Research & Commentary: Arkansas Should Not Rely on Cigarette and Vaping Taxes for Income Tax Relief

Published March 22, 2019

“To provide funding for income tax reductions,” Arkansas lawmakers introduced legislation that would increase the state’s cigarette tax and apply a tax on e-cigarettes and vaping devices. Senate Bill 571 would add a “special excise tax of twenty percent” on the sale of cigarettes and a privilege tax, or a tax for the “privilege” of doing business in the state, on e-cigarette products, amounting to a 67 percent wholesale tax on all e-liquids, even those without nicotine.   

In general, legislators should refrain from relying on cigarette taxes. Research indicates these taxes are unreliable revenue sources and highly regressive. Further, policymakers should avoid taxing electronic cigarettes and vaping devices because they are proven tobacco harm reduction (THR) products.

Tobacco taxes disproportionately impact lower-income people, who spend a greater share of their income on tobacco products. 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,” compared to 4.3 percent of those earning “between $30,000 and $59,999 and 2 percent for smokers earning more than 60,000.”

Additionally, tobacco and sin taxes are unreliable revenue sources over the long term. Although a sin tax may create a temporary increase in revenue, it often leads to future revenue decreases. 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.” Researchers at the Pew Charitable Trusts found 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.”

In addition to the economic harm caused by these taxes, policymakers should abstain from taxing THR products because they are significantly less harmful than combustible tobacco cigarettes and are effective tobacco-cessation tools.

Numerous public health groups recognize the reduced harm of e-cigarettes. In 2016, the Royal College of Physicians found e-cigarette use is “unlikely to exceed 5% of the harm caused by smoking tobacco.” Further, e-cigarettes are twice as effective as nicotine replacement therapy in helping smokers quit and reduce health care costs associated with combustible tobacco products. With this in mind, lawmakers should consider encouraging the use of these products for adult smokers, not discouraging it.

Medicaid recipients smoke at rates that are twice the average of privately insured persons, according to the Centers for Disease Control and Prevention. In 2013, “smoking-related diseases cost Medicaid programs an average of $833 million per state.”

In 2015, State Budget Solutions estimated Medicaid savings could have amounted to $48 billion in 2012 if e-cigarettes had been adopted in place of combustible cigarettes by all Medicaid recipients who consumed tobacco products.

Moreover, the electronic cigarette industry is an economic boon. “U.S. brick-and-mortar vape shops generate annual non-online sales of more than $300,000 per store.” The global e-cigarette market is expected to exceed $44 billion by 2023. Excessive taxes would severely negate this growth, as they have in Pennsylvania.

In 2016, the Keystone State passed a 40 percent wholesale floor tax on vaping products. Floor taxes require retailers to pay taxes on their existing inventory and force store owners to pay the taxes without any ability to recoup the costs. In October 2017, it was reported that an estimated 120 Pennsylvania vape shops closed.

Rather than relying on regressive sin taxes to fund income tax relief, Arkansas lawmakers should cut unnecessary spending.

The following articles provide more information on sin taxes and tobacco harm reduction.

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.

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
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
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.”

Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University demonstrates cigarette taxes are regressive, burdening poor individuals more than other groups.

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
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: Electronic Cigarettes 
Heartland Institute Senior Policy Analyst Matthew Glans examines electronic cigarettes, tobacco harm reduction, and various proposals to regulate e-cigarette use. E-cigarettes have become one of the most popular nicotine replacement products and a key building block in tobacco harm reduction strategies.

Nicotine without smoke: Tobacco harm reduction
This report aims to provide a fresh update on the use of harm reduction in tobacco smoking, in relation to all non-tobacco nicotine products but particularly e-cigarettes. It concludes that, for all the potential risks involved, harm reduction has huge potential to prevent death and disability from tobacco use, and to hasten our progress to a tobacco-free society. 

Research & Commentary: New CDC Report Finds Vaping Helps Smokers Quit
A report released by the Centers for Disease Control and Prevention (CDC) found only 0.4 percent of the people who had never smoked tobacco in a CDC study group are current vapers, which the report defines as using a vaping device either every day or some days. The CDC report, the first of its kind, estimates e-cigarette use among U.S. adults using a nationally representative household survey. The report finds only 3.4 percent of adults who have never smoked have tried an e-cigarette; 12.6 percent of Americans have tried an e-cigarette; and fewer than 4 percent of the U.S. population are regular e-cigarette users.


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, Heartland’s 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 Arianna Wilkerson, a state government relations manager at Heartland, at [email protected] or 312/377-4000.