ARKANSAS SHOULD NOT RELY ON CIGARETTE AND VAPING TAXES FOR INCOME TAX RELIEF

March 22, 2019

KEY POINTS:

  • “To provide funding for income tax reductions,” Arkansas lawmakers introduced legislation that would increase the state’s cigarette tax and apply a tax on e-cigarettes and vaping devices.

  • Senate Bill 571 would add a “special excise tax of twenty percent” on the sale of cigarettes and a privilege tax, or a tax for the “privilege” of doing business in the state, on e-cigarette products, amounting to a 67 percent wholesale tax on all e-liquids, even those without nicotine.   

  • Cigarette taxes are highly regressive and disproportionately impact lower-income persons.

    • 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.

  • Tobacco and sin taxes are unreliable revenue sources over the long term. The National Taxpayers Union Foundation found from 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased.”

  • Policymakers should abstain from taxing vapor products because they are significantly less harmful than combustible tobacco cigarettes

  • Numerous public health groups recognize the reduced harm of e-cigarettes. In 2016, the Royal College of Physicians found e-cigarette use is “unlikely to exceed 5% of the harm caused by smoking tobacco.

  • The use of vapor products could reduce state health care costs. 

    • Medicaid recipients smoke at rates that are twice the average of privately insured persons, according to the Centers for Disease Control and Prevention. In 2013,smoking-related diseases cost Medicaid programs an average of $833 million per state.

    • One study analyzing all Medicaid recipients switching from combustible cigarettes to e-cigarettes estimates savings would have amounted to $48 billion in 2012.

“To provide funding for income tax reductions,” Arkansas lawmakers introduced legislation that would increase the state’s cigarette tax and apply a tax on e-cigarettes and vaping devices. Senate Bill 571 would add a “special excise tax of twenty percent” on the sale of cigarettes and a privilege tax, or a tax for the “privilege” of doing business in the state, on e-cigarette products, amounting to a 67 percent wholesale tax on all e-liquids, even those without nicotine.   

In general, legislators should refrain from relying on cigarette taxes. Research indicates these taxes are unreliable revenue sources and highly regressive. Further, policymakers should avoid taxing electronic cigarettes and vaping devices because they are proven tobacco harm reduction (THR) products.

Tobacco taxes disproportionately impact lower-income people, who spend a greater share of their income on tobacco products. A Cato Journal article found from 2010 to 2011, “smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes,” compared to 4.3 percent of those earning “between $30,000 and $59,999 and 2 percent for smokers earning more than 60,000.”

Additionally, tobacco and sin taxes are unreliable revenue sources over the long term. Although a sin tax may create a temporary increase in revenue, it often leads to future revenue decreases. The National Taxpayers Union Foundation found from 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased.” Researchers at the Pew Charitable Trusts found a decline in cigarette consumption caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016.”

In addition to the economic harm caused by these taxes, policymakers should abstain from taxing THR products because they are significantly less harmful than combustible tobacco cigarettes and are effective tobacco-cessation tools.

Numerous public health groups recognize the reduced harm of e-cigarettes. In 2016, the Royal College of Physicians found e-cigarette use is “unlikely to exceed 5% of the harm caused by smoking tobacco.” Further, e-cigarettes are twice as effective as nicotine replacement therapy in helping smokers quit and reduce health care costs associated with combustible tobacco products. With this in mind, lawmakers should consider encouraging the use of these products for adult smokers, not discouraging it.

Medicaid recipients smoke at rates that are twice the average of privately insured persons, according to the Centers for Disease Control and Prevention. In 2013, “smoking-related diseases cost Medicaid programs an average of $833 million per state.”

In 2015, State Budget Solutions estimated Medicaid savings could have amounted to $48 billion in 2012 if e-cigarettes had been adopted in place of combustible cigarettes by all Medicaid recipients who consumed tobacco products.

Moreover, the electronic cigarette industry is an economic boon. “U.S. brick-and-mortar vape shops generate annual non-online sales of more than $300,000 per store.” The global e-cigarette market is expected to exceed $44 billion by 2023. Excessive taxes would severely negate this growth, as they have in Pennsylvania.

In 2016, the Keystone State passed a 40 percent wholesale floor tax on vaping products. Floor taxes require retailers to pay taxes on their existing inventory and force store owners to pay the taxes without any ability to recoup the costs. In October 2017, it was reported that an estimated 120 Pennsylvania vape shops closed.

Rather than relying on regressive sin taxes to fund income tax relief, Arkansas lawmakers should cut unnecessary spending.

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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