SOUTH DAKOTA’S PROPOSED TAX ON VAPING WOULD DAMAGE TOBACCO HARM REDUCTION EFFORTS

February 22, 2019

KEY POINTS:

  • H.B. 1209 would include “any noncombustible product containing nicotine that employs a heating source … that can be used to produce vapor from nicotine in a solution” in the state’s taxation of tobacco products, excluding combustible cigarettes. Vaping products would be subject to a 35 percent wholesale tax.

  • South Dakota currently uses very little tobacco money to fund tobacco prevention programs.

    • The first $30 million collected in tobacco taxes in South Dakota is earmarked to the state’s general fund.

    • After reaching $30 million, the next $5 million is deposited into the state’s “tobacco prevention and reduction trust fund … and used to implement the tobacco prevention and reduction program.”

    • All revenue raised in excess of $35 million is allocated to the state’s general fund.

  • Of the $87.6 million in tobacco settlement payments and taxes South Dakota received in 2018, only $4.5 million in state funds was allocated to tobacco prevention programs

  • Several public health organizations have noted the potential health benefits of vapor products including Public Health England, Royal College of Physicians, and the National Academies of Sciences, Engineering, and Medicine.

    • The American Cancer Society noted in 2018 that based on the “currently available evidence, using current generation e-cigarettes is less harmful than smoking.

  • E-cigarettes have proven to be effective smoking cessation devices.

  • South Dakota is already losing out on potential revenue from e-cigarette sales, as the state currently bans online sales of nicotine.

    • Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million.

    • Nine e-cigarette retailers were in “2018 Internet Retailer Top 1000 rankings.”

  • Burdensome taxes on vape products have shuttered the industry in other states.

Legislation introduced in South Dakota aims to tax electronic cigarettes and vaping devices. H.B. 1209 would include “any noncombustible product containing nicotine that employs a heating source … that can be used to produce vapor from nicotine in a solution” in the state’s taxation of tobacco products, excluding combustible cigarettes. Vaping products would be subject to a 35 percent wholesale tax.

Rather than imposing taxes on e-cigarettes, lawmakers should promote the use of tobacco harm reduction (THR) products, as they provide significant health benefits, can save states money on smoking-related health care costs, and create significant economic benefits.

South Dakota currently uses very little tobacco money to fund tobacco prevention programs. The first $30 million collected in tobacco taxes in South Dakota is earmarked to the state’s general fund. After reaching $30 million, the next $5 million is deposited into the state’s “tobacco prevention and reduction trust fund … and used to implement the tobacco prevention and reduction program.”

All revenue raised in excess of $35 million is allocated to the state’s general fund. Of the $87.6 million in tobacco settlement payments and taxes South Dakota received in 2018, only $4.5 million in state funds was allocated to tobacco prevention programs, about 5 percent of tobacco moneys and “just 38.5 percent of the Centers for Disease Control and Prevention’s annual spending target.”

With states providing little money to help tobacco users, consumers have turned to other products to help them quit smoking, including electronic cigarettes. E-cigarettes have emerged as an effective tobacco harm reduction product, providing consumers with nicotine without the associated harms that are found in combustible tobacco cigarettes.

Public health groups have extensively studied e-cigarettes and have found them to be significantly less harmful than combustible tobacco cigarettes. Public Health England, Royal College of Physicians, and the National Academies of Sciences, Engineering, and Medicine have all acknowledged vaping devices and e-cigarettes are less harmful than tobacco. The American Cancer Society noted in 2018 that based on the “currently available evidence, using current generation e-cigarettes is less harmful than smoking.”

E-cigarettes have proven to be effective smoking cessation devices. One study found 6.1 million to 9.2 million citizens in the European Union have quit smoking traditional tobacco cigarettes by using e-cigarettes. A 2019 study concluded e-cigarettes are “twice as effective as nicotine replacement at helping smokers quit.”

The use of e-cigarettes is also useful for state budgets. As a THR product, e-cigarettes can help negate the associated health care costs of combustible tobacco cigarettes. One study determined that if all Medicaid recipients that smoked combustible cigarettes had switched to electronic cigarettes, states could have saved $48 billion on Medicaid in 2012. A similar, smaller analysis of just 1 percent of the Medicaid population concluded Medicaid savings would be “approximately $2.8 billion per 1 percent of enrollees” over the next 25 years.

Lawmakers should also be aware of the potential benefits that e-cigarettes could bring to their state’s economy. Analyses on vape shops indicate these businesses “generate annual non-online sales of more than $300,000 per store” and average $26,000 in monthly sales. Additionally, the e-cigarette industry is expected to grow substantially, as the global market “is estimated to reach $44,610.6 million by 2023.”

South Dakota is already losing out on potential revenue from e-cigarette sales, as the state currently bans online sales of nicotine. Online sales of e-cigarettes grew 41.3 percent from 2016 to 2017, from $345 million to $487.7 million. Nine e-cigarette retailers were in “2018 Internet Retailer Top 1000 rankings.”

Burdensome taxes on vape products have shuttered the industry in other states. In 2016, Pennsylvania enacted a 40 percent wholesale retail tax on e-cigarettes. Within a year, an estimated 120 vape shops closed. Less than one year later, Pennsylvania state legislators attempted to reverse or reduce the scope of the tax because of the significant amount of harm it had caused.

Lawmakers should refrain from taxing THR products, including e-cigarettes and vaping devices. These products are significantly less harmful than combustible tobacco and they serve as an effective cessation tool that can provide savings for state governments. Moreover, the e-cigarette industry is profitable and will likely continue to grow and provide gains to states’ economies.

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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