With cigarette sales down and e-cigarettes hot, lawmakers find themselves in a bit of a revenue quagmire.

By Mandy Rafool

It’s a cigarette. It’s a pipe. No, it’s a vaporizer.

Young woman vapingElectronic cigarettes—or personal vaporizers—may look like cigarettes but they don’t contain tobacco and they don’t require a match to light up. They run on batteries and convert liquid nicotine (of varying strengths) into a vapor that is inhaled in the same way as smoke from cigarettes. The user is “vaping”—a whole new term and concept to the public policy world that is causing some confusion. This inability to neatly classify e-cigarettes has been particularly taxing on state policymakers.

Perceived by many to be safer than cigarettes, these devices have grown rapidly in popularity since they were first introduced in the United States in 2005. Many smokers are turning to e-cigarettes for their nicotine dose. At the same time, related or not, sales of regular cigarettes decreased by 30 percent from 2004, according to the Centers for Disease Control and Prevention, and that brought down state revenues too, because cigarettes are among the highest taxed products in the country.

The Vapors Are Blowing

For lawmakers looking to replace that shrinking revenue stream, one option is to tax e-cigarettes as tobacco products. The new devices do contain nicotine, after all. But if long-term research proves that vaping is safer than smoking and that smokers are indeed abandoning an unsafe product for one that is healthier, wouldn’t the wise policy choice be to encourage smokers to switch to the safer option—e-cigarettes?

Maybe, but states rely on tobacco tax revenues to fund a number of popular programs, including education about the harmful effects of smoking. Without the funds from tobacco sales, these programs may have to be cut or funded with other state revenues.

This has not escaped the attention of lawmakers who are looking at e-cigarettes with an eye toward generating revenue and wondering just exactly where they may fit in.

Minnesota lawmakers, in 2012, were the first to tax electronic cigarettes. Their rationale was that since the nicotine in e-cigarettes comes from tobacco, the product is a taxable tobacco product. They set the tax at the already-established 95 percent of the wholesale cost of any product containing or derived from tobacco. In 2014, North Carolina jumped in too, and became the only other state to levy a tax on e-cigarettes. Lawmakers there chose to tax the liquid nicotine at $0.05 per milliliter.

The fact that only two states have imposed taxes so far does not mean that others aren’t interested. To tax or not to tax e-cigarettes was a popular topic in recent legislative sessions. Taxes were proposed, but not enacted, in at least 15 additional states.

The most popular proposals would have added e-cigarettes to the definition of tobacco products and taxed them at the wholesale level. Lawmakers in Hawaii, Indiana, Kentucky, Massachusetts, New Jersey, Ohio, Oregon, Rhode Island, Utah, Vermont, Washington and Wisconsin considered going this route. Other proposals ranged from a 15 percent floor stock tax on inventory in Kentucky, to a $0.05 tax on nicotine cartridges in Oklahoma (per 1.5 milliliter) and South Carolina (per milliliter), to a tax of $0.15 per 1.5 milliliter of liquid in Michigan.

Given the number of proposals in 2014, more state legislatures are likely to follow Minnesota and North Carolina’s lead and debate the merits of imposing this new tax. Bills have already been prefiled in three states—Nevada, New Mexico and Virginia. The two basic questions are:  Should e-cigarettes be taxed? If so, by how much?

The Yeas and Nays

Tax policy experts justify tobacco taxes on the grounds that they help offset the harmful health effects of smoking. Furthermore, high taxes on tobacco products may also discourage young people from taking up smoking in the first place, thereby reducing future public health costs.

Vape chartBut tax policy scholars argue against taxing electronic cigarettes because vaping may reduce the number of regular tobacco users by providing a satisfying alternative. If true, vaping provides a net benefit for society, which should not be discouraged by taxing e-cigarettes.

Those who favor vaping taxes, however, point out that e-cigarettes contain the same nicotine derived from tobacco as regular cigarettes do—it’s just in a liquid form. So it makes sense to tax them as a tobacco product. And, since vaping is relatively new, it is still unclear whether vaping e-cigarettes is any safer than smoking regular cigarettes, or whether there are unknown, harmful long-term effects from vaping.

If state lawmakers opt to tax e-cigarettes, the question is: what type of tax and how much? The most frequently considered method is a tax at the wholesale level. It’s also the easiest to administer. On the other hand, the wholesale price does not reflect the difference in nicotine levels, which varies. So some states have considered taxing nicotine levels as way of trying to impose the tax on the potential health risk.

What’s Next?

With “vape” winning “word of the year” in 2014 and now officially in the Oxford English Dictionary, it looks like e-cigarettes and all their accoutrements are here to stay. Whether these products are taxed is up to state lawmakers, but the research on their effectiveness at helping smokers quit may influence their decisions. And that is just starting to stream in. A study from the University of Hawaii Cancer Center released in mid-November found promising results that e-cigarettes “have positive short-term effects on smoking cessation,” one of the lead researchers, Dr. Pallav Pokhrel, reported.

Lawmakers, on the other hand, are wondering if taxing—or not taxing-—e-cigarettes may have long-term effects on state revenues.                   

Mandy Rafool tracks state tax policy for NCSL.

Several states have considered legislative proposals to tax vapor products such as e-cigarettes. The chart shows the proposed amount of tax in the bill and its status.

Up in Vapor
Minnesota Increased from 75% to 95% wholesale
North Carolina 5 cents per 1.0 ml.
Michigan  15 cents per 1.5 ml
New Jersey    75% wholesale
Ohio    49% wholesale
Delaware 30% wholesale
Hawaii 85% wholesale
Indiana 24% wholesale

1. 15% on inventory

2. 20% wholesale

Maine Cigarette equivalency tax
Massachusetts 90% wholesale
New York  75% wholesale
Oklahoma 5 cents per 1.5 ml.
Oregon 81% wholesale
Rhode Island 80% wholesale
South Carolina  5 cents per 1.0 ml.
Utah  86% wholesale      
Vermont  92% wholesale
Washington 95% wholesale
Wisconsin 84% wholesale
Pre-filed for 2015  
New Mexico  

Sources: NCSL and the American Vaping Association, December 2014

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