Focus Areas:    Consumer Protection | Tax

Vapor products, harm reduction, and taxation: Principles, evidence, and a research agenda

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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