Testimony Before the Indiana Senate Appropriations Committee
Lindsey Stroud, State Government Relations Manager
The Heartland Institute
March 28, 2019
Chairman Mishler and Members of the Committee:
Thank you for taking the time today to discuss the issue of taxing electronic cigarettes and vaping devices. My name is Lindsey Stroud. I’m a state government relations manager at The Heartland Institute, a 34-year-old independent, national, nonprofit organization whose mission is to discover, develop, and promote free-market solutions to social and economic problems. Heartland is headquartered in Illinois and focuses on providing national, state, and local elected officials with reliable and timely research and analyses on important policy issues. Heartland would like to submit the following testimony regarding the tax of four cents per milliliter of e-liquid containing nicotine.
As tobacco revenues continue to decline, many states are considering taxing electronic cigarettes and vaping devices. Lawmakers should refrain from enacting draconian taxes on tobacco harm reduction products. E-cigarettes provide public health gains by reducing smoking-related health care costs, and taxes on such products could discourage smokers from switching to less-harmful products. Moreover, the e-cigarette industry provides added value to state and local economies, and vape shops would be severely impacted by the aggressive tax burden proposed here.
E-cigarettes were first introduced to the U.S. market in 2007 and have since emerged as an effective smoking-cessation product. Nearly three million American adults have used these products to quit smoking. A 2019 study in The New England Journal of Medicine found the use of e-cigarettes to be “twice as effective as nicotine replacement [therapy] at helping smokers quit.”
In 2015, Public Health England (PHE), a leading health agency in the United Kingdom that is similar to the U.S. Food and Drug Administration, found e-cigarettes to be 95 percent safer than smoking. In 2018, after reexamining the evidence, PHE “reiterated its claim that vaping is at least 95% safer than smoking.” The agency is also responsible for the “Stoptober” campaign, urging smokers to quit tobacco cigarettes and promotes the use of e-cigarettes as “a great way to fight cravings – they carry a small fraction of the risk of cigarettes.”
The Royal College of Physicians (RCP) is another United Kingdom-based public health organization, and the same public group the United States relied on for its 1964 Surgeon General’s report on smoking and health. In 2016, RCP agreed with PHE, finding e-cigarettes “unlikely to exceed 5% of the risk of harm from smoking tobacco.”
American public health groups have reached similar conclusions. In January 2018, the National Academies of Sciences, Engineering, and Medicine concluded e-cigarette use results in “reduced short-term adverse health outcomes in several organs.” In February 2018, the American Cancer Society noted “using current generation e-cigarettes is less harmful than smoking.”
It is well known that Medicaid recipients smoke at rates of twice the average of privately insured persons, according to the Centers for Disease Control and Prevention (CDC). In 2013, “smoking-related diseases cost Medicaid programs an average of $833 million per state.”
A 2015 policy analysis by State Budget Solutions examined electronic cigarettes’ effect on Medicaid spending. The author estimated Medicaid savings could have amounted to $48 billion in 2012 if e-cigarettes had been adopted in place of combustible tobacco cigarettes by all Medicaid recipients who currently consume these products.
A 2017 study by R Street Institute examined the financial impact to Medicaid costs that would occur should a large number of current Medicaid recipients switch from combustible cigarettes to e-cigarettes or vaping devices. The author used a sample size of “1% of smokers [within] demographic groups permanently” switching. In this analysis, the author estimates Medicaid savings “will be approximately $2.8 billion per 1 percent of enrollees,” over the next 25 years.
Indiana currently uses very little money to fund tobacco education and prevention efforts. In 2018, Indiana received an estimated “$568 million in tobacco settlement payments and taxes,” yet the state only spent $7.5 million on tobacco prevention efforts in the same year, “just 10.2 percent” of CDC’s recommended spending figures.
Perhaps the most problematic aspect of the current legislation is all tax revenue generated would be deposited into the state’s general fund, with none earmarked for tobacco prevention efforts. It seems counterproductive for states to rely on funding from persons choosing a healthier tobacco product, when Indiana currently spends only 1.3 percent of tobacco revenue on helping smokers quit.
Moreover, a tax on vaping products will negatively impact the tremendous gains vape shops provide for state and local economies. An Analysis finds “U.S. brick-and-mortar vape shops generate annual non-online sales of more than $300,000 per store,” averaging $26,000 in monthly sales. One study of vape shops in the San Francisco Bay area found retailers employed on average three workers per store, with shops ranging from two to eight employees.
Lawmakers should be aware that taxing vaping products may force consumers to purchase their e-cigarettes out-of-state, or online, which is a major marketplace for vaping products. Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million. Altogether, the e-cigarette market “is estimated to reach $44,610.6 million by 2023.”
Although the tax proposed today is a per-milliliter tax, lawmakers should direct their attention to how taxes negatively impact vape shop in other states. For example, when Pennsylvania passed a 40 percent wholesale tax on e-cigarettes in 2016, an estimated 120 vape shops closed.
Lawmakers may think a per-milliliter tax would generate expected revenues, but consumers could avoid the tax by adding their own nicotine to e-liquid solutions. One company that sells a “concentrated nicotine additive” advertises its product by stating, “Don’t lose business because of outrageous nicotine taxes.” In essence, a vape shop can purchase e-liquids with zero nicotine and only pay a tax on a 1 ml packet used to any size e-liquid bottle.
Moreover, many lawmakers across the country have responded to a fear mongering campaign decrying a youth vaping epidemic by offering legislation that regulates, taxes, and even prohibits e-cigarettes and vaping devices.
Although youth vaping increased in 2018, data are still inconclusive. For example, the referenced studies data found an increase in youth who reported vaping more than one time per month, but the data did not distinguish between a person who reported vaping twice in a single month, or those who might have vaped every single day for several months.
Youth access to e-cigarettes and vaping products is increasingly scrutinized. However, lawmakers across the country are not addressing youth access to combustible tobacco products. Data from FDA tobacco product compliance data in Indiana found a total of 531 violations of selling tobacco products to minors between January 1, 2018 and March 1, 2019. Of those 531 violations, 187 involved sales of cigarettes, 93 involved sales of cigars, 94 involved sales of smokeless tobacco and 156 involved sales of e-cigarettes.
Evidence also finds bans on youth access to vaping products increases the rates of youth non-vapor tobacco use. Bans on the sales of e-cigarettes created “a statistically significant 1.0 percentage point increase in recent smoking rates among 12 to 17 year olds,” according to a 2015 Yale study.
The study was applicable to Lancaster County, Nebraska, which initiated a task force to drive down youth access to vaping products. Lancaster reported a reduction of sales of vaping products to minors “from 21.2 percent in 2017 to 5.3 percent in 2018.” During the same period, sales of non-vapor tobacco products to minors increased from 5.9 to 8.7 percent.
Rather than imposing taxes on tobacco harm reduction products, lawmakers should promote the use of e-cigarettes and vaping devices. E-cigarettes are 95 percent less harmful than tobacco cigarettes. These disruptive technologies are effective smoking-cessation devices, can alleviate state budgets by reducing health care costs associated with combustible cigarettes, and are a boon to local and state economies. Lawmakers should also understand similar taxes have not generated expected revenues and could lead to unintended consequences.
Thank you for your time today.
For more information about The Heartland Institute’s work, please visit our website at www.heartland.org, or contact Lindsey Stroud by phone at 757/354-8170 or by email at [email protected]
 Nicholas Bakalar, “From 0 to 10 Million: Vaping Takes Off in the U.S.,” The New York Times, August 31, 2018, https://www.nytimes.com/2018/08/31/health/vaping-cigarettes-nicotine.html.
 Lindsey Stroud, “Research & Commentary: Randomized Trial Finds E-Cigarettes Are More Effective Smoking Cessation Tool Than Nicotine Replacement Therapy,” Research & Commentary, The Heartland Institute, February 11, 2019, https://heartland.org/publications-resources/publications/research–commentary-randomized-trial-finds-e-cigarettes-are-more-effective-smoking-cessation-tool-than-nicotine-replacement-therapy.
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