health Scotland, Public Health England, and other groups have found ENDS are 95 percent less harmful than tobacco cigarettes.

Research & Commentary: Randomized Trial Finds E-Cigarettes Are 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
Lindsey Stroud, a State Government Relations Manager at The Heartland Institute examines a study in The New England Journal of Medicine that finds e-cigarettes and vaping devices to be twice as effective as nicotine replacement therapy (NRT) in helping smokers quit cigarettes. Nearly 700 participants were studied over a 52-week period, with researchers finding that 18 percent of e-cigarette users reported abstinence, compared to 9 percent of those using NRT. Stroud writes 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,” an implores policymakers to regulate these devices in a way that promotes their usage.

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 Heartland’s Government Relations department, at governmentrelations@heartland.org or 312/377-4000.