The white paper titled Vapor products, harm reduction, and taxation: Principles, evidence, and a research agenda, was authored by ICLE Chief Economist, Eric Fruits. The study analyzed current policies in relation to taxes on e-cigarettes and other safer alternatives, and unsurprisingly found that the taxes imposed on these products do not always reflect their harm reduction benefits.
“In particular, there is a lack of economic and policy work identifying, prioritizing, and evaluating the trade-offs — most fundamentally, between harm reduction and revenue generation — that should guide tax-policy formulation for such products,” said the ICLE.
In light of this, the paper urges economists and health policy researchers to take in consideration these findings when debating policies for such products, in other words the necessity to analyze “the welfare effects of various policies for the taxation of e-cigarettes and similar products.”
Background:
Most of the harm from smoking is caused by the inhalation of toxicants released through the combustion of tobacco. Non-combustible nicotine delivery systems (including e-cigarettes, heat-not-burn products, and smokeless tobacco) are generally considered to be significantly less harmful than combustible cigarettes. And many smokers who are otherwise unable or unwilling to quit smoking have been switching to these less harmful products.
In an attempt to encourage such behavior, some governments have chosen to levy lower taxes on non-combustible nicotine devices than on their more harmful, combustible alternatives. At the same time, however, many governments are concerned that applying lower tax rates to less harmful products will reduce short-term revenue and may also result in higher rates of youth uptake. This poses a challenge for harm reduction advocates who believe that nudging smokers to switch to less harmful products would have dramatic social benefits.
The evaluation of this trade-off is central to the design and enactment of optimal tax policies for non-combustible nicotine products — and yet, to date, no such evaluation has been undertaken.
Summary:
- Today, more than 20 countries have introduced taxes on e-cigarettes and other vapor products. In the United States, several states and local jurisdictions have enacted e-cigarette taxes. Unfortunately, there is virtually no empirical basis for any of these policies, and their effects on both health and government revenue are simply unknown.
- In the long-run, the goals of reducing or eliminating consumption of a taxed good and generating revenues from it are in conflict. If a tax is successful in reducing consumption, it likely falls short in generating revenue. Similarly, if a tax succeeds in generating revenues, it likely falls short in reducing or eliminating consumption.
- But at the same time, the consequence of over-taxing a product may be the consumption of alternative goods that cost less but cause even greater harm. It is not only the absolute level of taxation that matters, but also the level relative to alternatives.
- Unfortunately, cross-product comparisons are extremely difficult. Not only is it complicated to assess relative tax rates on differentiated products, but the effect of even the same nominal tax rate on consumers’ decisions will vary from product to product.
- Empirical research in this relatively new and dynamic product category is sparse. Studies of consumer demand in the face of changes in price and taxation provide a wide range of estimates with varying degrees of reliability.
- Current research acknowledges that the most restrictive policies would effectively eliminate e-cigarettes as a viable alternative to smoking, while the most permissive may promote e-cigarette usage and potentially encourage youth uptake. Realistically, these are empirical issues of degree, rather than theoretical issues of either-or.
- In between these extremes are policies that may discourage young people from initiating use of e-cigarettes, while encouraging current smokers to switch to less harmful e-cigarettes.
- But whether any of these policies would also line up with legislators’ preferences for revenue generation and their tolerance for poorer health outcomes is unclear.
Research Agenda:
While there is a growing body of research regarding the chemistry, toxicology, and clinical aspects of vapor products, there is little research quantifying how existing or potential policies advance or stifle the objective of harm reduction. Policies that demand further research include:
- Taxation and pricing of vapor products, especially relative to combustible products;
- Quantification of the economic impact of increased longevity;
- Quantification of the impact of vapor products on smoking-related health expenditures
Research should be targeted on evaluating which policies would advance harm reduction objectives at the lowest cost to consumers and producers while fostering innovation. In particular, policies should be evaluated based on empirical evidence demonstrating the extent to which they would:
- Increase the number of current users of combustible products who switch to a less harmful, non-combustible alternative;
- Decrease the number of dual-use consumers;
- Discourage youth uptake of nicotine-containing products; and/or
- Encourage investment and innovation in developing safer vapor products and related devices.
