Dec 1st 2017

Excise taxes, often referred to as “sin taxes,” generally exist (on top of all other taxes) for two specific purposes – to discourage people from consuming certain products and to reimburse the state for the costs borne from consumption of those products.

The theory is pretty simple really. The rationale behind creating additional taxes on cigarettes is to discourage people from smoking more (by making it more expensive) and to reimburse the state for bearing some of the costs of treating smoking related diseases. The same principle can be applied in one fashion or another to the other products normally subject to additional excise taxes by various levels of government such as beer, wine, distilled spirits and gasoline. By creating an additional tax on such products, we financially discourage people from continuing to consume those products at the same levels.

Excise taxes do decrease consumption, but the rate of return diminishes the higher the taxes get. And, increasingly while consumption may be reduced, the real impact is simply to dramatically change the buying habits of individuals. Let’s consider the example of smokers. Increasing cigarette taxes does encourage a certain percentage of smokers to either smoke less or maybe even quit. But what about those who choose not to quit smoking? Well, they simply change their buying habits.

As the price of cigarettes increases in certain jurisdictions because of higher taxes, many people simply choose to purchase as much product as possible outside those jurisdictions. If you’re a Massachusetts (4th highest cigarette tax state) smoker and you travel to New Hampshire (19th highest cigarette tax state), I guarantee you’re going to choose to buy your cigarettes in New Hampshire (along with some gas, Diet Coke and Doritos.) On just excise taxes alone (sales taxes are applied on top of excise taxes), you’ll save $1.73 per pack or over $17 per carton. New Hampshire isn’t stupid. Surrounded by high-tax states of Vermont and Massachusetts,they’ll gladly take the money of consumers who come in for cigarettes and gas.

In response to a dramatic tax hike, smokers simply buy in another jurisdiction, they buy less expensive products (less sales tax collected by state) or they’ll buy less expensive roll-your-own tobacco and roll their own cigarettes. Or they buy from a “friend” who sells cigarettes out of the trunk of his car in an alley. Additionally, those higher taxes also incentivize smaller, independent retailers to purchase products in low tax jurisdictions and illegally sell them in high tax jurisdictions, often with counterfeit tax stamps to appear legit. The higher the excise tax, the greater the incentive (profit) for black market sales. The greater percentage of products sold on the black market, the more difficult it is to ensure sales of adult products aren’t finding their way into the hands of kids.

Now, let’s consider e-cigarettes. Only a handful of jurisdictions throughout the country levy additional excise taxes on the products. So what was the result when Washington, DC and Chicago created onerous new e-cigarette taxes in their cities? Well, vape shops that existed in those cities have already gone out of business because they can’t compete effectively or they’ve closed up shop and moved just outside the jurisdiction. If you are opening a new vapor business, you won’t do it in Chicago or DC, you’ll do it on a busy street right outside the city. It doesn’t take a rocket scientist to understand why. And what about the vapers in those cities? Well, they have to travel further and buy outside the city or they buy products online. The new e-cigarette tax simply inconveniences purchasers in the state and takes their money outside the state (or city).

At the end of the day, revenues from cigarette taxes have been in a free fall as smoking has declined and smokers change their purchasing habits. Revenues from big tax increases don’t deliver the same return as they did 20 years ago. And make no mistake about it, it’s all about the money. If increasing your cigarette tax by one more dollar per pack causes 50% of current smokers to find alternative means to purchase products (legal or otherwise), your efforts to raise additional revenues to fund schools and roads becomes seriously compromised. And it’s precisely the decline in cigarette tax revenue (and decreased payments from cigarette companies to states as a result of the Tobacco Master Settlement Agreement that is dependent the level of cigarette sales) that is the primary driver behind the effort to create additional, new taxes on e-cigarettes.

What proponents of new taxes fail to contemplate is that while there may be tens of thousands of brick and mortar retail locations in one state that sell cigarettes, there may be only a handful of e-cigarette retailers by comparison. The Vermont House just passed an additional 92 percent e-cigarette tax. Will that 92% (that’s a LOT) e-cigarette tax replace lost cigarette tax revenues? Will it even raise enough revenue to be worth the cost and effort of the state trying to collect and enforce such a tax? No, it won’t.

So what’s the result? Well, at the end of the day, the small handful of Vermont vapor businesses will either be put out of business or simply forced to shutter their businesses in Vermont and move to another state because of the e-cigarette tax. Vapers will be inconvenienced, but won’t stop vaping. Vermont will lose the sales, income and property taxes generated by those businesses. Vapers will simply find different ways to acquire the products they desire. They’ll buy online or make their own products. Sadly, some of them will return to smoking because the state made vaping too inconvenient and expensive. So what problem does that solve? It doesn’t solve any problems. It simply drives economic activity underground.

And how would the Vermont 92% e-cig tax affect efforts to keep the products out of the hands of minors? Well, responsible Vermont vendors who follow the law will be gone. And the end result of the Vermont e-cig tax if it’s passed will be that it won’t raise significant revenue, it will encourage thousands of people to mix their own liquids (or buy on the black market from others who do) and it will make enforcement of youth sales bans next to impossible to enforce. In short, it will be a disaster.

Last year, there was an effort by a Philadelphia City Council member to create a new tax on vapor products to fund the city’s schools. We should always be careful not to judge public policies on their intentions but on their results. In the case of Philadelphia, while the intention would have been to provide critical funding to an important program, the end result is that you would have attempted to fund an important program with a small, unstable revenue stream. It would have been the kids who would have been shortchanged by a shortsighted policy that would have failed to fulfill its lofty goal. Our kids deserve better.

Fortunately, in Philadelphia last year, vapor advocates worked to educate officials and ultimately defeat the proposal. And the same thing happened in Vermont. An e-cig tax was passed by the House last year and thankfully cooler( and smarter) heads prevailed in the Senate. Let’s hope vapers engage and educate in Vermont with the same energy and we see the same result this year.

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