Taxing Nicotine E-Cigarettes: Who Will Ultimately Pay?

Last Friday, several media outlets, including New Power, shared an article translated by Sina Technology titled "U.S. House of Representatives Approves E-Cigarette Tax! $9.9 Billion Revenue Expected Over 10 Years," which reports that the U.S. House of Representatives has approved a tax provision targeting the nicotine content in e-cigarettes. This means that the U.S. will impose taxes on nicotine liquids for the first time.

Although this tax provision has not yet entered the public disclosure stage, the news has spread across the U.S. and even the global e-cigarette industry. Suddenly, taxation has become a hot topic among e-cigarette operators and consumers. Whether the tax is reasonable and how it should be collected has become a fiercely debated topic in the current e-cigarette market.
 
The U.S. Government Will Tax Nicotine E-Cigarettes

According to foreign media reports, a tax bill that will make nicotine liquids more expensive was passed by a vote in the U.S. House of Representatives on Wednesday, without any prior public hearings. If the bill is subsequently signed by the Senate and becomes law, an additional tax of $20 will be imposed on each 60 ml bottle of 12 mg/ml nicotine e-liquid.

The tax was proposed by bipartisan representatives Tom Suozzi and Peter King on October 18, under the bill name "HR 4742." Notably, there was no formal public debate held before the proposal, yet it was voted on just five days after its introduction in the House of Representatives.

This law is very new; as of last Friday, just two days after it was voted on by the committee, the full text had not yet been published on the congressional website. It is understood that the bill passed with a vote of 25 to 14, with the majority voting against it, except for two Democratic and two Republican representatives.

Representative Suozzi expressed shock at the number of teenagers addicted to nicotine, stating that increasing the cost of e-cigarettes will directly correlate with reduced usage of e-cigarette products. He also tweeted, emphasizing, "Let’s start with the basics—vaping is bad. It’s killing people. Parents of children are terrified... e-cigarettes are sending them to the hospital."

Jim McDonald, a writer for Vaping360, commented that the committee's stance seems unopposed, similar to governors who have already passed emergency e-cigarette bans, and that this rule will make the e-cigarette environment more difficult. Proponents believe that the lung injuries associated with black market cannabis oils are the reason for taxing e-cigarette products at the same level as tobacco products.

McDonald believes that the bill proposed by Suozzi and King does not align with the opinions of tobacco control experts. Experts suggest a differential tax system (making lower-risk products cheaper than higher-risk products) to encourage smokers to switch to safer harm reduction products. However, in reality, the tax rate on e-cigarettes is higher than that on traditional cigarettes, which is unfair.

Additionally, the U.S. Joint Committee on Taxation noted that once the new law is passed and implemented, it will bring considerable revenue to federal policy over the next 10 years. However, some representatives have stated that young people are sensitive to price, and taxation may have some effect, but it cannot completely prevent young people from using e-cigarettes.
 
How is the E-Cigarette Tax Calculated?

According to currently available information, the bill is based on nicotine content rather than e-liquid volume.

The bill proposes a tax of $50.33 for every 1,810 mg of nicotine, which translates to 2.78 cents per mg. However, the tax rate for cigarettes is $50.33 per 1,000 cigarettes (with a retail price of $1 per pack), equating to 5 cents per mg (each cigarette contains about 10 mg, totaling 200 mg per pack).

This means that the bill does not tax e-cigarettes and traditional tobacco products equally. Clearly, tobacco products consider cigarette production, not nicotine content. However, for e-cigarette products, HR 4742 considers nicotine content rather than pod production.

Vaping360 has also raised questions about this. For example, when calculating flavored e-liquids, a 30 ml bottle of 50 mg/ml nicotine salt e-liquid would incur an additional tax of $41.7, but if calculated by content, that bottle contains the equivalent of nicotine from 7.5 packs of cigarettes. Yet, cigarettes only need to pay $7.5 in tax.

The difference between $41.7 and $7.5 in taxes is a staggering gap...

If we compare it to Juul e-cigarettes, one pod is 0.7 ml, containing 59 mg/ml of nicotine salt, meaning each pod will incur about $1.15 in taxes, equivalent to about 8 yuan in tax.

McDonald emphasized that if the bill applies to DIY e-liquids, the cost increase would be even more severe. "100 ml of nicotine base liquid, with a nicotine concentration of 100 mg/ml, would increase the cost to $2,800 (about 19,756 yuan)!"

The Joint Committee on Taxation's chief advisor told the House that the bill would raise at least $10 billion over 10 years. He also stated that the tax would reduce e-cigarette sales by 22% annually, even without considering potential black market issues.
 
Controversial Tax Bill

Since the House voted to pass the e-cigarette tax bill, various controversies surrounding "e-cigarette taxation" have emerged: some say that preventing minors from purchasing is merely the U.S. government's way of justifying taxation; others argue that e-cigarettes are tobacco products and should be taxed accordingly.

The question of whether "e-cigarettes should be taxed?" and whether "the House's decision was erroneous?" is something New Power wants to express some observations on over the past few days.

First, let’s discuss whether taxation is warranted. New Power believes that e-cigarette taxation is an inevitable trend. Taxation is a basic obligation of businesses; even if e-cigarettes are proven to reduce harm, they still pose health risks to teenagers and non-smokers, thus traditional tobacco products are taxed, and e-cigarettes should also be taxed.

The only contentious issue is whether "the tax is reasonable," which is the main reason for the backlash against the bill from the U.S. e-cigarette industry. Currently, the point of contention is that the method of taxing e-cigarettes differs from traditional cigarettes and is even much higher than the tax rates on traditional tobacco products. This leads to two issues:

First, since e-cigarettes do not contain tar or carbon monoxide, and studies have confirmed they are less harmful, it stands to reason that smokers should be encouraged to switch from traditional tobacco products to e-cigarettes. However, taxing e-cigarette products based on nicotine content will lead to increased product costs, higher end retail prices, and ultimately consumers may be unable to afford the high usage fees, resulting in a return to cheaper cigarette products.

Second, it could create a large black market for e-cigarettes. The unreasonable taxation of HR 4742 will encourage users to illegally import high-potency pure nicotine liquids from other countries. Since making e-liquids requires technical skills and experience, it is easier for novices to encounter dangerous accidents. Moreover, similar to black market THC products, users may purchase e-liquids from various dubious sources to save on usage costs, leading to unpredictable consequences.

Although the bill has only passed the House, it still has room for change before being approved and signed by the Senate, but it is enough to shock the e-cigarette industry. If the unreasonable tax policies of HR 4742 are not revised, it could ultimately lead to a resurgence in smoking rates, collapsing years of anti-smoking policies in the U.S.

As for whether the House's statement of "preventing youth addiction" is merely a facade? New Power believes this is worth discussing within the industry.

Upon closer observation, it can be seen that this bill not only raises "product prices" but more importantly, taxing based on nicotine content will force manufacturers to lower the nicotine concentration in their products. Here’s an example:

If the nicotine concentration is 50 mg/ml and the e-liquid volume is 2 ml, applying the U.S. tax formula (0.0278*50*2) would result in an additional tax of $2.78 (about 19 yuan) per pod. Based on the average price of a pack of three pods in the domestic market being 99 yuan, after adding taxes, a pack would cost 156 yuan;

If, according to national standards, the nicotine concentration is limited to 20 mg/ml, then applying the tax formula (0.0278*20*2) would result in an additional tax of $1.11 (about 8 yuan) per pod, meaning the domestic price of a pack of three pods would be 123 yuan.

From 156 yuan to 123 yuan, a normal business would likely choose the latter. This means that to reduce product costs, e-cigarette manufacturers will lower the nicotine concentration in their products.

From this perspective, HR 4742, aside from raising product prices, also forces e-cigarette products to lower their nicotine content. For curious teenagers considering e-cigarettes, this significantly reduces the likelihood of addiction. Moreover, given that the average price of cigarettes in the U.S. is relatively high, e-cigarettes with lower nicotine content will not be entirely disadvantageous.
 
Upon understanding this, it can be seen that HR 4742 does have some rationality. Although the taxation system affects the development of the e-cigarette industry in some aspects, viewed rationally, it indeed has the potential to address the "addiction" issues caused by high nicotine concentrations.

New Power believes that the real focus of the bill should be on whether "the taxation is balanced." Whether e-cigarettes are considered tobacco products or harm reduction products, policies must take into account the environmental benefits of e-cigarettes and carefully evaluate and discuss to formulate the most suitable long-term taxation regulations.

"How to balance the relationship between taxation and smoking control" has always been an important topic for the development of the e-cigarette industry, as in many countries and regions, tobacco and fiscal conditions are closely linked. Therefore, policies must aim to achieve smoking control objectives without affecting national tax revenues as much as possible. This is also why the e-cigarette industry continuously calls on the government for constructive communication with industry practitioners.

Overall, whether HR 4742 will pass remains uncertain, but from another perspective, it can be seen as a positive development for the e-cigarette industry, as taxation represents recognition of an emerging industry and is a necessary path toward standardization and legalization. If the U.S. government can effectively prevent youth addiction through taxation regulations and achieve a balance in tax benefits, then global regulatory bodies can take inspiration from this to allow e-cigarette products to legally replace traditional cigarettes.