Proposed Vapor Tax Benefits Big Tobacco, Would Harm Small Businesses in Texas
Updated: Nov 25, 2020
The 2021 state legislative session has yet to begin in Texas, but that is not stopping lawmakers from introducing tax legislation.
House Bill 211 has been pre-filed in the Lone Star State and would apply a 5 percent excise tax on electronic cigarettes and vapor products. The revenue generated from the tax would be dispersed into the state’s general fund and “may be appropriated only to the Health and Human Services Commission for the purpose of providing health benefits coverage under the child health plan program.”
There are several issues with the proposed tax. First, as tobacco harm reduction products, policymakers should refrain from enacting excise taxes on e-cigarettes. Excise taxes are often used to deter persons from certain behaviors – i.e. alcohol and tobacco are often subject to such taxes. E-cigarettes and vapor products are significantly less harmful than combustible cigarettes, as noted by numerous public health groups including Public Health England, the Royal College of Physicians, the American Cancer Society, and the National Academies of Sciences, Engineering and Medicine. As such, policymakers should not deter their use, and rather, promote them as tools to help persons quit smoking. Indeed, a 2019 study published in the New England Journal of Medicine found the use of e-cigarettes to be twice as effective in helping smokers quit.
Second, the proposed tax will favor vapor products produced by tobacco companies, and products that are most cited in youth use surveys.
There are several types of e-cigarette devices currently used, including “mods” or open-systems in which a user fills a device with e-liquid, and closed “pod” systems in which a device employs a prefilled cartridge containing e-liquid, and disposable e-cigarettes that a user would discard after use. Often, pod systems and disposables contain less e-liquid than what is used in open-system vapor products. Users of open-systems purchase e-liquid separately of the device, and the packaging for these products vary in sizes from 1ml of e-liquid to over 100ml.
Delaware, Kansas, Louisiana, North Carolina, Ohio, Virginia, and West Virginia impose a per-mL tax on nicotine in vaping products, with taxes ranging from 5 cents per mL to 10 cents per mL. Some lawmakers might consider this type of taxation ideal, as it taxes only the nicotine-containing e-liquid used in vaping devices, but this taxing scheme does not provide parity among the different vaping devices.
Open-system are disproportionately affected by per-mL taxes because e-liquid is available in larger quantities compared to closed pod systems. A 5 cents per mL tax on a 120 mg bottle of e-liquid would amount to a total tax of $6, but a pod system containing 0.5 mg of nicotine would only be subject to a tax amounting to 2.5 cents.
Additionally, per-milliliter taxes create incentives for users to avoid the nicotine tax by adding their own nicotine to e-liquid solutions. One company that sells a “concentrated nicotine additive” advertises its product by stating, “Don’t lose business because of outrageous nicotine taxes.” Under some tax regimes, a vape shop can purchase e-liquids with zero nicotine and only pay a tax on a 1 mL packet of nicotine that can be used for any sized e-liquid bottle.
Interestingly, some states have taken notice to the different types of vapor product offered for sale and have introduced bifurcated tax rates to represent those differences. Connecticut, Kentucky, New Hampshire, New Jersey, New Mexico and Washington impose differing tax rates for open and systems, ranging from wholesale taxes on open systems to per-ML and per-cartridge taxes imposed on closed systems.
Ultimately, the tax would unfairly burden small businesses and vape shop owners who overwhelmingly sell open systems and e-liquid, compared to tobacco manufacturers which sell closed systems.
According to the Vapor Technology Association, in 2018, the industry created 8,022 direct vaping-related jobs, including manufacturing, retail, and wholesale jobs in Texas, which generated $283 million in wages alone. Moreover, the industry has created hundreds of secondary jobs in the Lone Star State, bringing the total economic impact in 2018 to $807,839,700. In the same year, Texas received more than $112 million in state taxes attributable to the vaping industry.
Further, as many lawmakers seek to address youth use of e-cigarettes and vapor products, per-milliliter excise taxes will be ineffective in deterring youth use as they impose minimal costs on the actual devices that youth are using. According to a September 2020 report from the Centers for Disease Control and Prevention, data from the National Youth Tobacco Survey found “pre-filled cartridges remained the most commonly used product type” and that “disposable e-cigarette use has increased 1,000% among high school students and 400% among middle school students.”
Interestingly, Texas spends very little of existing tobacco monies on tobacco control programs, including education and prevention. In 2019, Texas received an estimated $1.9 billion in tobacco taxes and tobacco settlement payments. In the same year, the state spent only $4.2 million, or less than 1 percent, on funding tobacco control programs. When figuring that in 2019, 12.7 percent of adults smoked cigarettes, the state allocated only $1.53 per smoker on tobacco control programs for the year.
It is disingenuous that lawmakers would seek to rely on former smokers to fund a state-ran children’s health care program. Rather than impose sin taxes on tools that have helped millions of Americans quit smoking, lawmakers should utilize existing tobacco monies on meaningful programs, including tobacco control, and look for revenue elsewhere.
Nothing in this analysis is intended to is intended to influence the passage of legislation, and it does not necessarily represent the views of Tobacco Harm Reduction 101. For more information on tobacco and vapor products in the Lone Star State, please visit Tobacco Harm Reduction 101’s Texas page at https://www.thr101.org/texas.