South Africa’s National Treasury has outlined a proposal on the taxation of electronic nicotine-delivery systems (ENDS), reports BusinessTech.
Among other measures, the agency is considering taxes on hardware and e-liquids, with higher nicotine products attracting higher levies than low-nicotine varieties.
While the market for ENDS is still in its infancy in South Africa, the National Treasury expects it to grow. The agency says it wants to learn from the experience of other countries where growth of ENDS has raised concerns about underage consumption. The agency said it is also aware of concerns about the potential of ENDS to undermine global tobacco control efforts and public health.
Vaping products are covered neither by South Africa’s Tobacco Products Control Act nor by the country’s Medicines Act. The government has proposed the Control of Tobacco Products and Electronic Nicotine-Delivery Systems Bill in which it hopes to regulate vapor products in a similar way as cigarettes.
The bill was introduced for public comment in 2018 but remains in a draft form.
According to a 2021 study commissioned by the Vapor Products Association of SA, the vapor industry in 2019 contributed ZAR2.49 billion to South Africa’s GDP while paying ZAR710 million in taxes. More than 350,000 South Africans use vapor products.
Sri Lanka’s National Authority on Tobacco and Alcohol (NATA) wants to change taxes so that cigarette prices increase by 6 percent each year, reports The Island.
The proposed tax formula comprises six components––cigarette tax percentage, proposed price for next year, inflation, present price, GDP and the “externality factor” of 4 percent.
“The 4 percent is added to ensure that the price of a cigarette is increased every year even if inflation drops to zero,” said Samadhi Rajapaksa, Chairman, NATA.
Rajapaksa noted that Sri Lankan depends less on tobacco tax revenue than many people believe. “Our tax revenue from these sources is about 11 percent only,” he said.
Earlier, Rajapaksa said that the NATA would increase the minimum age for sale, purchase and promotion of tobacco products from 21 to 24 in 2022.
Rajapaksa told the media that NATA had decided to amend the National Authority on Tobacco and Alcohol Act this year.
The increase of the minimum age for sale, purchase and promotion of tobacco products was one of the proposed amendments to the Act, he said.
“Already advertising, promotion and sponsorship of tobacco is prohibited. We want to stop the cross border advertising of tobacco products, too,” he said.
Cigarette excise taxes in the Philippines increased from PHP55 ($1.08)) to PHP55 per pack on Jan. 1, reports The Philippine Daily Inquirer. Under the tobacco tax law of 2019, they will continue rising by PHP5 per pack annually until they reach PHP60 per pack in 2023.
Meanwhile, the excise tax rate on conventional freebase or classic nicotine vaping products increased to PHP55 per 10 ml from PHP50 last year. The rate for nicotine salt vapes rose to PHP47 per ml from last year’s PHP42 per ml.
Despite the coronavirus pandemic-induced recession in 2020, “sin” tax collections from cigarette and alcohol products rose to PHP227.6 billion from PHP224.6 billion in 2019. Actual 2020 collections exceeded the conservative PHP201.5-billion target, as lockdowns dampened sales and limited distribution of tobacco and alcohol products due to movement restrictions on non-essential goods.
Market leader Philip Morris Fortune Tobacco Co. estimates that illicit cigarettes increased their market share to 8.6 percent in 2021 from about 5 percent in 2020.
The Bureaus of Internal Revenue estimates that the 2.5 million illicit cigarette packs it confiscated last year deprived the government of about PHP123.3 million in tax revenues.
As of November 2021, law enforcement had apprehended 102 illicit cigarette traders and to seized 38,827 master cases of illicit cigarettes worth PHP1.3-billion.
The government of Bosnia and Herzegovina should consider reducing its tobacco excise taxes to help tackle the flourishing illegal cigarette trade, according to Svetozar Mihajlovic, director of AD Duvan.
Bosnia and Herzegovina levies a 90 percent tax on the retail price of tobacco products—above the 80 percent recommended by the European Union, where the average consumer has a much higher disposable income.
“It is a huge amount of tobacco that ends up on the black market, and the state, unfortunately, has not done anything about it yet,” Mihajlovic said in The Sarajevo Times.
. “They only increased excise taxes, and by increasing excise taxes they created an abnormal situation on the market and that led to the black market being dominant in this territory.”
Poor excise and agrarian policies have brought Bosnia and Herzegovina’s tobacco industry to the brink of collapse, according to observers.
In the 1970s, the region produced 25,000 tons of tobacco. This declined to about 10,000 tons in the 1990s, and today local farmers grow only about 500 tons per year—a significant share of which ends up in illicit cigarettes.
Indonesia will raise the excise tax rate for tobacco products by an average of 12 percent in 2022, reports The Jakarta Post.
The increase will be greater for machine-made cigarettes than hand-rolled cigarettes, which will see a maximum 4.5 percent hike.
Mulyani Indrawati said the decision took into account the government’s target to reduce smoking among youth, the tax measure’s impact on jobs in the tobacco industry and the effect on state revenues.
A new report finds that combustible cigarettes will become less expensive than vaping products and nearly 43,000 jobs would be lost if the proposed nicotine tax contained in the Build Back Better bill (HR 5376) were to become law. The Vapor Technology Association (VTA) funded study, The Negative Economic Impacts of the New Nicotine Tax Imposed Only on Vapor Products In the Reconciliation Bill, conducted by economist John Dunham & Associates, is being billed as a comprehensive analysis of the negative effects that the proposed tax will have on smokers, the industry and the economy.
“Our analysis finds that the bill would not create anything close to parity with cigarette taxes but, rather, would tax vapor products at a much higher rate – up to nine times higher – than the tax on a pack of cigarettes,” the report states. “The proposed nicotine tax in the Reconciliation Bill would lead to a net price increase on vapor products at retail of about 53 percent (21.2 percent for a standard two-pack of closed-system pod products and 73.5 percent for a standard 60 milliliter bottle of open system e-liquid), while the price of cigarettes and other tobacco products would remain unchanged as they would not be subject to any additional federal tax.”
The study also concludes that the proposed nicotine tax would lead to a reduction of nearly 42,800 full-time equivalent jobs and the loss of $2.2 billion in wages and benefits, negatively impact the size of the overall economy which would fall by about $7 billion and would result in states and their localities losing $620 million in taxes while the federal government attempts to generate revenues.
“A pack of cigarettes contains approximately 204 milligrams of nicotine (10.2 mg/cigarette x 20 cigarettes per pack). Applying the proposed nicotine tax of 2.78-cents per milligram to cigarettes, means that the tax on a pack of cigarettes should be $5.41, not $1.01,” the study states. “Viewed another way, the federal tax on cigarettes, if applied to their nicotine content, would only amount to less than half a penny per milligram, not the 2.78-cents Congress seeks to impose on e-cigarettes ($1.01 per pack / 204 mg of nicotine per pack).”
As defined in the bill, the proposed tax would be equal to about $2.22 on the standard closed system nicotine vapor product (such as a two pack of JUUL pods), and a $10.01 on the standard average 60 milliliter bottle of nicotine containing e-liquid used in an open system vapor device,” according to the study.
If passed, the proposed tax would also lead to a loss of about 31.9 percent of vapor product sales or 3.7 million milliliters of e-liquid consumed. Of this loss, 61.2 percent would be the result of consumers switching to other tobacco products, including combustible cigarettes. An additional 18.5 percent of these lost sales would move to the black market, according to the study.
“Modeling suggests that a large portion of consumers would react by purchasing unregulated products over the black market or make their own e-liquids,” according to the study. “These figures (which reflect a price increase resulting from the tax of 53 percent) are conservative and are not out of line with other studies examining the substitution of vapor products and combustible cigarettes when taxes are imposed.”
Experts say Congress’ latest attempt to tax nicotine is complicated, confusing and harmful to public health.
By Timothy S. Donahue
To help pay for an infrastructure bill, the U.S. Congress has again introduced an excise tax on next-generation nicotine products, such as e-cigarettes and snus. The excise tax would apply to nicotine vapor products using both natural and synthetic nicotine as well as nicotine pouches. Experts say the provision, which would ultimately be paid by tobacco consumers, goes against U.S. President Biden’s campaign promise to not increase taxes on those making less than $400,000, negatively impact tobacco harm reduction efforts, increase sales of combustible tobacco products and boost an already growing black market.
The nicotine tax has been removed and reintroduced to Biden’s Build Back Better (BBB) legislation at least three times. The proposed vapor tax provision is now part of the latest version of the administration’s social spending and climate bill. According to Ulrik Boesen, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, taxes on tobacco and nicotine products tend to serve at least two purposes: to improve public health and raise revenue. He claims that a nicotine tax could do that if it is properly designed.
Ulrik Boesen / Credit: Tax Foundation
“A good design means internalizing externalities related to consumption of a product,” Boesen stated. “With tobacco and nicotine product consumption, these externalities are the health risks connected to frequent use and [the] quantity consumed. Nicotine is the addictive substance in the products but not the harmful ingredient. In other words, the proposal does not target the harmful behavior directly.”
Taxing based on nicotine content would favor low-nicotine liquids and could encourage increased consumption in the quantity of liquid, according to Boesen. “For example, a vapor pod that has a nicotine content of 3 percent and contains 1 mL of liquid would be taxed at $0.83 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 mL of liquid would be taxed at $1.39 even if there is no difference, or even a negative differential, in broader health effects of the two pods,” he states, adding that the effects of the tax are most substantial for nicotine pouches, such that the category is unlikely to survive.
Other estimates show that a 60 mL bottle of e-liquid with 12 mg of nicotine e-liquid would be taxed at $20.02. A four-pack of 8 mL pods with 5 percent nicotine salt pods would be taxed at $4.45 and a 15-pouch can of 8 mg nicotine pouches would be taxed at $3.34 (alongside state and local taxes, the cost of a single can could grow to $20 in some states).
Bryan Haynes, a partner with the law firm Troutman Pepper who specializes in tobacco and vapor regulations, said that, at a minimum, the proposed nicotine tax is “a hastily written addition” that will “have a negative impact on tobacco harm reduction efforts and public health.” He said that it’s the first time the tobacco industry has seen an excise tax placed on an ingredient instead of a finished good. “This is an unprecedented type of tax that will ultimately drive former smokers back to combustible products,” said Haynes, adding that taxing an ingredient could also cause unforeseen issues for manufacturers, such as moving material between factories.
Bryan Haynes / Credit: Troutman Pepper
“If a company is producing nicotine or even synthetic nicotine, moving product from one factory to another could trigger the need for an Alcohol and Tobacco Tax and Trade Bureau (TTB) license, and when product is removed, so to speak, from their factory, they would be responsible for remitting the taxes,” explained Haynes. “There may be a way, for example, if the company removed the nicotine from their factory and transported it in-bond to another TTB factory that you could make that work. But it’s just not clear. There is the potential for a lot of unforeseen issues to arise the way the tax is currently being proposed.”
States often tax nicotine products by its cost. Boesen says the tax on the product will pyramid since the federal tax would be levied at the manufacturer level and the state tax is levied at the distribution level. “In effect, the state tax base includes the federal tax and becomes a tax on a tax. This means that even if the taxes on tobacco and other nicotine products are approximately equal at the federal level, by the time it reaches the consumer, the nicotine product will carry a higher tax (and often a higher price),” he states. “This is highly problematic when considering that cigarettes are much more harmful than nicotine products. That makes the federal tax proposal look like a harm-maximizing strategy.”
Credit: Tax Foundation
The bill also subjects synthetic nicotine products to the nicotine tax. Many in the industry have expressed concern that this provision could allow the U.S. Food and Drug Administration to assert authority over the substance. Synthetic nicotine is covered not only in the proposed tax bill but also in the Prevent All Cigarette Trafficking (PACT) Act, which bans the U.S. Postal Service from mailing any vaping products.
Azim Chowdhury, a partner at the law firm Keller and Heckman who specializes in vapor, nicotine and tobacco product regulation, said that’s just not possible and Haynes agrees. “The definition of a tobacco product in the Tobacco Control Act (TCA) is clear. It’s just not ambiguous; a product must be made or derived from tobacco, or a component or part of a tobacco product, to be a tobacco product,” said Chowdhury.
Azim Chowdhury
“Congress would have to change the Tobacco Control Act’s definition of a tobacco product in order to give FDA’s Center for Tobacco Products the authority to regulate synthetic nicotine products as tobacco products. That won’t happen overnight. I also see a scenario where synthetic nicotine could be regulated as a drug and that would be a whole different and more onerous regulatory regime.”
The FDA could, however, cite the inclusion of synthetic products in the PACT Act and the latest nicotine tax proposal in its lobbying efforts to change the TCA’s definition of tobacco, said Haynes. “I could see the FDA telling Congress, ‘You just amended the Internal Revenue Code to make these products subject to federal excise taxes just like tobacco-derived nicotine, so it’s not a big stretch to amend the Tobacco Control Act’ in the same way,” he explains. “That’s how I would do it. It’s not really a legal argument, but it could be a decent lobbying argument.”
It isn’t just vapers, business owners and attorneys that find fault with the proposed nicotine tax; researchers suggest the tax could also harm public health. Michael Pesko, an associate professor in the Department of Economics at Georgia State University, used a $1.4 million dollar grant from the National Institutes of Health (NIH) to conduct e-cigarette policy evaluation research, including the evaluation of e-cigarette taxes (Pesko receives no funding from the tobacco industry or related groups). Pesko found that e-cigarettes and other nicotine vaping products function as what economists call “substitutes” for conventional cigarettes.
“In practical terms, if e-cigarettes and cigarettes are substitutes, then raising the price of one on average leads people to increase use of the other. Given extensive peer-reviewed evidence indicating that these products are substitutes, an unintended but inevitable effect of increasing taxes on e-cigarettes is to increase cigarette use,” Pesko said. “Given that cigarettes are believed to be substantially more harmful than e-cigarettes, this effect on [combustible] cigarette use is concerning …. A wide array of research suggests that this boost in cigarette use as a result of large e-cigarette tax increases would significantly increase overall tobacco-related death and disease.”
Michael Pesko / Credit: GSU
These findings prompted Pesko to send a letter to Congress concerning the proposed vape tax. In the letter, he states that his research team’s economic evaluations of existing state and county e-cigarettes taxes found that increasing e-cigarette taxes to parity with the combustible cigarette tax rate would “sizably increase cigarette use across teens, adults and pregnant women compared to taxing tobacco products differentially in proportion to their health risk.”
Pesko said researchers found several concerning consequences of large e-cigarette tax increases:
Simulating the current bill’s e-cigarette tax on teen tobacco use indicates that this policy would reduce teen e-cigarette use by 2.7 percentage points but that two in three teens who do not use e-cigarettes due to the tax would smoke cigarettes instead. This would result in approximately a half million extra teenage smokers overall. This finding that teens substitute to cigarettes in response to e-cigarette taxes has also been documented using National Youth Tobacco Survey data.
The tax would raise the number of daily adult cigarette smokers by 2.5 million nationally and reduce adult e-cigarette users by a similar number.
For every e-cigarette pod eliminated by an e-cigarette tax, more than 5.5 extra packs of cigarettes are sold instead.
For every three pregnant women that do not use e-cigarettes due to an e-cigarette tax, one smokes cigarettes instead (study).
Pesko told Vapor Voice he was surprised to find that increased e-cigarette tax consistently resulted in substitution across various data sources. “And the magnitudes are fairly sizable,” he noted. “This is an unusual level of accordance for academic research.” Pesko believes that any tax on nicotine products should be based on quantity.
Boesen agreed. He stated that for vapor products, the “obvious choice” is taxing the liquid by volume (per mL), and for nicotine pouches, a tax by weight or per pouch is a straightforward solution. “It is the administratively simplest and most straightforward way for the federal government to tax these goods as it does not require valuation and as such does not require expensive administration,” he stated. “The nicotine tax proposal in the Build Back Better Act neglects sound excise tax policy design and by doing so risks harming public health. Lawmakers should reconsider this approach to nicotine taxation.”
Chowdhury said that the industry must do more and that interested stakeholders and consumers should reach out and push back on the nicotine tax because it will be devastating to the vapor industry. “It seems like the general industry feels like [this nicotine tax] won’t get through somehow, that some people will prevent it from being in the final bill, but I think it’s a huge risk,” said Chowdhury. “Without serious pushback, it could end up there; it could very well end up becoming law.”
Haynes said that if the nicotine tax bill ever makes it to Biden’s desk, “he’s going to sign it.”
