In the absence of a clear category definition, next-generation products are subjected to a bewildering array of tax policies.
By Stefanie Rossel
As next-generation tobacco products (NGPs) continue to gain popularity, developing an appropriate taxation policy for novel cigarette alternatives remains a complex issue around the globe. It’s a subject that involves many conflicting interests: Governments are looking for new revenues to make up for “losses” brought about by shrinking cigarette sales. In the absence of long-term studies, policymakers are reluctant to embrace the idea that NGPs might benefit public health and hence need to be promoted by appropriate taxation. Others argue for zero taxation of NGPs to prevent ex-smokers from switching back to combustibles and to encourage current smokers to switch to less unhealthy alternatives.
Lacking a unified policy on how excise taxes on vapor products should be structured, several member countries of the European Union and an increasing number of states and lower authorities in the U.S. have been going it alone. Recent examples bear witness to the widely varying policy rationales that have developed around the NGP category in the absence of clear definitions. Are vaping devices just as bad—i.e., as hazardous to health—as combustible cigarettes and therefore deserve an equally high punitive tax? Californian voters seem to agree, although scientific evidence suggests that vapor products are a significantly less harmful alternative to tobacco products. In November 2016, voters in the Golden State approved a ballot initiative to increase taxes on cigarettes to $2.87 per pack of 20 and to tax vaping devices at an equivalent rate.
Other questions relate to whether vaping is a gateway to smoking, especially for young people, and whether nicotine is just as much a cause for smoking-related diseases as are the byproducts of combustion. While both theories have been debunked by now, Finland’s fiscal policymakers, like many of their colleagues in other countries that currently tax vape products, still had them in mind when introducing an excise duty of €0.30 ($0.34) per milliliter of e-liquid on Jan. 1.
In December 2016, Finland amended its tobacco excise tax act to define e-liquid as a tobacco product. The new tax applies to all e-liquids, even those without nicotine. Sales of nicotine-containing liquids had become legal in the Finnish market only in mid-November 2016. Fittingly, Finland now permits only one flavor for e-liquids: tobacco.
Proof that vapor product taxes are unlikely to compensate for declining cigarette revenues comes from Pennsylvania. In October 2016, a 40 percent tax hike on the wholesale price of e-cigarettes, including devices and liquids, as well as a tax on retailers’ inventories, came into effect. The vapor tax was projected to bring in $13.3 million in revenues but had a devastating effect—more than 100 vape shops across the state went out of business. By the end of March, with three months left in the 2016–2017 fiscal year, Pennsylvania’s Department of Revenue had collected only $7 million in e-cigarette taxes.
In the focus of EU tax policy
Among the EU member states that have taxed NGPs, a clear trend is recognizable: E-cigarettes are taxed based on liquid volume. Excise tax on e-liquid is presently levied in Italy and Portugal (since 2014); Latvia, Romania and Slovenia (since 2016); and Hungary, Greece and Finland (since the beginning of this year). In June, Poland’s health ministry released a proposal to impose a tax on vapor liquids.
Hungary, Latvia, Portugal, Romania and Slovenia have also introduced excise taxes on tobacco-heating products. While it does not tax e-cigarettes, Slovakia joined these states in May. Acknowledging that tobacco-heating products, despite containing tobacco, do not fit into existing classifications, most of these countries created new tax categories.
The excise tax is typically based on the weight of the heated tobacco mixture, with rates ranging from €62 per kg in Latvia to €88 per kg in Slovenia. Hungary, by contrast, uses tobacco sticks to calculate the rate.
Guidance in NGP tax matters may eventually come from Brussels. The European Commission is required to review the rates and structures of excise duties applied to manufactured tobacco every four years and propose changes where necessary. This review is currently underway, and for the first time the inclusion of vapor products is being discussed.
If e-cigarettes were to be included, the commission would have to set a common excise regime for vapor products across all 28 member states. Vapor trade organizations have already cautioned against imposing additional costs and administrative burdens that would make the end product more expensive and act as a disincentive to switching from smoking to vaping.
In late 2016 and early 2017, the commission held a public consultation about e-cigarette taxation. Asked whether e-cigarettes and liquids should be subject to an additional tax, 89.88 percent of respondents said no. Many fear that hiking taxes on NGPs will increase cross-border sales and cause some users to return to combustibles. The commission is currently assessing the results of the consultation.
Significant variations
In the U.S., there is no federal levy on vapor products. States, counties and cities levy taxes, and the methods and levels vary considerably. Among the jurisdictions that currently tax vapor products, four charge excise based on wholesale price. Minnesota has implemented a tax of 95 percent of the wholesale price on tobacco products, including e-cigarettes. California and the District of Columbia tax vapor products at a rate equal to the tax imposed on cigarette packs; in the case of D.C., this means a 67 percent tax. Kansas, Louisiana, North Carolina and West Virginia tax e-cigarettes based on the volume of consumable liquid solution.
Several cities tax e-cigarettes even if their state does not. Chicago, for example, levies a tax of $0.80 per unit plus a per milliliter rate of $0.20.
The implementation of high taxes on NGPs in the U.S. has driven smaller vape shops out of business and encouraged vapers to either shop online or out of state. Kansas recently tried to turn this development around. In July, the state reduced its tax per milliliter of e-liquid from $0.20 to $0.05, bringing it in line with the tax in North Carolina and Louisiana.
While the tax structure and rates for vapor products in those states have now been harmonized, it will be a while before tax authorities around the globe will be singing from the same sheet.