The Tobacco Tax Equity Act currently being considered in Congress would increase taxes on all tobacco and nicotine products to raise revenue for President Joe Biden’s proposed $3.5 trillion reconciliation bill.
The proposed tax increase attempts to equalize the taxes on all nicotine products—regardless of their risk, use patterns, or approval by the Food and Drug Administration. Taxes on combustible cigarettes would double to $2 per pack under the bill’s current form. The tax on dipping tobacco, roll-your-own tobacco, and pipe tobacco would rise by 2,023 percent, 100 percent, and 1,651 percent, respectively.
Vapor products, which are not currently taxed at the federal level, would be taxed at a rate of $100.66 per 1,810 mg of nicotine to align them with taxes on traditional cigarettes. Thus, the tax on a typical pack of e-cigarette pods would be around $9, and a 30-milliliter bottle of 12-milligram e-liquid would be taxed at $20.02. Federal taxes on small cigars would increase by 100 percent under the proposal, but larger and premium cigars could see up to a 1,000 percent tax increase.
Two already products approved as “appropriate for the protection of public health” by the FDA would also see tax increases. The tax on heated tobacco products would increase 100 percent and the smokeless tobacco, snus, would incur a 2,892 percent tax increase on a can of 24 pouches.
These sweeping tax hikes would break the Biden administration’s campaign pledge that it would not raise taxes on low and middle-income Americans. The tax increases also contradict the FDA’s smoking reduction strategy, would undermine public health efforts, and cause job losses across the country.
Tobacco Tax Hikes Are Regressive
On the 2020 campaign trail, now-President Joe Biden frequently pledged to not raise taxes on individuals earning below $400,000 a year. However, cigarette taxes are acknowledged to be one of the most regressive taxes at both the state and federal levels. Almost three-quarters of America’s 34 million smokers are from low-income communities. According to the Joint Committee on Taxation, 94.3 percent of consumers who would be paying more in tobacco taxes make under $200,000 a year.
If the congressional tobacco tax proposal were to pass, a pack-a-day smoker in New York state making $15,000 a year would pay almost 20 percent of their yearly income to tobacco taxes, according to the Tax Foundation. In West Virginia, the state with the highest smoking rate in the nation, that figure would be more than 10 percent.
Smoking is concentrated among blue-collar workers without college degrees. For example, about 35 percent of those with only a GED smoke while only four percent of individuals with a graduate degree smoke. It would not be an understatement to say that the dramatic tobacco tax increase is strongly supported by high-income Americans with advanced educations but would be paid for by low- and middle-income Americans who didn’t go to or graduate from college.
Under even the most optimistic assumptions by public health groups, 97 percent of smokers would continue smoking despite the proposed increased tax. However, these assumptions don’t account for those currently using safer nicotine alternatives switching back to smoking because the price advantage of using e-cigarettes and other devices would have been eliminated. The revenue raised from these taxes would be a fraction of the cost of the president’s Build Back Better agenda but would significantly impact the pocketbooks of tens of millions of Americans.
Congress’ Proposal Contradicts the FDA’s Strategy for Tobacco Harm Reduction
Equalizing taxes across all nicotine products, regardless of their risk to users, runs counter the FDA’s strategy to reducing tobacco-related public health harms. The FDA’s plan to reduce smoking is based on the “continuum of risk,” which recognizes that not all nicotine products are created equal. Cigarettes are the most dangerous nicotine product, not because of the presence of nicotine but because of the smoke that results from combustion. Nicotine replacement therapies like gums are some of the safest.
Writing in the journal Tobacco & Nicotine Research, the head of the Center for Tobacco Products Mitch Zeller said:
“FDA’s new strategy promises to save millions of lives by accelerating declines in smoking among those currently addicted, while preventing future generations from becoming addicted to cigarettes in the first place. Primary objectives include helping people move away from the tobacco product that causes the most harm—cigarettes—and encouraging industry resourcefulness in developing potentially less harmful products for adults who seek nicotine.”
Zeller told Congress, “If we could get all those people [who smoke] to completely switch all of their cigarettes to noncombustible cigarettes, it would be good for public health.”
The FDA has already authorized two such products; IQOS, and general snus, both of which are allowed to inform consumers of their benefits relative to cigarettes. E-cigarettes are currently under FDA review. Increasing taxes on e-cigarettes so dramatically before the FDA has completed this process risks severe consequences for the roughly 15 million adult vapers in the U.S.
Further, a study conducted by health economists at Georgia State University estimated that equalizing taxes on e-cigarettes and combustible cigarettes could deter 2.75 million Americans from quitting smoking.
In August, 15 past presidents of the Society for Research on Nicotine and Tobacco (SRNT) led by the University of Michigan School of Public Health’s Kenneth Warner took to the pages of the American Journal of Public Health (AJPH) to warn that the potential of e-cigarettes to save lives was being lost and that nicotine products should be taxed “proportionate to risk.”
Increased Tobacco Smuggling Could Threaten Community Safety
The illicit cigarette trade currently represents about a fifth of the entire market and deprives states and localities of between $3 and $7 billion in tax losses annually. Doubling the federal excise tax will undoubtedly increase the illicit market for tobacco products. One of the main concerns with increased illegal activity is national security and domestic organized crime. Because tobacco trafficking is a low-risk, high-reward activity, it’s especially attractive to criminal syndicates and terrorist networks.
In 2015, a State Department report warned of the increasing danger such a lucrative criminal enterprise posed to U.S. security:
“Internationally, it fuels transnational crime, corruption, and terrorism. As it converges with other criminal activities it undermines the rule of law and the licit market economy and creates greater insecurity and instability in many of today’s security “hot spots” around the world. Illicit tobacco provides a significant revenue stream to illicit actors without the high risks and punishments associated with trafficking in narcotics or humans.”
Border states such as California, Arizona, New Mexico, and Texas are particularly vulnerable to the illicit tobacco trade. Tobacco taxes are significantly lower in Central and South America, and established pathways for narcotics trafficking can be utilized to smuggle cigarettes.
Tax Increases Hurt Small Businesses and Can Lead to Job Loss
Because of varying patterns of use and price elasticities between different tobacco products, the economic impact of the proposed tobacco tax will have diverse effects. For example, analysis by Chmura Economics & Analytics shows cigarette volumes will fall 6.4 percent. But cigar volumes will decline 55.9 percent, and vapor volumes will decline by 34.4 percent. Such declines represent a significant threat for the thousands of cigar and vape shops across the country as well as all-purpose tobacco retailers.
According to Chmura, the Tobacco Tax Equity Act would cost 14,030 jobs. The states that would be hit hardest in terms of job losses are Florida, California, Georgia, North Carolina, Texas, and Ohio.
If one of the goals of the proposed reconciliation bill is to help low and middle-income Americans, large increases in tobacco and nicotine taxes will undermine this objective. As the Institute on Taxation and Economic Policy outlined in its modeling of the Build Back Better Bill “…tax increases on tobacco and nicotine would clearly fall most heavily on low-income smokers.”
Unfortunately, the Tobacco Tax Equity has not been subjected to sufficient analysis or scrutiny to determine whether the potential benefits outweigh the costs. From a public health standpoint, equalizing or, indeed, taxing lower-risk nicotine products more than combustible cigarettes disincentivizes switching away from more harmful products. As such, the status quo federal excise tax on tobacco products, despite a number of flaws, still remains preferable to the tax increases proposed in the Tobacco Tax Equity Act.