March 21 2014

Smoking Out a New Tax Opportunity

Patrice J. Lee

Controversy over e-cigarettes is spreading across the country as cities and states tackle what to do about these cigarette alternatives.

E-cigarettes are battery-operated cigarettes that don’t use tobacco, but turn nicotine into vapor which a smoker can inhale to achieve the same affect. Part of their attraction is that they are considered and marketed as a safer, healthier alternative to traditional cigarettes.

E-cigarettes enjoy freedom from federal rules and limited sales taxes. That may be short-lived. The focus has been on whether they should be categorized as tobacco products – making them subject to regulations- and banned from public spaces and. The FDA is moving in this direction, which will give ammunition to opponents.

Some municipalities aren’t waiting. Former Nanny Sate Mayor Michael Bloomberg banned them in the Big Apple last year. College and university systems took up the issue as well.

The problem is there’s a lack of long-term research to determine if they actually lead to the same sinister health issues like cancer. So far, the Centers for Disease Control and Prevention found that vapor from e-cigarettes has “far fewer of the toxins found in smoke compared to traditional cigarettes.”

Since the trend toward banning e-cigarettes emerged recently, the head scratcher has been why the hoopla? If they don’t contain tobacco and their cancer-causing carcinogens, why is the FDA trying to get them lumped in with other tobacco products? And why are groups and lawmakers lining up to fight them?

The answer appears to be cold, hard cash.

Fox News reports:

Supporters say increasing taxes will keep them out of the hands of children and teens.

But critics argue treating traditional cigarettes the same as e-cigs will hurt small businesses and strip smokers of the incentive to quit.

Many argue that the reason state and local leaders are pushing so hard to tax e-cigarettes is because they’ve become addicted to the massive amounts of money brought in through the Master Settlement Agreement – a 25-year settlement that forces the nation’s top tobacco companies to pay out billions of dollars in profit to help pay for smoking-related health care costs in some states.

If e-cigarettes are regulated the same way, that might mean millions more for states still struggling to find financial footing following the recession.

Utah, North Dakota and the District of Columbia have included e-cigarettes as part of their indoor-smoking bans, setting up the argument that the vapor sticks should be regulated like other tobacco products in the state. Wyoming, Tennessee, New York and Colorado are among nine other states that have already dumped e-cigarettes into the tobacco product category. 

Tax revenue is a strong motivator to ban e-cigarettes. Lawmakers from dozens of cash-strapped see them as a new source of revenue. If they can make e-cigarettes as socially unacceptable as regular cigarettes, they can then apply “sin taxes” or excise taxes to them, potentially raking in tens of millions of dollars or more.

We are all familiar with the anti-tobacco lobby’s successful campaign against cigarettes and the tobacco company. Not only did they alter perceptions of smoking, they managed to extract a hefty ransom. They’ve set up a model to be replicated so it’s not surprising then that they’ve set a new target.

What a cozy arrangement between opponents and lawmakers. Both could win but taxpayers lose.

I’m no fan of smoking, but if the health risks have been removed from e-cigarettes, then the alarm against them is misplaced.

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