Friday, May 17, 2013
Regulating, Taxing E-Cigarettes
As previously noted (here), e-cigarettes are winning over American smokers. E-cigs’ vapor of nicotine, water and propylene glycol is vastly safer than smoke, and these products satisfy smokers’ behavioral cues.
Marketers have enjoyed a regulatory moratorium since federal judge Richard Leon blocked the FDA’s attempt to regulate e-cigs as drug-delivery devices in 2008 and 2009 (here). His ruling was upheld on appeal (here). As a result, on April 25, 2011, the FDA announced that e-cigs are tobacco products (here).
After some delay, the FDA recently indicated that it may issue its first set of so-called “deeming regulations” on alternative tobacco products this summer. There is considerable speculation as to what form those regulations might take.
Given that the agency has shown no interest in tobacco harm reduction, its regulatory scheme for e-cigs might mirror that for cigarettes and traditional smokeless tobacco products. That could include onerous advertising and marketing restrictions that would cripple efforts to increase awareness and trial of e-cigs by smokers.
Because e-cigs are tobacco products, they will be saddled with heavy federal and especially state excise taxes. Cigarette consumption is gradually declining, which means that state payments from the 1998 Master Settlement Agreement are in decline. To counter that, some states have raised cigarette taxes dramatically, which ironically threatens legal sales and tax revenue and encourages black marketeers.
Tobacco prohibitionists, including medical associations, federal agencies and state health departments, don’t want smokers to switch to e-cigs; they will pressure legislators for high e-cig taxes that erase any economic advantage. On the other hand, weak opposition to all taxes can be expected from loosely organized e-cig consumers, trade groups and individual marketers. In that scenario, tobacco control and high taxes are likely to prevail.
Two states, Oklahoma and South Carolina, have considered a rational approach to e-cig excise taxes: a nickel per unit of nicotine solution, with the tax never to exceed one-tenth of the excise tax on a pack of cigarettes. It’s not perfect – a 1:50 or 1:100 ratio would be more appropriate – but it’s a positive development for tobacco harm reduction, one I proposed ten years ago (here) and again in 2008 (here).
As I wrote in 2003: “When it comes to taxes there are no easy answers. But a rational tobacco tax strategy based on risk is as compelling as it is innovative, because it allows lawmakers to meet their fiscal responsibility while fulfilling their moral obligation to help smokers who are desperate to quit.”