Nebraska Should Avoid Using Tobacco and Vaping Taxes for Property Tax Relief

Lindsey Stroud

Legislation has been introduced in Nebraska to raise the tax on cigarettes and apply the state’s Tobacco Product Tax to vapor products. All revenue generated by the new tax would be allocated the Property Tax Credit Cash Fund.

LB 314 intends to increase the state’s sales tax on cigarettes from 64 cents per pack of 20 cigarettes, to $2.14 per pack, an increase of more than 230 percent. The legislation would also apply the Tobacco Product Tax of 20 percent wholesale price to e-cigarettes and similar devices “on any vapor cartridge or container of nicotine … that is intended to be used with or in an electronic cigarette.”

Cigarette taxes are highly regressive and disproportionately impact lower-income persons. According to the Centers for Disease Control and Prevention, adults living below the poverty line, defined as $25,100 a year for a family of four, are nearly two times more likely to smoke than those living at more than twice the poverty line. Lower income individuals tend to spend more of their income on cigarettes. A Cato Journal article found that from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income cigarettes.” Smokers that earned between $30,000 and $59,999 spent 4.3 percent, and those earning more than $60,000 spent 2 percent of their income on cigarettes.

Higher taxes on cigarettes can create black markets and lead to increased cigarette smuggling. In 2015, the Tax Foundation ranked Nebraska 29th for cigarette smuggling; only neighboring Missouri and Wyoming had lower rates of smuggling, ranking 39th and 42nd, respectively. The proposed legislation would make Nebraska’s cigarette tax the highest in the region, by more than 60 cents per pack.

Cigarette taxes are also unreliable revenue sources and should not be depended on to fund legislative priorities other than smoking cessation. Although the proposed tax may create a short-term fiscal increase, it will eventually lead to long-term revenue shortfalls as cigarette consumption declines. The Pew Charitable Trusts noted that this decline has caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016.”

Moreover, the inclusion of a 20 percent wholesale tax on electronic cigarettes is a disservice to the harm reduction potential these products provide for millions of smokers. Research increasingly indicates it is the smoke that causes the most harms related to combustible cigarettes.

E-cigarettes effectively provide nicotine without the associated harms of smoke and are significantly less harmful, as found by numerous public health organizations including Public Health England, the National Academies of Sciences, Engineering, and Medicine, and the American Cancer Society. The Royal College of Physicians determined that the health hazards associated with the use of e-cigarettes are “unlikely to exceed 5% of the harm [caused by] smoking tobacco.” They are also effective cessation tools, as indicated by a 2019 study that found e-cigarettes to be “twice as effective as nicotine replacement at helping smokers quit.”

Research also finds that e-cigarettes can reduce state health care costs. One study estimated Medicaid spending could have been reduced by $48 billion in 2012 if all Medicaid recipients who smoked completely switched to e-cigarettes. In a smaller analysis of only one percent of Medicaid recipients switching from combustible to e-cigarettes, the authors found that Medicaid savings could be “approximately $2.8 billion per 1 percent of enrollees over the next 25 years.”

Most problematic with increasing taxes on cigarettes and electronic cigarettes is the fact that none of the additional revenue will be dedicated to smoking cessation and prevention, of which Nebraska currently spends little revenue on.  In 2018, Nebraska collected $103.5 million from tobacco settlement and taxes, yet the “state allocated $2.6 million in state funds to tobacco prevention” in the same year, or “just 12.4 percent of the [CDC’s] annual spending target.”

Lawmakers should avoid relying on tobacco taxes to fund programs other than smoking cessation. Such excise taxes disproportionately impact lower-income persons, foster black markets and are unreliable sources of revenue. Further, policymakers should refrain from excessive taxes on e-cigarettes and vaping devices, as these are effective tobacco harm reduction products whose use should be promoted, not hindered.

Nothing in this analysis is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute or Tobacco Harm Reduction 101.

Originally published at The Heartland Institute.