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ARIZONA'S WHOLESALE VAPOR TAX IGNORES TOBACCO HARM REDUCTION

May 21, 2020

By: Lindsey Stroud

KEY POINTS:

  • House Concurrent Resolution 2034 would charge all vapor products to a 43 percent wholesale tax – in addition to the state’s sales tax of 5.6 percent. The additional monies from the tax will be deposited into a fund administered by the Arizona Board of Regents to provide college scholarships.

  • E-cigarettes are a disruptive technology that deliver nicotine in a manner that is significantly less harmful than combustible cigarettes. Lawmakers should refrain from excise taxes on such products and promote their use. 

  • Numerous public health groups have acknowledged the reduce harm of vapor products, including Public Health England, the Royal College of Physicians, and the National Academies of Sciences, Engineering and Medicine. In 2019, the American Cancer Society declared that e-cigarette use to be “significantly less harmful for adults than smoking regular cigarettes […] because e-cigarettes do not contain or burn tobacco.

  • A 2015 policy analysis by State Budget Solutions examined electronic cigarettes’ impact on Medicaid spending. The author estimated Medicaid savings could have amounted to $48 billion in 2012 if e-cigarettes had been adopted in place of combustible tobacco cigarettes by all Medicaid recipients who currently consume these products. This would have amounted to $1.4 billion in Medicaid savings to Arizona in 2012.

  • The vapor industry provides economic benefits to the Grand Canyon State. According to the Vapor Technology Association, in 2018, the industry created 2,905 direct vaping-related jobs, including manufacturing, retail, and wholesale jobs in Arizona, which generated $132 million in wages alone. Moreover, the industry has created hundreds of secondary jobs in the Grand Canyon State, bringing the total economic impact in 2018 to $415,136,600. In the same year, Arizona received more than $4 million in state taxes attributable to the vaping industry.

  • Arizona allocates very little of existing tobacco monies on such programs. For example, in 2019, received an estimated $429.5 million in monies generated by tobacco taxes and tobacco settlement payments. In the same year, the Grand Canyon State dedicated only $17.3 million in state funding, or 4 percent of tobacco monies, to tobacco control programs, including education and prevention. In 2018, tobacco companies spent $115.6 million on marketing their products in Arizona.

  • Unlike traditional excise taxes which are usually taxed by volume, wholesale taxes are ad valorem taxes, meaning the tax imposed is based on the price of the product. There are several problems with applying this tax to vapor products. For example, some e-cigarettes can be used only once, while other devices can be reused multiple times. Under a wholesale tax, single-use vapor products are subject to a greater tax burden.

  • Another issue with wholesale taxes on vapor products – and HCR 2034’s language – is they tend to apply to a device’s components and not just the final product, including components that don’t contain nicotine.

Legislation has been introduced in the Grand Canyon State that would apply an excise tax to electronic cigarettes and vapor products. House Concurrent Resolution 2034 would charge all vapor products to a 43 percent wholesale tax – in addition to the state’s sales tax of 5.6 percent. The additional monies from the tax will be deposited into a fund administered by the Arizona Board of Regents to provide college scholarships.

The legislation is deeply problematic as excise taxes are designed to deter use of products. As a tobacco harm reduction tool, lawmakers should be promoting the use of e-cigarettes – not taxing individuals who have quit smoking, especially as Arizona dedicates very little funding to tobacco control programs. Further, a 43 percent wholesale tax is not reflective of the various vapor products on the market and impose unfair tax burdens to a multitude of vaping devices.

Electronic cigarettes and vaping devices are tobacco harm reduction tools. These disruptive technologies deliver nicotine in a manner that is significantly less harmful than combustible cigarettes. Combustible cigarettes contain hundreds of ingredients, and when burned, create thousands of harmful chemicals. Vapor products only contain five ingredients and emit a vapor that is significantly less harmful than the smoke produced by tobacco cigarettes.

Numerous public health groups have acknowledged the reduce harm of vapor products, including Public Health England, the Royal College of Physicians, and the National Academies of Sciences, Engineering and Medicine. In 2019, the American Cancer Society declared that e-cigarette use to be “significantly less harmful for adults than smoking regular cigarettes […] because e-cigarettes do not contain or burn tobacco.”

Electronic cigarettes and vapor products can also alleviate state budgets by reducing smoking-related health care costs. Indeed, a 2015 policy analysis by State Budget Solutions examined electronic cigarettes’ impact on Medicaid spending. The author estimated Medicaid savings could have amounted to $48 billion in 2012 if e-cigarettes had been adopted in place of combustible tobacco cigarettes by all Medicaid recipients who currently consume these products. This would have amounted to $1.4 billion in Medicaid savings to Arizona in 2012.

Moreover, the vapor industry provides economic benefits to the Grand Canyon State. According to the Vapor Technology Association, in 2018, the industry created 2,905 direct vaping-related jobs, including manufacturing, retail, and wholesale jobs in Arizona, which generated $132 million in wages alone. Moreover, the industry has created hundreds of secondary jobs in the Grand Canyon State, bringing the total economic impact in 2018 to $415,136,600. In the same year, Arizona received more than $4 million in state taxes attributable to the vaping industry.

Most problematic with the legislation is that the additional monies are not dedicated to tobacco control programs, even though Arizona allocates very little of existing tobacco monies on such programs. For example, in 2019, received an estimated $429.5 million in monies generated by tobacco taxes and tobacco settlement payments. In the same year, the Grand Canyon State dedicated only $17.3 million in state funding, or 4 percent of tobacco monies, to tobacco control programs, including education and prevention. In 2018, tobacco companies spent $115.6 million on marketing their products in Arizona.

As of January, 2020, 20 states and the District of Columbia levy excise taxes on vapor products. These taxes vary between wholesale and per milliliter taxes which is an important distinction as vapor products vary and their tax burden is reflected by the type of tax imposed.  

For example, unlike traditional excise taxes which are usually taxed by volume, wholesale taxes are ad valorem taxes, meaning the tax imposed is based on the price of the product. There are several problems with applying this tax to vapor products. For example, some e-cigarettes can be used only once, while other devices can be reused multiple times. Under a wholesale tax, single-use vapor products are subject to a greater tax burden.

Another issue with wholesale taxes on vapor products – and HCR 2034’s language – is they tend to apply to a device’s components and not just the final product, including components that don’t contain nicotine. Although, HCR 2034 specifically does not subject vapor products’ batteries or chargers to the tax, “any component, part or accessory of the device, whether or not sold separately,” is subject to the 43 percent wholesale tax.  

HCR 2034 is simply a revenue-grabbing measure and does not acknowledge the reduced harm or e-cigarettes and vapor products. Moreover, there is major lack of funding dedicated to programs that help reduce smoking in the Grand Canyon State. Should lawmakers truly want to fund educational scholarships, they should not be relying on former smokers that have quit smoking using vapor products.

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 vapor products in the Grand Canyon State, please visit Tobacco Harm Reduction 101’s Arizona page at https://www.thr101.org/arizona.

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©2020 by Tobacco Harm Reduction 101.