Several states are considering introducing or increasing taxes on steam products to offset falling tax revenues from traditional tobacco products or to fill budget gaps following the coronavirus pandemic. Legislators should approach the problem carefully, however, as faulty excise taxation on vapor products could lead consumers back to more harmful flammable products like cigarettes.
Since vaping entered the market in the mid-2000s, it has become an established product category and a viable alternative to smokers. To date, 28 states and the District of Columbia have imposed an excise tax on vaping products. In addition, the federal government is likely to impose a tax on vaping products in the near future.
While steam taxes can be an untapped source of revenue for states that are not yet required to levy excise duties, significant revenue is unlikely in the short term.
This week’s map shows where the state steam taxes are as of January 1st.
Steam tax methods vary. Government tax based on price (ad valorem), volume (specific) or with a forked system that has different rates for open and closed tank systems. Of those who tax wholesale assets, Minnesota tops the list at a 95 percent rate, but Vermont follows exactly at 92 percent. Delaware, Kansas, Louisiana, North Carolina, and Wisconsin all have the lowest rate per milliliter ($ 0.05).
Vapor products can deliver nicotine, the addictive component of cigarettes, without burning and inhaling the tar, which is part of smoking cigarettes. While more research is needed into the potential harm mitigation qualities of steam products, there is currently consensus that steam products are less harmful than traditional flammable tobacco products. Public Health England, an agency of the UK Ministry of Health, concludes that vapor products are 95 percent less harmful than cigarettes.
Given these different levels of damage, it is important to understand the concept of harm reduction and its relevance to the taxation of steam products. Even if they are unhealthy in themselves, steam products are extremely attractive as an alternative to smoking. After all, a major reason smokers have difficulty quitting is because of the addiction of nicotine. Mitigation is the concept that it is more practical to reduce the harm associated with the use of certain goods than to try to completely eliminate it through bans or punitive taxes.
Protecting access to harm-reducing vapor products is linked to tax policy, as nicotine-containing products are an economical substitute. A well-designed tax on steam products should be low to encourage conversion from flammable materials. Conversely, high excise taxes on harm-reducing vaping products can damage public health by forcing vapers to smoke again. A recent publication found that 32,400 Minnesota smokers were deterred from quitting after the state introduced a 95 percent excise tax on vape products.
If the policy goal of taxing cigarettes is to encourage recruitment, steam taxation must be seen as part of that policy-making. For more information on the ideal design for steam and other excise taxes, please see our latest report.
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