A recent NBER working paper by Gutiérrez & Philippon has attracted attention from observers who see oligopoly everywhere and activists who want governments to more actively “manage” competition. The analysis in the paper is fundamentally flawed and should not be relied upon by policymakers, regulators, or anyone else.

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To fill an anticipated $876 million budget hole in the 2019-21 biennium, the Oregon Health Authority is pursuing a $300 million increase in taxes on tobacco products, including e-cigarettes and other vapor products. The agency has not provided any indication what an e-cigarette tax would look like, which invites the question whether e-cigarettes and other vapor products should be taxed at all and, if so, at what rate?

A recent NBER working paper by Gutiérrez & Philippon attempts to link differences in U.S. and EU antitrust enforcement and product market regulation to differences in market concentration and corporate profits.

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More than 20 countries have introduced taxation on e-cigarettes and other vapor products. In the United States, several states and local jurisdictions have enacted e-cigarette taxes.

Most of the harm from smoking is caused by the inhalation of toxicants released through the combustion of tobacco. Non-combustible nicotine de-livery systems, including e-cigarettes, “heat-not-burn” products, smokeless tobacco and other nicotine delivery systems, are generally considered to be significantly less harmful than combustible cigarettes.

Policymakers face a wide range of strategies regarding the taxation of va-por products. On the one hand, principles of harm reduction suggest vapor products should face no taxes or low taxes relative to conventional ciga-rettes, to guide consumers toward a safer alternative to smoking. On the other hand, the precautionary principle as well as principles of tax equity point toward the taxation of vapor products at rates similar to conventional cigarettes.

Analysis of tax policy issues is complicated by divergent—and sometimes obscured—intentions of such policies. Some policymakers claim that the objective of taxing nicotine products is to reduce nicotine consumption. Other policymakers indicate the objective is to raise revenues to support government spending. Often missed in the policy discussion is the effect of fiscal policies on innovation and the development and commercialization of harm-reducing products. Also, often missed are the consequences for cur-rent consumers of nicotine products, including smokers seeking to quit us-ing harmful conventional cigarettes.

Policy decisions regarding taxation of vapor products should consider both long-term fiscal effects, as well as broader economic and welfare effects. These effects might (or might not) suggest very different tax policies to those that have been enacted or are under consideration.

Our research concludes the economics of harm reduction with respect to vapor products is an area in need of reliable empirical research.

• Within a harm reduction framework, some policy objectives overlap and others conflict. For example, an objective to encourage current smokers to switch to less harmful e-vapor products largely is con-sistent with an objective to discourage dual use. On the other hand, policies that encourage switching may conflict with an objective to discourage youth uptake of vapor products. The extent of the net eco-nomic benefits of vapor products in a harm reduction framework are empirical matters of degree that require reliable research. To date, there is no peer-reviewed published research quantifying the net economic benefits of vapor products with respect to harm reduction.

 

• The small body of research on consumer demand response to e-ciga-rette pricing finds a wide range of estimates of e-cigarette own-price elasticity and cross-price elasticity with respect to conventional cig-arettes, even among studies using the same set of data. Without re-liable empirical research, policymakers face great uncertainty regarding whether specific tax proposals will achieve—or con-found—their stated policy goals.

 

• Despite the innovations that gave rise to the market for vapor prod-ucts, virtually no empirical research has evaluated the impacts of taxation and regulation on innovation in the industry. Differential taxation of vapor products would like induce a supply-side response, but there is no quantitative research on supply at this time.

Principles of harm reduction recognize that every proposal has uncertain outcomes as well as potential spillovers and unforeseen consequences. Nev-ertheless, the basic principle of harm reduction is a focus on safer rather than safe. Policymakers must make their decisions weighing the expected benefits and expected costs. With such high risks and costs associated with cigarette and other combustible use, taxes and regulations must be devel-oped in an environment of uncertainty and with an eye toward a net reduc-tion in harm, rather than an unattainable goal of zero harm.

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Last July, U.S. Congressman David N. Cicilline, who serves on the House Judiciary Antitrust Subcommittee, called for a hearing on Amazon’s proposed $13.7 billion acquisition of Whole Foods. The Congressman claimed he was not “taking a position on the legality” of Amazon’s attempt to purchase Whole Foods. In fact, his letter noted that “several leading antitrust scholars” had suggested the merger would be beneficial to consumers.

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The Economist takes on “sin taxes” in a recent article, “‘Sin’ taxes—eg, on tobacco—are less efficient than they look.” The article has several lessons for policy makers eyeing taxes on e-cigarettes and other vapor products.

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This has been a big year for business in the courts. A U.S. district court approved the AT&T-Time Warner merger, the Supreme Court upheld Amex’s agreements with merchants, and a circuit court pushed back on the Federal Trade Commission’s vague and heavy handed policing of companies’ consumer data safeguards.

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AT&T’s merger with Time Warner has lead to one of the most important, but least interesting, antitrust trials in recent history.

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In January a Food and Drug Administration advisory panel, the Tobacco Products Scientific Advisory Committee (TPSAC), voted 8-1 that the weight of scientific evidence shows that switching from cigarettes to an innovative, non-combustible tobacco product such as Philip Morris International’s (PMI’s) IQOS system significantly reduces a user’s exposure to harmful or potentially harmful chemicals.

Read the full piece here.