Tobacco and electronic cigarettes have become popular targets for tax increases across the nation. States with growing budget problems have turned to sin taxes as potential sources of new or increased tax revenue. In an effort to close Alabama’s $200 million budget hole, Gov. Robert Bentley (R) has proposed a series of tax increases during the state’s special legislative session, including several major tax increases on cigarettes and vaping products.
Bentley’s tax proposal would increase the per-pack cigarette tax from 42 cents to 67 cents and create a new tax on electronic cigarettes of 25 cents per milliliter. He also proposes to set a minimum price on tobacco and tobacco replacement products, prohibit retailers from conducting certain promotions or sales, and limit sampling.
Both taxes are significant, and the tax on e-cigarettes is completely disproportionate to the tax on an equivalent amount of cigarettes. The proposed tax on e-cigarettes, measured per milliliter, would result in the equivalent of a $3.50 tax per pack of cigarettes. Currently, electronic cigarettes and vaporizers are taxed at the normal sales tax rate.
Tobacco taxes are an unreliable revenue source, often used to prop up government spending while relying on a narrow and shrinking tax base, thus creating greater revenue gaps taxpayers must eventually fill with additional tax increases. According to data from the U.S. Census Bureau, state revenue from tobacco product sales taxes decreased in 2013 by 0.9 percent, to $17 billion. This decrease followed a 0.5 percent decrease in 2012.
Tobacco taxes are highly regressive, burdening those who can least afford to pay them and diverting spending from other products and services. According to the Centers for Disease Control and Prevention, people living below the poverty level are far more likely to smoke (29.2 percent) than those who live above the poverty level (16.2 percent).
Alabama should not undermine efforts to help people quit smoking. Data from the United Health Foundation show Alabama’s tobacco use rate ranks in the upper third of states. The average rate of cigarette smoking among U.S. adults ranges from 10.3 percent to 27.3 percent. Alabama’s smoking rate of 21.5 percent in 2011 was 13th highest among the states.
Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit using traditional methods, such as nicotine gum, nicotine patches, and medication. A comprehensive review published in the BMC Public Health Journal by Drexel University professor Dr. Igor Burstyn reviewed more than 9,000 studies of e-cigarette liquids and vapor. Burstyn found exposure to e-cigarette vapor poses no health threat to bystanders.
Imposing excise taxes on vapor products is not justified from a public health perspective, and it removes a prime economic incentive for smokers to improve their health by switching to e-cigarettes. Although many states tax e-cigarettes, few tax them as drastically as Bentley proposes. Minnesota subjects e-cigarettes to a punitive excise tax of 95 percent of the wholesale price. North Carolina does so at the much lower rate of 5 cents per milliliter of the nicotine-containing liquid.
The Alabama proposal will drive consumers away from local e-cigarette businesses to online companies and stores in neighboring states. Angi Stalnaker, spokesperson for the Breathe Easier Alliance of Alabama, told Yellowhammer News the proposed tax increases could lead to the closing of hundreds of small businesses in the state and cause up to 2,000 Alabamians to lose their jobs. As none of Alabama’s neighboring states currently imposes a tax on these products, Alabamians who live in border counties would simply drive across the state line to make their purchases.
Sin taxes disproportionately harm lower-income taxpayers while punishing local businesses. The new tax proposed in Alabama will only contract the state’s economy over time and result in revenue shortfalls and further tax increases.
Americans for Tax Reform argue the real problem in Alabama is spending, not revenue. Between 1999 and 2009, Alabama overspent beyond the rate of inflation and population growth by 21 percent. Alabama should avoid trying to alter people’s behavior through the tax code and instead focus on keeping taxes low by controlling spending.
The following documents provide additional information on tobacco and other “sin” taxes.
Levels of Selected Carcinogens and Toxicants in Vapor from Electronic Cigarettes
https://heartland.org/policy-documents/levels-selected-carcinogens-and-toxicants-vapor-electronic-cigarettes
Tobacco Control found e-cigarette vapor contains some toxic substances, but only at levels “9–450 times lower than in cigarette smoke and were, in many cases, comparable with trace amounts found in the reference product.” The study finds replacing tobacco cigarettes with electronic cigarettes could substantially reduce exposure to tobacco-specific toxicants.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
John Nothdurft of The Heartland Institute argues targeted tax increases serve only to push sound fiscal policies and real budget reform solutions to the public policy backburner. 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.
Research & Commentary: New Taxes, Regulations Proposed for E-Cigarettes in Indiana
https://heartland.org/policy-documents/research-commentary-new-taxes-regulations-proposed-e-cigarettes-indiana
As the use of electronic cigarettes has grown, state and local governments across the nation have moved to increase taxes on these products. The 2015 Indiana General Assembly considered legislation that would have imposed several new taxes and regulations on electronic cigarettes. Heartland Institute Senior Policy Analyst Matthew Glans argues vaping taxes are harmful to state economies and to states’ public health because they hinder a proven method for reducing tobacco use.
Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on lower-income households. Third, the expanding number of goods being taxed in this way results in unproductive and preventive lobbying.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
http://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
This Heartland Institute Policy Brief by Eli Lehrer 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.”
Cigarette Tax Hikes Burn Hole in State Coffers
http://www.app.com/article/20081012/OPINION/810120325/1030/OPINION
Gregg M. Edwards, president of the Center for Policy Research of New Jersey, reports the state brought in less revenue after its cigarette tax hike than before the tax increase.
Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
http://www.budgetandtax-news.org/article/19564
Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University shows cigarette taxes are regressive, placing the greatest burden on impoverished individuals.
Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
The National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”
E-Cigarettes Are Making Tobacco Obsolete. So Why Ban Them?
http://heartland.org/policy-documents/e-cigarettes-are-making-tobacco-obsolete-so-why-ban-them
Matt Ridley reports vaping works better than any other method of giving up smoking, examining several studies reaching this conclusion. With the success of vaping products, why are cities banning them?
Peering Through the Mist: Systematic Review of What the Chemistry of Contaminants in Electronic Cigarettes Tells Us about Health Risks
http://heartland.org/policy-documents/peering-through-mist-systematic-review-what-chemistry-contaminants-electronic-cig-0
Electronic cigarettes are generally recognized as a safer alternative to combusted tobacco products, but there are conflicting claims about the potential health concerns these products warrant. This paper reviews the available data on the chemistry of aerosols and liquids of electronic cigarettes and compares modeled exposure to vapor with occupational safety standards.
Cigarette Taxes and Smoking: Will Higher Taxes Yield a Public Benefit?
http://heartland.org/policy-documents/cigarette-taxes-and-smoking-will-higher-taxes-yield-public-benefit
Kevin Callison and Robert Kaestner of the Cato Institute summarize their study focusing on the effect of recent, large cigarette tax increases on smoking among adults ages 18–74. The data suggest the association between cigarette taxes and smoking is small, negative, and usually not statistically significant.
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 subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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 John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
