Tax Analysts Blog

Taxing E-Cigarettes Seems Crazy

Posted on Jun 4, 2014

The do-gooders in the state capitals are at it again: There have been multiple proposals to tax e-cigarettes in the same manner as traditional cigarettes. I get the rationale for tobacco taxes. You smoke, you get sick, society has to pay for your medical care. That's consistent with the classic rationale for excise taxes. Those taxes are legitimate only if used to pay for externalities -- that is, the societal costs that aren't borne by the market.

Of course, cigarette taxes in particular have never really been about externalities. If they were, every penny of revenue would go to smoking-related healthcare. Instead, dozens of states earmark some cigarette tax revenue for education (I still can't believe teachers who rely on cigarette tax revenue for their raises aren't leaving cartons of Lucky Strikes on their kids' desks). I've had a dozen lawmakers tell me that cigarette taxes aren't about externalities. They're about grabbing money -- in this case from a frowned-upon minority.


Yes, cigarette taxes are hard to oppose because, well, smoking is bad for you. Moreover, the cigarette makers have a sordid history that makes anyone thinking of opposing more taxes on their products squeamish.


Taxing cigarettes isn't all about grabbing money, of course. There are folks like Michael Bloomberg and his ilk who just like to tell people what to do: Don't eat salt, don't eat fat, don't drink, don't get high, don't own guns, etc. They're tiresome, but their arrogance seems boundless.


So now they want to tax e-cigarettes. Why? I like to think it's because many people enjoy them. I know lots of folks who swear by them. Liberal elites can't fathom people making their own choices about what to put in their bodies (conservatives have their own set of issues about what I can or can't do, but smoking as an issue belongs to the liberals).


Taxing e-cigarettes is a money grab. If people use e-cigarettes instead of real cigarettes, the state loses money. The vested interests like the public employee unions and the myriad government contractors can't have that. But proponents won't admit the money-grabbing motive. They pretend there are actually externalities to be addressed. Now, truthfully, we really don't know what the long-term effects of e-cigarette use are, but at the moment there's no evidence they're dangerous.


Actually, there is evidence that e-cigarettes have positive externalities. A recent study in the journal Addiction found that e-cigarette users were more likely to give up real cigarettes. If that's true, we should be subsidizing e-cigarettes, not making them more expensive. Yet politicians routinely say that e-cigarettes will lead people to start smoking, or worse -- use drugs! Are they daft? Shouldn't those who want to impose a special tax on a product have the burden of proving its dangers?

This post is an excerpt of article that first appeared in State Tax Notes magazine.

Read Comments (3)

emsig beobachterJun 3, 2014

Ecigarettes should be taxed as an ordinary commodity. If there is scientific
proof that e cigarettes really do help smokers quit; and, the ecigarettes do
not have negative effects then they could be subsidized from the tobacco tax
receipts.

AMT buffJun 4, 2014

Deadweight loss is minimal when government taxes addictive products, for which
the demand is by definition highly inelastic.

Could it be that our legislators have become competent economists? Just
kidding!

emsig beobachterJun 4, 2014

AMT buff: No, economists have proven mathematically what politicians have
always known. Impose taxes on necessities, whether they're addictive or not.
That way taxes are collected with the least amount of squeal. However, the old
politicians knew to include some taxes on luxuries to mitigate the
regressiveness of the tax system. This worked fairly well until the late 18th
century.

The late Italian economist, de Vito de Marco postulated that the best tax
system is one in which the poor pay less taxes than they think they do and the
rich pay more than they think they do. Too much for politicians/

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