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IMA Tax Policy Blog

Should States Tax Vapor Products And Cigarettes The Same Way?

New Report Analyzes Different Approaches to Taxing Vapor Products … from the Tax Foundation

Many states are grappling with the questions of if and how to tax the new market of vapor products, also known as “e-cigarettes.” Although there is a substantial amount of ongoing research about the health costs of vapor products, there has not been much in the way of guidance on how to tax them. Currently, only a small handful of states tax the products, but do so in dramatically different ways.

Today, the nonpartisan Tax Foundation released a new summary and analysis of vapor product taxes in the U.S. The study summarizes the basics of what the products are and how they compare to cigarettes in terms of production and health risks, and also provides a detailed overview of enacted and proposed taxes in each state.

The key findings include:

As of January 1, 2016, four states, the District of Columbia, and three local jurisdictions have enacted taxes on vapor products (electronic cigarettes), but their methods and levels of taxation vary dramatically. (Map of states with vapor product taxes)

In 2015, at least an additional 23 states considered excise taxes on vapor products.

Vapor products are generally found to have a much lower risk profile than traditional incinerated cigarettes.

Public Health England, housed in the British Department of Health, issued findings that vapor products are 95 percent less harmful than cigarettes and can serve as an effective tobacco-cessation method.

Vapor products likely have much lower externalities than traditional cigarettes, and it follows that the excise taxes on the products should be lower or nonexistent.

“Policymakers should avoid extending punitive rates from traditional cigarettes to vapor products because it limits the consumer’s ability to use vapor products to quit cigarettes,” said Tax Foundation Economist and Director of State Projects Scott Drenkard. “Our first reaction should not be to impose cigarette taxes on what is fundamentally a different product.”

The report goes on to discuss why vapor taxes should be based on the volume of nicotine liquid in the product, rather than on the wholesale price, and how pending federal regulation would impact state tax policies.

Full report: Vapor Products and Tax Policy

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.