What’s the deal with e-cigarettes?

The House voted in favor of, the Senate approved and the governor signed the Omnibus Tax Law Changes bill into law yesterday which includes a tax on a new product – e-cigarettes.  What’s the deal and how should lawmakers and the tax code treat e-cigarettes?  Cordato explains here why taxing e-cigarettes is bad policy. And now the Tax Foundation has this to say…

The North Carolina House last Wednesday passed a bill that applies an excise tax to electronic cigarettes at a rate of 5 cents per milliliter of nicotine liquid. The tax has been opposed by some notable entities, but was “essentially asked for” by Reynolds American, a major producer of both traditional and electronic cigarettes.

What’s the deal here? Electronic cigarettes, which are nicotine vapor consumed with an electronic cartridge, are generally found to be far less risky than traditional incinerated tobacco. This has led some (and me, in the Seattle Times) to argue that the products shouldn’t be taxed at all. As a guiding light, we should be aiming for taxes that are neutral, meaning they don’t affect business or personal decision-making.

But in 2012, Minnesota problematically issued a revenue notice that lumps electronic cigarettes into the “Other Tobacco Products” (OTP) category of the tax code, resulting in a very hefty tax on electronic cigarettes: 95 percent of wholesale cost. Some other states (like New Jersey and Ohio) have since pushed for similarly high rates.

The goal in North Carolina appears to be to plant a flag of where tobacco taxes on e-cigarettes ought to be if you are taxing based on risk. Accordingly, the tax is very small. One electronic cigarette delivers the amount of puffs of one pack of traditional incinerated cigarettes, and while traditional incinerated cigarettes are taxed at 45 cents per pack in North Carolina, this tax would be levied at 2.5 cents per pack. The highest state excise tax on cigarettes is $4.35, in New York.

I’ve argued elsewhere that relying on tobacco revenue is not sound budgeting practice, and that the supposed external costs of smoking are overblown. The North Carolina proposal appears to sidestep those criticisms to a large degree, as the tax is expected to collect just $5 million each year.

Ideally, all cigarettes should only be taxed at the sales tax rate. But the North Carolina proposal is far better than the Minnesota tax, and should be the new standard against which other e-cigarette tax proposals are judged.

Becki Gray / Senior Vice President

Becki Gray is Senior Vice President of the John Locke Foundation. She provides information, consultation, and publications to elected officials, government staff and other dec...

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