What Would Happen If Vaping Were Taxed the Same as Cigarettes?

“In addition to increasingly strict regulatory policies, another obstacle to the development of the e-cigarette industry is the issue of taxation.”

For a long time, many regulatory agencies in various countries have advocated for the regulation or prohibition of e-cigarettes under the pretext of “youth addiction” and “smoking control.” While these reasons may seem reasonable at first glance, it is undeniable that tobacco is a major source of tax revenue for many countries, and the impact of e-cigarettes on taxation cannot be ignored.

With Vermont lawmakers proposing a hefty 92% tax on e-cigarette products and other devices, hoping to generate $1.1 million in revenue in 2022, the issue of e-cigarette taxation has resurfaced. Even though such tax policies are extremely unpopular among local smokers and e-cigarette users, the trend of taxation has not slowed down, and many state governments in the U.S. are beginning to propose how to tax e-cigarette products.

Earlier this year, I mentioned in an article about e-cigarette taxation that the explosive growth of e-cigarettes will inevitably impact the traditional tobacco industry, especially regarding national fiscal revenue. Therefore, taxation will undoubtedly become a future trend.
 
While I believe that taxing e-cigarette products is inevitable, increasing taxes can not only raise the threshold for addictive products but also help fill the fiscal gap caused by the loss of tobacco tax revenue. However, if other countries follow the U.S. model of imposing high taxes on e-cigarettes to address other fiscal expenditures, wouldn’t smokers’ health gradually deteriorate under the burden of taxation?

Currently, the taxation situation for e-cigarettes in the U.S. is still very chaotic and inconsistent. Since state governments have their own taxing authority, they can impose taxes on e-cigarette products as long as the legislature approves. Therefore, you will see a bizarre phenomenon, such as Pennsylvania’s 40% tax and Vermont’s 92% tax on e-cigarettes.

It is important to note that public health agencies in various states can adjust how tobacco tax revenues are used through legislation, which, from the perspective of e-cigarette users, not only seems contradictory but also gives a feeling of being treated as a cash cow by the government.

Generally speaking, most tobacco taxes are used for education and smoking cessation efforts, but with health agencies yet to legislate on their use, and with e-cigarettes being recognized by the FDA as harm reduction tools, increasing taxes will have negative impacts on smokers, smoking control efforts, and the e-cigarette industry, aside from benefiting state finances.

Moreover, many studies have shown that e-cigarette products are safer than traditional cigarettes and are currently the most effective harm reduction tools. For this reason, many public health experts believe that legislators should judge the management of these two products based on their risk profiles. Imposing such harsh taxes on e-cigarettes sends the wrong message to the public and could potentially perpetuate this misinformation.

Additionally, there is a serious issue with the taxation of e-cigarettes in the U.S.: whether the taxation aligns with the proportional principle of traditional cigarettes. Taking Vermont as an example, the average tax rate for a pack of cigarettes is about 47%, while the 92% tax on e-cigarettes is nearly double that of traditional cigarettes. This added cost will undoubtedly lead to an increase in the retail price of e-cigarettes, significantly reducing traditional smokers' willingness to switch to e-cigarettes.

E-cigarettes are fundamentally different from tobacco products in terms of product structure, usage principles, and production costs; every aspect is completely different. However, simply taxing e-cigarettes based on tobacco products means that the increased tax revenue far exceeds that of traditional tobacco products, especially when it exceeds twice the tobacco tax rate, making it unaffordable for consumers to bear such harm reduction costs.
 
Perhaps you still do not understand how outrageous Vermont's tax rate is, so let’s compare what would happen if domestic e-cigarettes were taxed like traditional cigarettes.

In our country, tobacco taxes are divided into three stages: tobacco leaf tax, value-added tax, and consumption tax. Since e-cigarette products do not include the purchase of tobacco leaves, I will not include the tobacco leaf tax for now.

In our country, the tax rate on tobacco, aside from the normal value-added tax of 17%, includes the consumption tax, which is as follows: Class A cigarettes 45%, Class B cigarettes 40%, cigars 40%, and tobacco leaves 30%. It is also stipulated that starting from June 1, 2001, the method for calculating the consumption tax on cigarettes has been adjusted from a price-based rate to a combined method of quantity-based and price-based calculations. The formula for calculating the taxable amount is: Taxable amount = sales quantity × fixed tax rate + sales amount × proportional tax rate. #p#分页标题#e#

Currently, the fixed tax rate for cigarettes is: 150 yuan per standard box (50,000 sticks, same below). If we estimate based on the domestic e-cigarette industry’s claim that “one pod equals one pack of cigarettes,” each standard box would roughly equal 2,500 pods, so the fixed tax rate is set at 0.06 yuan per pod;

Proportional tax rate: For every standard carton (200 sticks, same below) of cigarettes with a distribution price above 50 yuan, the tax rate is 45%, and for those below 50 yuan, the tax rate is 30%. Here we assume that the distribution price for 10 pods (about 10 packs of cigarettes) is 50 yuan, and the proportional tax amount is 45%. The results are as follows:

For selling a box of 3 pods at 99 yuan, the taxable amount = 3 x 0.06 + 99 x 0.45, leading to a conclusion of 44.78, rounded to 45 yuan. This means that the retail price of a box of 3 pods after tax would be 144 yuan, equivalent to a price of 48 yuan per pod.

Comparatively, if domestic e-cigarettes were taxed at about twice the rate of Vermont’s cigarettes, a box of 3 pods would cost nearly 300 yuan. This means that a traditional smoker who usually spends 20 yuan on a pack of cigarettes would have to spend the equivalent of 15 packs of cigarettes to afford a box of pods. Moreover, this does not include the value-added tax.

“If you are a traditional smoker, would you be willing to pay that?”

Looking at the global taxation situation, the value-added tax on e-cigarettes in EU countries is still relatively reasonable.

Italy’s tax standard is 0.385 euros per milliliter (about 3 yuan), Portugal’s is 0.6 euros per milliliter (about 5 yuan); the Greek government plans to impose a consumption tax on e-liquid at a standard of 0.1 euros per milliliter (about 1 yuan); Latvia charges 0.01 euros (about 0.07 yuan) and 0.005 euros (about 0.03 yuan) for e-liquid and nicotine per milliliter, respectively.

Based on an average of 1.8 milliliters per pod, if a box of pods sells for 99 yuan in the EU, after adding value-added tax, it would roughly be around 114 yuan. This taxation method is much more reasonable than the 92% tax.

Overall, should e-cigarettes be taxed? I still hold the same view: “They must be taxed. But it is necessary to clearly balance the relationship between taxation and smoking control.” This includes not only the savings in medical and environmental maintenance costs due to tobacco harm reduction but also assessing how much fiscal gap e-cigarettes actually need to fill.

In this regard, the Japanese government has done well with its taxation approach for heated non-combustible products. Although new tobacco products have reached about 20% of the tobacco market share in Japan, tobacco tax revenue has remained stable at 2.1 trillion yen in recent years. Currently, the average price of traditional cigarettes is 440 yen per pack, with a tax rate of about 63%. Meanwhile, the average price of IQOS, glo, and PloomTech pods is 460, 420, and 460 yen per box, respectively, with tax rates of 49%, 36%, and 15% for the three types of pods.

This means that even if new tobacco products are included in the tobacco tax system, reasonable taxation will not significantly impact existing fiscal revenue.

On the other hand, even though there are currently no high taxes imposed on e-cigarettes domestically, with national standards for e-cigarettes about to be introduced, the e-cigarette industry will inevitably face issues of “who regulates” and “taxation issues.” It is hoped that at that time, policies will take into account the social value of e-cigarettes and formulate reasonable tax policies.