Western Virgins would have to pay extraordinarily high taxes on steam products in the state when Senate Law 68 goes into effect. The bill, sponsored by Senator Ron Stollings (D) and Senator Richard Lindsay (D), would increase taxes on liquids used in vapor products from 7.5 cents per milliliter (ml) to $ 1 per ml – an increase of over 1,300 percent .
The bill also increases the tax on cigarettes by 80 cents per pack, bringing the total to $ 2 per 20 cigarettes. Both taxes would go into effect on July 1, 2021, generating unexpected revenue for the state’s general fund.
While excise taxes on both cigarettes and vape products can be a legitimate way to recoup some of the societal costs associated with nicotine consumption, there is little justification for taxing vape products at a higher rate than flammable tobacco products. At $ 1 per ml, a standard 20 ml bottle would have a tax of $ 20, which is the same as the tax burden on a full pack of cigarettes (200 cigarettes) when taxed at $ 2 per pack. A typical vaper can vape anywhere from 3 to 8ml per day (depending on fluid strength and type of vaping equipment), which would result in a daily tax burden of $ 3 to $ 8. If SB 68 were enacted, a smoker would have to smoke 30 to 80 cigarettes a day to incur the same state tax costs.
Currently, a 60 ml bottle in West Virginia costs $ 15-30 (including $ 4.50 in current excise taxes). The new bill would increase that tax burden to $ 60 and go from an effective tax rate of between 18 and 43 percent to an effective tax rate of between 235 and 571 percent. Such a high effective tax rate doesn’t even apply to cigarettes in New York City or Chicago.
Compared to the astronomical tax rate proposed for vapor products, the increase in cigarette taxes appears to be small. Still, lawmakers shouldn’t give in too much to excise tax increases, and West Virginia lawmakers should consider some unintended consequences that could result from increased taxes on cigarettes. West Virginia is not currently losing any tax revenue as a result of cigarette smuggling, but increasing the price differential between cigarettes sold in Virginia and cigarettes sold in West Virginia could change that fact.
Increased smuggling due to tax differences is not a theoretical problem. In countries with high tax rates, smuggling can make up over 50 percent of the market and harm consumers, businesses and tax revenues. Smuggling counteracts the positive effects of limiting local demand as illicit products tend to be more harmful to consumers, are sold to minors, and cost governments billions of dollars in lost tax revenues.
Finally, the bill stipulates that the proceeds will be allocated to the general fund, indicating that the impetus to increase the cost of nicotine-containing products is additional income. While the tax hike would likely result in a slump in revenue in the short term, excise taxes remain a poor sustainable source of income. The tight base of a consumption tax means that revenue generation can be volatile. Legislators would be well advised to allocate the revenue from excise taxes on tobacco and nicotine products to cover the costs associated with the consumption of such products. General fund income should be generated through broad taxation at low rates.
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