ARKANSAS E-CIGARETTE TAX IS DISSERVICE TO

TOBACCO HARM REDUCTION

February 20, 2019

KEY POINTS:

  • Arkansas legislators are considering two bills that would implement a new tax on electronic cigarettes and increase the tax on combustible cigarettes.

  • Arkansas' current tobacco taxes apply to, “smoking tobacco, moist snuff, cigarettes and other tobacco [and] are taxed” at 68 percent the manufacturer price.

  • SB 347 would impose the same 68 percent tax on vaping devices to include “a vapor product or an e-liquid product.”

    • The first $10 million in revenue generated by the tax will go to the University of Arkansas for Medical Science National Cancer Institute Designation Trust Fund.

    • All other funds generated will be deposited in the Medical Sciences’ cash account.

  • HB 1442 would increase “the cost of doing business by tobacco retailers from 7.5 percent to 9.5 percent of the basic costs of cigarettes to the retailer.”

    • The legislation will also impose a 10 cent-per-milliliter tax on e-liquids, which may or may not contain nicotine.

    • The legislation does recognize modified risk tobacco products, or tobacco products that have been permitted by the U.S. Food and Drug Administration to be advertised with a reduced harm disclaimer and would reduce the rate of taxation, should any products be approved.

  • Arkansas uses very little tobacco revenue towards cessation and prevention efforts

    • In 2018, Arkansas collected an estimated $282 million from tobacco settlements and taxes and only spent $8.9 million, or three percent of the tobacco funding received on tobacco prevention and education.

  • Numerous public health organizations have recognized the reduced harm of e-cigarettes and vaping devices.

  • There are problematic economic implications with the legislation because of the negative effects of taxing vaping products.

  • Vape shops are also a good way for entrepreneurs to create jobs and increase economic opportunities.

  • Arkansas is already losing revenue as the state bans internet sales of nicotine products. Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million

Arkansas legislators are considering two bills that would implement a new tax on electronic cigarettes and vaping devices and increase the tax on combustible cigarettes. Unfortunately, draconian taxes on tobacco harm reduction products is a disservice to public health and negatively impacts small businesses. Instead, lawmakers should promote these products and not burden them with gratuitous taxes.

Currently, e-cigarettes and vaping devices are subject to Arkansas’ sales tax. Under tobacco taxes, “smoking tobacco, moist snuff, cigarettes and other tobacco are taxed” at 68 percent the manufacturer price. SB 347 would impose the same 68 percent tax on vaping devices to include “a vapor product or an e-liquid product.” The first $10 million in revenue generated by the tax will go to the University of Arkansas for Medical Science National Cancer Institute Designation Trust Fund. All other funds generated will be deposited in the Medical Sciences’ cash account.

HB 1442 would increase “the cost of doing business” by tobacco retailers from 7.5 percent to 9.5 percent “of the basic costs of cigarettes to the retailer.” The legislation will also impose a 10 cent-per-milliliter tax on e-liquids, which “may or may not contain nicotine.” The legislation does recognize “modified risk tobacco products,” or tobacco products that have been permitted by the U.S. Food and Drug Administration to be advertised with a reduced harm disclaimer, compared to combustible cigarettes. The legislation would reduce the rate of taxation, should any products be approved.

It is alarming that Arkansas lawmakers would threaten tobacco harm reduction when the state currently uses very little tobacco revenue towards cessation and prevention efforts. In 2018, Arkansas collected an estimated $282 million from tobacco settlements and taxes.However, the state only spent $8.9 million, or three percent of the tobacco funding received on tobacco prevention and education.

Research on the health effects of e-cigarette use consistently finds these products to be less harmful than combustible cigarettes, as well as an effective tool for smoking cessation. Public health organizations including Public Health England, the Royal College of Physicians, the National Academies of Sciences, Engineering, and Medicine, and the American Cancer Society find the use of electronic cigarettes and vaping devices less harmful than combustible cigarettes. Moreover, a 2019 study found e-cigarettes to be “twice as effective as nicotine replacement at helping smokers quit.”

State lawmakers should also understand that e-cigarettes can actually relieve state budget shortfalls by dramatically reducing health care costs. Analyzing a scenario where all Medicaid recipients who smoked switched from combustible cigarettes to e-cigarettes found states could have saved $48 billion in 2012. A smaller analysis examined one percent of the Medicaid population switching, finding that Medicaid savings would “be approximately $2.8 billion per 1 percent of enrollees” over the next 25 years.

More problematic is the economic implications with the legislation because of the negative effects of taxing vaping products. For example, when Pennsylvania passed a 40 percent wholesale tax on e-cigarettes in 2016, an estimated 120 vape shops closed. The Arkansas Vape Advocacy Alliance believes a 10 cent-per-milliliter tax on e-liquids will make “vapor products less affordable and less available.” The Tax Foundation finds that since vapor products “have much lower externalities than traditional cigarettes … excise taxes on the products should be lower or nonexistent.”

Vape shops are also a good way for entrepreneurs to create jobs and increase economic opportunities. It is estimated that vape shops “generate annual non-online sales of more than $300,000 per store” and average $26,000 in monthly sales. The industry is also expected to grow substantially over the next few years. In fact, the global electronic cigarette market “is estimated to reach $44,610.6 million by 2023.” Moreover, Arkansas is already losing revenue as the state bans internet sales of nicotine products. Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million.

Rather than imposing unwarranted taxes on tobacco harm reduction products, policymakers in Arkansas should encourage their use. E-cigarettes and vaping devices provide nicotine without the associated harms of combustible cigarettes and spur economic growth. Moreover, their use can actually save states money by reducing health care costs associated with combustible cigarettes.

Nothing in this Research & Commentary 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.

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