May 17, 2019

With a $160 million budget shortfall, Rhode Island lawmakers proposed increasing taxes on cigarettes and cigars, while imposing a new tax on electronic cigarettes and vaping devices. House Bill 5151 would increase the cigarette tax by $0.25 from $4.25 to $4.50 per pack, increase the tax on cigars by $0.30 to $0.80 per cigar, and create a new 40 percent wholesale tax on e-cigarettes and vaping devices.

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Although taxes on tobacco products can lead to short-term revenue boosts, Ocean State lawmakers should not rely on them as steady revenue streams because they are extremely erratic and regressive. Moreover, excise taxes are often used to deter adults from using harmful products. However, e-cigarettes are excellent tobacco harm reduction tools and should not be subject to excise taxes.

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Furthermore, overwhelming evidence shows cigarette taxes are highly regressive and disproportionately impact lower-income persons.  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.” Smokers who earned $30,000 to $59,999 spent 4.3 percent, and those earning more than $60,000 spent just 2 percent of their income on cigarettes.

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Additionally, cigarette taxes are inherently unreliable, and often lead to long-term revenue shortfalls. 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.” Pew Charitable Trusts revealed 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.”

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Lawmakers’ intent on taxing e-cigarettes and vaping devices is especially troubling because these products have helped an estimated three million Americans quit smoking. These products are also twice as effective as nicotine replacement therapy in helping smokers quit.

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Despite fearmongering campaigns, e-cigarettes are significantly less harmful than combustible cigarettes. In 2015, Public Health England (PHE), a leading health authority in the UK, noted the use of e-cigarettes to be 95 percent less harmful than combustible cigarettes.

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The Royal College of Physicians (RCP) is the same public health group that first linked cigarettes to cancer in 1962. In 2016, RCP echoed PHE’s claims, finding health-related hazards associated with e-cigarettes “unlikely to exceed 5% of the harm [caused by] smoking.” RCP noted “in the interests of public health it is important to promote the use of e-cigarettes.”

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Moreover, the use of e-cigarettes can actually save states money by reducing smoking-related health care costs. State Budget Solutions concluded estimated Medicaid savings could have amounted to $48 billion in 2012 had smokers enrolled in Medicaid switched to e-cigarettes. In 2017, the R Street Institute analyzed the effects of “1% of smokers [within] demographic groups permanently switching.” Applying the analysis to Medicaid recipients, the R Street author estimated savings “will be approximately $2.8 billion per 1 percent of [Medicaid] enrollees” over the next 25 years.

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Perhaps most troubling with the proposed tax increase is that Rhode Island spends little tobacco moneys on helping smokers quit. In 2018, Rhode Island collected an estimated $195.5 million in tobacco settlement payments taxes, yet only allocated $375,622 (less than 1 percent) on tobacco prevention and cessation programs.

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Rather than relying on regressive, unreliable excise taxes for budget shortfalls, lawmakers should trim spending. Further, applying “sin” taxes to e-cigarettes discourages the use of these harm reduction products and negates public health gains.

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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.