Death and taxes

Naturally, we do our level best to stave off both. And in the case of e-cigarette taxes, vapers are leading the resistance.

By Maria Verven

As any halfway-intelligent person who’s done his research knows, vapor products are the antithesis of traditional tobacco products. The primary reason they were developed and are used by millions of former smokers is to minimize tobacco’s adverse health effects.

Treating and taxing these products at the same rate as cigarettes is also at odds with scientific and medical views, such as those of the prestigious Royal College of Physicians, which concluded e-cigarettes are “much safer than smoking” and are “likely beneficial to U.K. public health.”

Nevertheless, the U.S. Food and Drug Administration (FDA) passed regulation that lumps vapor products as “tobacco products” under the Tobacco Control Act, citing fears that these new products are “putting a new generation of kids at risk of addiction.” The FDA’s ruling, which goes into full effect in August 2018, has already severely curtailed the innovation in the industry and is likely to wipe out many if not most small businesses in the space, according to industry experts.

The other key driver behind e-cigarette taxation is the fact that tobacco use is on the decline. Even the U.S. Centers for Disease Control and Prevention (CDC), which sounded the alarm that e-cigarette use is on the rise among adolescents, reports that the smoking rate is sharply declining. In a 2015 CDC report, that rate is around 15 percent, a decrease of almost 10 percent since 1997.

Meanwhile, e-cigarette use continues to increase. E-cigarettes and vapor products were used by an estimated 9 million people in the U.S. in 2015 according to the CDC, and it’s likely the number of vapers has since grown. Even the CDC’s own studies found that the majority of e-cigarette users are recent former and current cigarette smokers who use these products to quit.

Since tobacco taxes help fund a variety of state and public programs, the drop in the number of smokers has caused major funding gaps. Excise taxes paid by merchants make up 3 percent of the federal budget, and tobacco taxes specifically constitute an average of 2 percent of state budgets.

Where to turn? Despite the huge benefits to smokers and overall public health, tax-hungry legislators and public health groups are turning to e-cigarettes and vaping products to make up the gaps in funding.

A BRIEF OVERVIEW OF U.S. E-CIGARETTE TAXES

As of this writing, seven states (California, Kansas, Louisiana, Minnesota, North Carolina, Pennsylvania and West Virginia) tax vapor products. In addition, several cities and counties, including Washington, D.C.; Chicago and Cook County, Illinois; and Montgomery County, Maryland, have also levied hefty taxes.

While the methods and levels of taxation vary, most legislators operate under the misguided premise that e-cigarettes should be taxed at the same level as tobacco products.

The tax rates in California, Minnesota, Pennsylvania and D.C. are based on a percentage of either the wholesale or retail purchase price, while the tax rates in Kansas, Louisiana, North Carolina and West Virginia are based on the amount of consumable e-liquid.

Late last year, despite the fact that California’s smoking rate dropped to the second lowest of any state, the state overwhelmingly passed Proposition 56, which added an additional $2 in taxes per cigarette pack plus hefty taxes on e-liquids containing nicotine. Vapers in that state are now shouldering the tax burden, paying about $30 for the same 30 mL bottle that used to cost them around $20.

“This disproportionate astronomical tax to vapor products only makes it harder for smokers to consider these devices as alternatives to combustible cigarettes,” said Kari Hess, a vape shop owner and co-president of the Northern California chapter of the Smoke-Free Alternatives Trade Association. “Prop. 56 misled voters by falsely implying that the harmful health effects of tobacco are similar to vapor products,” she said.

In Pennsylvania, the state’s new 40 percent tax bill has had a devastating effect on vapor businesses. So far, more than 110 vape shops of the state’s estimated 350 shops have closed since the tax took effect in October 2016.

The Pennsylvania Department of Revenue reports it’s raising well over $1 million every month since the new law took effect, and that doesn’t include revenue generated from a “floor tax” that required retailers to make a one-time payment based on the value of their inventory when the tax bill kicked in.

Dave Petrozzo, owner of Get Your Vape On, marked up prices to cover the cost of the tax but lost many of his customers to online stores or shops in other states. “This is the first time I’ve ever been in debt,” Petrozzo said. “It has affected the business dramatically.”

Ironically, if the trend continues and consumers keep going online or driving to other states to buy their e-liquids, the $13.3 million in annual revenue Pennsylvania is counting on from the new tax may not materialize, he said.

A SLIPPERY SLOPE

At least 23 other states are considering excise taxes on vapor products, including the state of Washington, which—no surprise—lumps vapor products and e-cigarettes with combustible tobacco products. Legislators there are now proposing that vape products be taxed at 95 percent of the wholesale price, following in Minnesota’s footsteps.

A New York State Department of Health survey raised red flags when it reported that the percentage of high school students who used e-cigarettes went from 10.5 percent in 2014 to 20.6 percent in 2016, despite the fact that it was coupled with a decrease in the traditional smoking rate.

New York Governor Andrew Cuomo and his administration will likely use the survey results to bolster their case for defining e-cigarettes and vaping products as tobacco products. They are proposing a tax of $0.10 per milliliter.

Meanwhile, across the pond, the European Commission published public responses to its EU Tobacco Excise Directive. Vapers in the EU are just as outraged as those in the U.S. about proposals to tax e-cigarettes at the same rate as their deadly counterparts.

A whopping 90 percent of the 7,700 public responses published by the EU answered “no” when asked: “In your opinion, should e-cigarettes and refill containers be subjected to excise duties?” while 80 percent said that if e-cigarettes were taxed, the tax should be much lower than taxes on cigarettes, cigars and other smoking tobacco.

Further, most respondents stated that even in the case of only a 20 percent tax-induced price increase of e-cigarettes, this would “very likely” lead to, first off, an increase in the consumption of traditional tobacco products and, also, users purchasing e-cigarettes from informal sources.

When projecting what a 50 percent tax-induced price increase on these products would mean, they responded that it would “very likely” lead to users quitting e-cigarettes all together.

WHAT WORKS IN THEORY MAY NOT WORK IN PRINCIPLE

One of the principles of sound tax policy is the idea that taxes should be equitable—not favoring one type of business over another. In other words, all consumer products would be subject to a broad-based consumption tax like a retail sales tax.

Additional levies on tobacco, alcohol and other “sins” would have no place, except possibly for special circumstances where policymakers can demonstrate a quantifiable negative effect from using a specific product, such as the well-documented adverse health effects from smoking traditional cigarettes.

So it’s easy to see why tobacco taxes are sometimes justified and used as a way to reduce smoking while supposedly helping fund smoking prevention and public health programs.

However, e-cigarettes have a far lower risk profile and have not caused comparable negative health consequences, even from continued use. Since taxation on tobacco products is meant to be an incentive to help people quit smoking, it goes against common sense to subject vapor products to hefty taxes, since they show great promise for helping addicted smokers who’ve been unable to quit.

In fact, many would argue that smokers should be incentivized, or “nudged,” to make a switch to the less risky alternative.

Vapor products are still so new that most states are just beginning to grapple with how to tax them. The FDA’s classification and their apparent similarity to traditional cigarettes, along with the “all or nothing” stance on nicotine use by some in the public health community, are colluding to work against the e-cigarette industry.

A growing body of research and an active and vocal vaping community can help combat misinformation, but it’s a long, uphill battle.

WHAT THE FUTURE HOLDS …

While tobacco industry sales continue to decline, legislators will continue to look to products that are taking their place, despite growing evidence that vapor products are significantly less harmful.

Tobacco sales shrunk by an estimated 2.5 percent in 2016 and are estimated to decline by another 3.4 percent decline this year, according to Wells Fargo analyst Bonnie Herzog.

Meanwhile, e-cigarette sales across all retail channels rose an estimated 9 percent to $850 million in 2016, and Herzog estimates $400 million in growth in the e-cigarette and vapor industry in 2017. “Bottom line, we remain bullish overall on reduced-risk products [RRPs], as we expect consumers will shift from e-cig/vapor products to next-generation RRPs, led by iQOS,” Herzog said.

Introduced in 2014 by Philip Morris, iQOS is a rechargeable, pen-like device into which a HeatStick—a short, cigarette-like but noncombustible tobacco product—is inserted and heated to create a tobacco-flavored nicotine aerosol.

Philip Morris has great expectations for iQOS and reduced-risk products, estimating it could achieve a 3 to 5 percent market share of the global cigarette market by 2020, or an additional annual margin between $720 million and $1.2 billion. The company reportedly plans to submit both a premarket tobacco product application and modified-risk application to the FDA.

Other tobacco companies also have big plans to capitalize on the market shift to reduced-risk products.

British American Tobacco’s $49 billion purchase of the remaining stake available in Reynolds American is expected to close later this year. That deal delivers Reynolds’ Vuse e-cigarette into BAT’s hands; Vuse already is being distributed to more than 25,000 convenience stores across the U.S. Reynolds also announced it completed clinical trials on Revo 2, a heated-tobacco product. Meanwhile, British American’s equivalent e-cigarette device, Vype, is sold overseas.

Big Tobacco aside, smaller and independent producers are exiting the market in droves, selling off their inventory instead of submitting new tobacco product applications to the FDA that would allow them to continue producing and selling. Most industry watchers expect the fallout to be drastic, with the market largely left in the hands of Big Tobacco.

Regardless of which retailers survive the FDA-induced shakeout, legislators need to better understand the major differences between vapor products and traditional tobacco products.

As vapor products continue to grow in popularity, we must continue to disseminate and proliferate viable research studies that demonstrate the role e-cigarettes play in reducing the harms of smoking and improving public health.

Only if and when legislators accept the role these products play in the public health continuum will they consider proposing and passing tax laws that make any sense.