Alaskan Vapor Tax Proposal: Excise Tax Misconception

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A proposal to introduce a wholesale tax on vapor-based products in Alaska could make it very expensive for smokers to switch to combustible tobacco products.

If enacted, HB 110 (SB 45) would impose, among other things, a 75 percent wholesale tax on nicotine vapor products (including components), a rate comparable to that of other products. tobacco and cigarettes. Such a high tax would dramatically increase the retail prices of vaping products, which could limit the number of smokers who switch.

While excise taxes on cigarettes and vaping products can be a legitimate way to recoup some societal costs associated with nicotine consumption, it is difficult to justify equal tax treatment between vaping products and combustible tobacco. . Vaping is unlikely to be harmless, but the consensus is that vapor products are significantly less harmful than traditional combustible tobacco products. Public Health England, an agency of the UK Department of Health, has concluded that vapor products are 95% less harmful than cigarettes.

Worse than the disproportionate tax rate is the substitution that is likely to result in an increase in smoking because of the tax – a distinct negative for public health in Alaska. A recent study funded by the National Institutes of Health found that increasing taxes on vapor products would increase the number of smokers. Rather than encouraging smoking, lawmakers should support harm reduction, and tax policy is a useful tool in such an endeavor, at least indirectly.

The tax code should be kept as neutral as possible, and it should not pick winners and losers, but the nature of excise taxes is such that a well-designed tax system would encourage consumers to quit smoking. Since the harm associated with the consumption of other nicotine products (vapor products, nicotine sachets, etc.) is much lower, there should be no tax or, at a minimum, the tax rate should be much lower. Since no taxes or low rates translate into lower retail prices, it helps consumers navigate the market and helps them switch to less harmful products.

If a tax is absolutely necessary, lawmakers should avoid price-based taxes. If the goal is to recover certain societal costs associated with consumption, quantity would be the most appropriate tax base. Whether a device is expensive or cheap does not matter for the damage resulting from its use. For vapor products, the obvious choice is to tax the liquid by volume (ie per ml). Such a design would actually target the harmful behavior and avoid taxing devices and components.

In addition to capturing the externality, it is the easiest and most direct way for governments to tax a good, as it does not require valuation and, as such, does not require expensive tax administration. . For example, in vertically integrated businesses (some vape shops both manufacture and sell vapor liquid), the assessed value on a wholesale transaction that does not actually take place must be calculated to estimate the tax payable. Taxation based on quantity rather than value also makes it easier for governments to forecast revenue, as it is unaffected by changes in consumer brand preferences or retail prices. Simple taxes reduce compliance costs and make it easier for tax authorities to apply the tax. To account for the differences in the market between disposable and non-disposable products, a bifurcated rate may be considered.

A 75 percent tax is high, but it wouldn’t be the only tax levied on nicotine users in Alaska. In fact, some localities in Alaska already levy very high taxes on steam products. For example, in 2021 Anchorage introduced a 55% wholesale price tax. Lawmakers should take into account the regressive effects of taxes on steam products of this magnitude. Most excise taxes are regressive, but taxes on vaping products are particularly regressive because the majority of consumers have lower incomes. Regressivity is not necessarily an argument against levying the tax – a regressive tax may be justified (and offsets may help mitigate the effects) – but since the revenue from that tax would simply be allocated to the general fund, it becomes relevant.

Alaska should avoid relying on narrow-based regressive taxes to fund its government. Revenues from an excise tax designed to internalize negative externalities should be used to effectively compensate for these externalities. This is not currently the case: of the nearly $ 60 million Alaska collects from tobacco taxes and the $ 20 million it receives from the Tobacco Framework Agreement, the State spends less than $ 10 million on quitting smoking. (In fairness, this ratio is better than 48 other states.)

In a statement accompanying the bill, the sponsor of the bill, Representative Sara Hannan (D), mentions youth use as the main reason for introducing the bill. Although the use by young people of any nicotine product is a major problem, there have been marked improvements in the fight against the use of young people in recent years. In her statement, Representative Hannan refers to data from the Centers for Disease Control (CDC) from 2018, where 21% of high school students reported vaping at least once in the past 30 days. In the most recent data from 2021, 11% reported using at least once in the past 30 days, and only 3% reported daily use.

In the area of ​​tax policy, HB 110 neglects a sound conception of excise duty policy and, in so doing, risks damaging public health. Lawmakers should reconsider this approach to taxing steam products.

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