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Vapor Products and Tax Policy

March 22, 2016
By Scott Drenkard

Vapor products, also known as electronic cigarettes, have grown steadily in popularity since their market debut in 2007.

two tumblers with liquor and a lit cigarrette

Vapor products, also known as electronic cigarettes, have grown steadily in popularity since their market debut in 2007. While mostly consigned to the relative obscurity of shopping mall kiosks and online sales for the first few years of their existence, vapor products have now become ubiquitous at gas stations, convenience stores, and dedicated stand-alone vapor stores. According to Wells Fargo Securities, though the vapor market is currently much smaller than the traditional cigarette market, it grew by 23 percent in 2014, and some project that vapor products will surpass traditional cigarettes in consumption over the next decade.

One of the main challenges for policymakers is determining how these emerging products should be treated with respect to tax policy. Excise taxes as a whole make up 3 percent of the federal budget, and tobacco taxes specifically comprise an average of 2 percent of state budgets. Legislators must determine whether vapor products should be classified as tobacco products and how or whether they should be taxed. Each of the states which have levied special taxes on vapor products to date—Minnesota, North Carolina, Louisiana, Kansas, and the District of Columbia—relied on unique policy rationales and implemented different methods of taxation. 

As vapor products have proliferated, debates over their public health implications have played out across the media and in health journals. Some reports have emphasized the potential for electronic cigarettes to cause damage to the lungs. Policymakers and citizens have also expressed concern that electronic cigarettes may serve as a gateway to traditional tobacco products, particularly among minors.

Conversely, other health professionals and policymakers view vapor products as a viable smoking cessation method for some smokers, contributing to improvements in public health. A number of studies suggest that vapor products can play a significant role in harm reduction by reducing consumption of traditional cigarettes. 

What can be stated with certainty is that vapor products differ sharply from traditional incinerated cigarettes in their construction, use, and health risks—distinctions with important implications for taxation.