New E-Cig Tax Burns Alaskans

Published November 2, 2015

Lawmakers in Alaska’s Matanuska-Susitna Borough, about 35 miles north of Anchorage, enacted an ordinance adding an excise tax of 55 percent to the price of wholesale e-cigarette purchases.

Revenue from the new tax hike will be diverted to the borough government’s general fund, instead of being directed to health care or prevention programs. 

Unintended Consequences

Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, says the tax hike will backfire.  

“We know that governments in the United States and around the world have raised excise taxes to such degree that one of the major unintended consequences is rampant smuggling that undermines the health goals that have been cited as the reason to impose those taxes in the first place,” LaFaive said. “With flammable tobacco, the tax rates have gotten so high that it’s been estimated recently by scholars that it would take a 100 percent increase in current excise taxes to get just a 5 percent improvement in the quit rate.”

Going into ‘The Illegal Market’

LaFaive says high tax rates change taxpayers’ behavior in rational, though unintended, ways.

“One of the directions they’re going is into the illegal market,” LaFaive said. “They’re crossing into another taxing jurisdiction so they can get the tobacco they want at a more reasonable price. Or they’re [replacing] cigarettes [with], say, pipe tobacco or e-cigarettes.”

Turning to Tobacco

Kevin Callison, an associate professor of economics at Grand Valley State University, says the Matanuska-Susitna tax hike will cause result in more consumers using tobacco.

“Most of that tax is going to be passed on through higher prices to consumers,” Callison said. “The literature on this is pretty underdeveloped because of the availability of data, but in economic theory if you have two goods that are substitutes and you raise the price of one, you’re going to increase the demand for the other.”

Discouraging Public Health

In addition to their use as cessation tools, e-cigarettes are considered a less harmful substitute for smoking. Callison says hiking taxes on e-cigarettes will discourage Matanuska-Susitna residents from moving from tobacco to e-cigs.

“It makes a lot of sense that if you increase the prices of e-cigarettes through increased taxation, you are going to reduce the number of people who quit smoking regular cigarettes and go to e-cigarettes,” Callison said. “I think there’s a clear substitution effect between the two.”

Elizabeth BeShears ([email protected]) writes from Trussville, Alabama.