Tobacco and electronic cigarettes have become popular targets for tax increases. States with growing budget problems have flocked to sin taxes as potential sources of new or increased tax revenue. In Arkansas, a joint interim legislative committee on House rules will study the idea of imposing a tax on any electronic oral device providing a vapor including nicotine.
From a policy perspective, 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 the most recent 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. According to the nonpartisan Tax Foundation, Arkansas’ tobacco tax currently ranks 29th, in the middle of the pack nationally. Arkansas’ $1.15 per pack tobacco tax is second-highest in the region; only Texas’ is higher, at $1.41.
Tobacco taxes are highly regressive, burdening those who can least afford to pay them while also 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 above the poverty level (16.2 percent).
Arkansas should not undermine efforts to help people quit smoking. Data from the Centers for Disease Control and Prevention show Arkansas has one of the highest tobacco use rates in the country. The average rate of cigarette smoking among U.S. adults ranged from 11.8 percent to 29.0 percent. Arkansas’ smoking rate of 27 percent in 2011 was second-highest among the states.
Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit through traditional methods such as nicotine gum, the nicotine patch, 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 and concluded 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. Only Minnesota follows this policy, subjecting e-cigarettes to a punitive excise tax of 95 percent of the wholesale price. North Carolina, the only other state to tax e-cigarettes, does so at a much lower rate of 5 cents per ml of nicotine-containing liquid.
The Arkansas proposal will drive consumers away from local e-cigarette businesses to online companies and stores in neighboring states. Americans for Prosperity Arkansas (AFPA) notes more than 60 local retail locations in the state catering to the vapor industry have been established since 2013, creating 180 Arkansas-based jobs. The new tax would slow this economic growth. AFPA also criticizes the layers of red tape and regulations the bill creates in the form of licensing and permitting, which make it more difficult to run small businesses.
Sin taxes disproportionately harm low-income taxpayers while punishing local businesses. The new tax proposed in Arkansas will only contract the market over time and result in revenue shortfalls and further tax increases. Arkansas should avoid trying to alter people’s behavior through the tax code and instead focus on keeping taxes low by keeping spending under control.
The following literature provide additional information on tobacco and other “sin” taxes.
Arkansas Politician Tries to Make It Harder to Quit Smoking
http://reason.com/blog/2015/02/12/arkansas-politician-trying-to-make-it-ha
Discussing Arkansas’s proposed vaping tax, Jim Pagels of the Reason Foundation argues tobacco companies are likely to appreciate having a law on the books that imposes a harsh tax on their stiffest competition, especially because people often use e-cigarettes to help them quit tobacco. “The last thing Arkansas needs is to make it harder for people to stop smoking. According to data from the Centers for Disease Control and Prevention, the state has some of the highest tobacco use rates in the country.”
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 vapors contain some toxic substances but 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 reforms 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 successful method of greatly reducing the toll of smoking tobacco.
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 low-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 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 that 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 of vapers 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 that focuses 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 or the number of cigarettes smoked 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 https://heartland.org/publications-resources/newsletters/budget-tax-news, 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.
