Research & Commentary: Nebraska Should Avoid Using Tobacco and Vaping Taxes for Property Tax Relief

Published February 21, 2019

Legislation has been introduced in Nebraska to raise the tax on cigarettes and apply the state’s Tobacco Product Tax to vapor products. All revenue generated by the new tax would be allocated the Property Tax Credit Cash Fund.

LB 314 intends to increase the state’s sales tax on cigarettes from 64 cents per pack of 20 cigarettes, to $2.14 per pack, an increase of more than 230 percent. The legislation would also apply the Tobacco Product Tax of 20 percent wholesale price to e-cigarettes and similar devices “on any vapor cartridge or container of nicotine … that is intended to be used with or in an electronic cigarette.”

Cigarette taxes are highly regressive and disproportionately impact lower-income persons. According to the Centers for Disease Control and Prevention, adults living below the poverty line, defined as $25,100 a year for a family of four, are nearly two times more likely to smoke than those living at more than twice the poverty line. Lower income individuals tend to spend more of their income on cigarettes. A Cato Journal article found that from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income cigarettes.” Smokers that earned between $30,000 and $59,999 spent 4.3 percent, and those earning more than $60,000 spent 2 percent of their income on cigarettes.

Higher taxes on cigarettes can create black markets and lead to increased cigarette smuggling. In 2015, the Tax Foundation ranked Nebraska 29th for cigarette smuggling; only neighboring Missouri and Wyoming had lower rates of smuggling, ranking 39th and 42nd, respectively. The proposed legislation would make Nebraska’s cigarette tax the highest in the region, by more than 60 cents per pack.

Cigarette taxes are also unreliable revenue sources and should not be depended on to fund legislative priorities other than smoking cessation. Although the proposed tax may create a short-term fiscal increase, it will eventually lead to long-term revenue shortfalls as cigarette consumption declines. The Pew Charitable Trusts noted that this decline has caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016.”

Moreover, the inclusion of a 20 percent wholesale tax on electronic cigarettes is a disservice to the harm reduction potential these products provide for millions of smokers. Research increasingly indicates it is the smoke that causes the most harms related to combustible cigarettes.

E-cigarettes effectively provide nicotine without the associated harms of smoke and are significantly less harmful, as found by numerous public health organizations including Public Health England, the National Academies of Sciences, Engineering, and Medicine, and the American Cancer Society. The Royal College of Physicians determined that the health hazards associated with the use of e-cigarettes are “unlikely to exceed 5% of the harm [caused by] smoking tobacco.” They are also effective cessation tools, as indicated by a 2019 study that found e-cigarettes to be “twice as effective as nicotine replacement at helping smokers quit.”

Research also finds that e-cigarettes can reduce state health care costs. One study estimated Medicaid spending could have been reduced by $48 billion in 2012 if all Medicaid recipients who smoked completely switched to e-cigarettes. In a smaller analysis of only one percent of Medicaid recipients switching from combustible to e-cigarettes, the authors found that Medicaid savings could be “approximately $2.8 billion per 1 percent of enrollees over the next 25 years.”

Most problematic with increasing taxes on cigarettes and electronic cigarettes is the fact that none of the additional revenue will be dedicated to smoking cessation and prevention, of which Nebraska currently spends little revenue on.  In 2018, Nebraska collected $103.5 million from tobacco settlement and taxes, yet the “state allocated $2.6 million in state funds to tobacco prevention” in the same year, or “just 12.4 percent of the [CDC’s] annual spending target.”

Lawmakers should avoid relying on tobacco taxes to fund programs other than smoking cessation. Such excise taxes disproportionately impact lower-income persons, foster black markets and are unreliable sources of revenue. Further, policymakers should refrain from excessive taxes on e-cigarettes and vaping devices, as these are effective tobacco harm reduction products whose use should be promoted, not hindered.

The following articles provide more information about excise 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.

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.

Research & Commentary: Randomized Trial Finds E-Cigarettes Are More Effective Smoking Cessation Tool Than Nicotine Replacement Therapy–commentary-randomized-trial-finds-e-cigarettes-are-more-effective-smoking-cessation-tool-than-nicotine-replacement-therapy
Lindsey Stroud, a State Government Relations Manager at The Heartland Institute examines a study in The New England Journal of Medicine that finds e-cigarettes and vaping devices to be twice as effective as nicotine replacement therapy (NRT) in helping smokers quit cigarettes. Nearly 700 participants were studied over a 52-week period, with researchers finding that 18 percent of e-cigarette users reported abstinence, compared to 9 percent of those using NRT. Stroud writes that “these latest findings provide more valuable information on the public health role that e-cigarettes and vaping devices provide for the 38 million cigarette smokers in the United States,” an implores policymakers to regulate these devices in a way that promotes their usage.

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: Study Finds E-Cigarettes Would Prevent 6.6 Million Premature Deaths–commentary-study-finds-e-cigarettes-would-prevent-66-million-premature-deaths
Heartland Institute State Government Relations Manager Lindsey Stroud examines an October 2017 Tobacco Control study that found electronic nicotine delivery systems (ENDS) might help extend life for millions of people. The authors of the study found there was an estimated 6.6 million fewer deaths and more than 86 million fewer-life-years lost over a ten year period because of ENDS products. Stroud concludes the use of ENDS could also help improve the budgets of numerous state programs, including Medicaid.

Research & Commentary: Public Health Officials Urge Use of Electronic Nicotine Delivery Systems
Heartland Institute State Government Relations Manager Lindsey Stroud notes the importance of NHS Health Scotland’s joint statement encouraging the use of electronic nicotine delivery systems (ENDS) as an alternative to tobacco products. NHS Health Scotland, Public Health England, and other groups have found ENDS are 95 percent less harmful than tobacco cigarettes.

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, our 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.