Compared with Europe, What Is the U.S. E-Cigarette Tax Policy?

Similar to Europe, the United States does not have a unified tax policy for e-cigarettes. In fact, the tax system in the U.S. is even more varied.

Although there is no federal tax, an increasing number of state governments (7 states) have introduced taxes on e-cigarette consumption. The most recent is California, where voters approved a measure to tax e-cigarette devices as tobacco products. A similar initiative in North Dakota failed on election day.

Local governments from Alaska to Maryland, as well as the city of Chicago and Washington D.C., have implemented e-cigarette taxes. Minnesota was the first state in the U.S. to include vaping products in its tax scope and is the only state to have done so before 2015.

Compared to the European market, there is no widely accepted method for taxing e-cigarettes in the U.S.

In Europe, tax laws categorize "nicotine-containing e-liquids" (in Slovenia, Romania, and Portugal) or "e-liquids for e-cigarettes" (in Latvia, Greece, and Hungary) as the main subject of consumption tax, creating independent tax categories for these products. Several states in the U.S., as well as the city of Chicago and Cook County, Illinois, have adopted a similar approach, taxing e-liquids based on volume, which is easier to measure.

Minnesota and Pennsylvania, along with Washington D.C. and several counties, have chosen to classify e-cigarettes or nicotine-containing e-liquids under the same tax category as "other tobacco products," which is a general category excluding tobacco but may include products like chewing tobacco, snuff, and cigarettes. These are heterogeneous products with no common tax base aside from price.

In this context, the most common and easily verifiable tax base is the wholesale price. Tax rates are usually high because they are designed for mature products with low price elasticity. High taxes are often used to deter consumption of other tobacco products. They are not suitable for novel products, as price-sensitive consumers may consider switching to lower-risk alternatives.

When Pennsylvania introduced a 40% tax on the wholesale price of e-cigarettes (including devices and e-liquids) in October 2016, the impact was devastating, even before the tax policy took effect. The tax also applied to retail inventory, nearly doubling the price for consumers. Fearing hefty taxes, dozens of e-cigarette shops across the state closed down. It seems that the target of $13 million in tax revenue is no longer considered achievable.

California's new tax policy may have an even greater impact. Starting in April 2017, e-cigarettes will be taxed at the same rate as traditional tobacco cigarettes, with a tax increase to $2.87 on a pack of 20 e-cigarettes. Prices will rise significantly, reducing the incentive for smokers to try e-cigarettes as an alternative.

There is still controversy over taxing e-cigarettes for public health and economic reasons. Raising the prices of vaping products through taxation reduces the incentive for smokers to try this lower-risk alternative. While governments are focused on reducing taxes on traditional tobacco products, the ability of e-cigarettes to compensate for this loss in tax revenue has largely yet to be proven.

Currently, both the U.S. and European markets are constructing autonomous fiscal policies. Without a framework set by EU directives, European countries are choosing to tax e-cigarettes as a new product distinct from traditional tobacco products. In contrast, many state governments in the U.S. are opting to tax e-cigarettes as traditional tobacco products, a policy with clear drawbacks.