Taxing regular cigarettes and reduced-risk products such as e-cigarettes at the same rate serves neither public health nor the government’s bottom line.
Taxing regular cigarettes and reduced-risk products such as e-cigarettes at the same rate serves neither public health nor the government’s bottom line.
I n a move expected to generate an estimated $96 billion in funding for the president’s Build Back Better Act (BBB) agenda, lawmakers are considering a tax on nicotine that would increase the cost of reduced-risk tobacco products such as e-cigarettes and vaping liquids. This is not a particularly novel idea, and it is also not a particularly good one.
The primary goals of taxing nicotine products are to generate large amounts of revenue and reduce nicotine consumption. But pursuing these two objectives simultaneously puts them inherently at odds with each other. Consumers must purchase nicotine products to generate the desired tax revenue, and by making such products more expensive, the taxes increase the likelihood that consumption will decrease. Ultimately, neither public health nor the state’s coffers benefit.
Of course, it is important to acknowledge that federal tobacco taxes have existed for centuries and modern tobacco taxation has reduced consumption and yielded a net positive effect on American health. Research indicates that a 1 percent increase in the price of tobacco or alcohol in America leads to a 0.5 percent decline in sales. However, these “sin taxes” are dependent on high levels of consumption to generate revenues over the long term. If the goal of increased taxation is to reduce consumption, then lawmakers should expect revenues to decrease as consumption also decreases. And that outcome is the opposite of the stated goal of the nicotine tax in the BBB plan, which is to generate consistent revenue to help offset the costs associated with the plan’s ambitious expansion of the societal safety net.
Meanwhile, the individuals who would be most impacted by all that new safety-net spending are those who historically account for a high proportion of cigarette use. Of the nation’s 34.1 million adult smokers, roughly 7 million have an annual household income under $34,000. These Americans tend to be uninsured or insured through Medicaid. When following the logic of increased taxation on consumption, it might make sense to continue raising the cost of nicotine products to improve health. But the jury is still out.
An Australian study of tobacco taxation’s impacts found different results among different socioeconomic groups. While consumption declined in the short-term, those decreases were not sustained. Research looking at nicotine dependence across the United States, the United Kingdom, Canada, and Australia found that individuals with a lower socioeconomic status were more vulnerable to relapse and required more comprehensive support to help kick the habit. Quitting combustible cigarettes is extremely difficult. Seventy percent of smokers reported wanting to quit in the past year, and 55 percent reported making an attempt to do so — but only 7.5 percent reported that they were able to quit successfully. In other words, the increased prices associated with higher taxation do not appear to completely deter smokers from continuing to smoke.
When considering the tax in the BBB plan, lawmakers would also do well to look to the Food and Drug Administration’s (FDA) recent work on this issue. The FDA has recognized that tobacco products exist on a continuum of risk, with cigarettes naturally being the most harmful to public health and reduced-risk products, also commonly known as “electronic nicotine delivery systems” (ENDS), being the least harmful. To assess the risks associated with these new ENDS products and better help protect the nation’s health, the FDA established rigorous, science-based regulatory processes. The two methods the FDA uses are known as the Premarket Tobacco Product Application (PMTA) and the Modified Risk Tobacco Product (MRTP). Through PMTA and MRTP mechanisms, the FDA scientifically reviews and certifies which products present a reduced risk when compared to combustible cigarettes.
These regulatory mechanisms, which formed the basis for the FDA’s first approval of an ENDS product for sale last month, are comprehensive. They consider a variety of criteria, including: relative health risks, the risks associated with combustible-cigarette users’ switching to the product rather than quitting tobacco use altogether, the risks associated with non-tobacco users’ beginning to use the product, and both the risks and benefits of using the product compared to using approved cessation products such as nicotine patches.
The BBB plan’s proposed nicotine tax, by contrast, does not discriminate between harmful and reduced-risk products. And as a result, it flies in the face of the FDA’s previous findings. On the one hand, the government recognizes that an ENDS product is “appropriate for the protection of public health,” but on the other, lawmakers seek to tax that same product, raising its price and decreasing its use.
Leaders in Washington are not unaware of these facts, either. In a recent letter to Congress, economists at Georgia State University found that “increasing e-cigarette taxes to parity with the cigarette tax rate will sizably increase cigarette use across teens, adults, and pregnant women, compared to taxing tobacco products differentially in proportion to their health risk.” When coupled with similar studies that analyze the unintended consequences of these types of measures, it is not hard to imagine a scenario in which individuals would choose cigarettes over more-expensive reduced-risk tobacco products. Additionally, current evidence suggests that increased taxation on e-cigarettes is not associated with reducing youth use. Research demonstrates that while taxation reduces the use of e-cigarettes by individuals aged 25–34, it does not do so for those aged 18–24. And since most smokers establish a habit before the age of 26, data suggest that taxes discourage smokers from switching to e-cigarettes but do little to deter non-smoking young adults from developing e-cigarette habits.
Class-wide taxation on products containing nicotine — regardless of the risks each individual product poses — will accomplish neither of the objectives that policy-makers claim they are trying to achieve. It is the equivalent of using a hammer on a project that requires a scalpel, and it may actually create a perverse incentive for adult users of reduced-risk nicotine products to select deadlier combustible-tobacco products simply because they are cheaper to obtain. A more nuanced legislative approach is to tax products in proportion to the harms they cause consumers, thereby incentivizing individuals to make decisions less harmful to their health and well-being.
The cost of improving standards of living and public health shouldn’t be carried by society’s most vulnerable. Rather than penalizing individuals of lower socioeconomic status, policy-makers would be wise to promote safer alternatives to nicotine consumption.
Mazen Saleh is the policy director for the R Street Institute’s Integrated Harm Reduction program. Previously, he worked at the National League for Nursing and the Association of American Medical Colleges. Pritika C. Kumar is a resident senior fellow for Integrated Harm Reduction Policy at the R Street Institute. Before joining R Street, she briefly served as a senior regulatory scientist at Altria, which followed on two decades of work in harm reduction. She received her Ph.D. in public health from Johns Hopkins.