Base Tobacco Taxes on Tobacco Risks – A Valid Strategy Is Revived

On August 13 the New England Journal of Medicine published a commentary (here) by three prominent tobacco research and policy experts challenging “national, state, and local policymakers” to “expedite the move away from cigarette smoking” by basing tobacco taxes on health risks.  They recommend high taxes on high-risk combustible products, and lower taxes on low-risk smoke-free products like e-cigarettes and smokeless tobacco. 

Economist Frank J. Chaloupka of the University of Illinois Chicago, attorney David Sweanor of the University of Ottawa and economist Kenneth E. Warner of the University of Michigan acknowledge that “the science supporting a difference in risk between combustible and noncombustible tobacco products is well established,” and they conclude that “Sizable public health benefits could derive from current cigarette smokers’ switching to [e-cigarettes] and other noncombustible products.”

I made the same argument in a Tampa Tribune op-ed on August 16.  12 years ago.

In 2003, many states were under pressure to raise tax revenues.  I submitted op-ed columns to newspapers in 16 states, noting: “Excise taxes on tobacco products may be inevitable, but they don’t have to be illogical.  A common sense approach is to tax tobacco products according to risk.  Cigarettes, widely acknowledged as the most dangerous products, are already taxed at high levels by most states, ostensibly to discourage consumption.  But the health impact of smokeless tobacco use is much lower; scientific and medical research has confirmed that smokeless tobacco use carries only about 2% of the risk of smoking.  A rational tobacco tax policy would set taxes on smokeless products at 2% those of cigarettes.” 

The Tampa Tribune published my proposal (click on the image to read it), which included this:

“Taxing tobacco products according to well-established risks will serve the public health goal of reducing the death toll from cigarette smoking.  Economic research shows that a large price differential encourages cigarette smokers to switch to smokeless tobacco.  A growing number of public health experts, including the prestigious Royal College of Physicians in Britain, recognize that smokeless tobacco may be an acceptable substitute for smokers who have been unable or unwilling to quit.  They point to evidence from Sweden where, over the past century, men have smoked less and used more smokeless tobacco than in any other Western country.  The result: Swedish men have the lowest rates of lung cancer -- indeed, of all smoking-related deaths -- in the developed world.

“How have the Swedes achieved this record-setting reduction in smoking?  First, placing tobacco discreetly inside the mouth is far safer than setting it on fire and inhaling the smoke, and the Swedes know it…Second, smokeless tobacco satisfies, because it delivers nicotine almost as efficiently as a cigarette.  Nicotine is addictive, but it causes none of the diseases associated with smoking.  Third, the “spitting image” of smokeless tobacco is history, because modern products, available in Sweden and the US, can be used invisibly and as easily as breath mints.  Finally, in Sweden the price of smokeless tobacco products is less than half that of cigarettes, the difference largely reflecting levels of taxation.”

Twelve years later, it is comforting to see this taxation strategy gaining wider currency.

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.”

Tobacco Harm Reduction as the Basis for Tax Policy in Indiana & Kentucky

On April 29, 2011, Indiana became the second state in the U.S. to officially recognize tobacco harm reduction. Governor Mitch Daniels signed into law HB 1004 (available here), which states: “The Indiana general assembly finds that the tax rate on smokeless tobacco should reflect the relative risk between such products and cigarettes.”

This is a landmark event. It sets the stage for the state to develop a rational excise tax policy for tobacco products -- something I have advocated since 2003. That year, I proposed that smokeless tobacco products and cigarettes should be taxed according to risk, in order to provide an economic incentive for smokers to transition from high risk/high tax cigarettes to very low risk/low tax smokeless products. My commentary was published by newspapers in Tallahassee and Tampa, Florida (here and here and St. Louis (here).

On March 23 of this year, I provided expert testimony at a hearing of the Indiana Senate Committee on Public Policy, which was considering HB 1405, a bill to appropriately classify dissolvable tobacco products. That legislation (here) was also passed by the legislature and signed by the governor. My prepared testimony is available here.

Indiana is the second state to recognize the roles that tobacco harm reduction and tobacco excise tax policy can play in promoting public health. In 2005, the Kentucky General Assembly passed and Governor Ernie Fletcher signed into law a bill recognizing that:

“increasing taxes on tobacco products should reduce consumption, and therefore result in healthier lifestyles for Kentuckians. The relative taxes on tobacco products proposed in this section reflect the growing data from scientific studies suggesting that although smokeless tobacco poses some risks, those health risks are significantly less than the risks posed by other forms of tobacco products. Moreover, the General Assembly acknowledges that some in the public health community recognize that tobacco harm reduction should be a complementary public health strategy regarding tobacco products. Taxing tobacco products according to relative risk is a rational tax policy and may well serve the public health goal of reducing smoking-related mortality and morbidity and lowering health care costs associated with tobacco-related disease.”

The idea of a rational risk-based tobacco tax is clearly gaining momentum in policy circles. Earlier this year, the National Center for Policy Analysis, a nonprofit, nonpartisan public policy research organization, issued a report titled “Taxing Tobacco By Risk.” That document, available on the NCPA website (here), discusses tobacco harm reduction as a basis for tax policy and concludes: “States that wish to pursue a consistent and science-based tobacco harm reduction strategy should examine the way in which they tax tobacco products and the amount of tax levied on these products.”

In 2003, I wrote: “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.”

Indiana and Kentucky have admirably adopted this compelling and innovative strategy; other states will be wise to follow.