Colorado Proposition EE: Tobacco and E-Cigarette Tax Increase for Health and Education Programs Measure
Summary:
If approved, Colorado’s Proposition EE would gradually raise taxes on cigarettes and tobacco while creating a new tax on nicotine to cover previously untaxed products such as e-cigarettes. The measure would also cut the statutory tax rate on tobacco products deemed by the Food and Drug Administration (FDA) to have a lower health risk or less toxicity than traditional cigarettes by 50 percent. Cigarette taxes would rise from $1.94 per pack in 2021, to $2.24 in 2024, to $2.64 in 2027, and set a minimum price of $7 per pack in 2021 and $7.50 per pack in 2024. A wholesale tax on e-cigarettes and other nicotine products would be established at 50 percent of wholesale value in 2021, rising to 56 percent in 2024, and 62 percent in 2027.
Fiscal Impact:
According to the fiscal note published on June 11, 2020, these tax increases are projected to raise state revenue by $85.9 million in FY 2021 and $173.5 million in FY 2022.
Proponents’ Argument For:
Supporters of Proposition EE claim these tax increases would provide revenue to fund universal preschool and tobacco cessation programs and fill budget shortfalls caused by the coronavirus pandemic. They also argue the establishment of an e-cigarette tax would deter Colorado youth from using these products, most of which contain nicotine, which is an addictive substance. Because youth are more sensitive to large price increases than adults, proponents hope a large tax increase would have a significant impact on youth vaping. Colorado currently has the highest rate of youth vaping in the country, with 27 percent of high school students using an e-cigarette at least once a month. Public health advocates also argue higher cigarette taxes would encourage those currently smoking to quit or switch to safer nicotine alternatives. More than 5,000 Coloradans die from smoking-related diseases every year.
Opponents’ Argument Against:
Critics argue higher cigarette taxes would be regressive, as most smokers earn below the median income. While cigarette taxes are an effective tool to reduce the overall legal consumption of cigarettes, most smokers do not quit in response to tax increases. Instead, the majority of smokers either reduce their consumption or buy cigarettes from the illicit market to reduce costs. Should the measure pass, Colorado would have the highest cigarette prices of its neighboring states, making it an attractive target for cigarette smugglers, opponents say. With regards to the e-cigarette tax, supporters of a harm reduction approach to tobacco policy argue high vape taxes would cause those adults who have switched to vaping to revert to smoking, which is the more harmful form of nicotine consumption. The more expensive e-cigarettes are, the less likely smokers are to switch to them. E-cigarettes have been conclusively proven to be safer than cigarettes and are often used as a means of quitting or reducing cigarette use. Opponents of the e-cigarette tax acknowledge youth vaping must be reduced but argue the recent increase in the purchase age to 21 and the prohibition of flavors most used by youth by the FDA earlier this year is sufficient.
Discussion:
The tax increase resulting from Colorado’s Proposition EE would undoubtedly raise revenue for the state. But accounting for the likely increase in cigarette smuggling, falling smoking rates, and reduced uptake of e-cigarettes, revenues the size of the estimates in the legislative fiscal note are unlikely to fully materialize.
Targeting a narrow category of products with a high tax to fund universal programs creates significant budget problems if that tax revenue declines. The twin purposes of raising revenue and reducing tobacco use are in inherent conflict. The more people quit or reduce their tobacco use, the less revenue there would be to fund universal preschool, leaving the program vulnerable to shortfalls that would require further tax increases or cuts in other services to keep the program afloat. In August, the legislature cut more than $3 billion from the budget due to collapsing revenues resulting from the coronavirus pandemic. Establishing a long-term program with the state’s finances in such a precarious position, even with some increase in tobacco revenue, could prove problematic.
According to a 2019 report by the Urban Institute: “Revenue gains from sin taxes are usually short-lived and can create longer-term fiscal challenges for states if revenue growth from sin taxes deteriorates over time or requires higher tax rates to maintain a certain level.” Ongoing universal programs such as preschool are best funded through taxes that are low and broad-based. Unfortunately, cigarette taxes are especially regressive, with smoking rates highest in households that earn less than $35,000 per year.
The most problematic part of this measure from a public health standpoint is the high wholesale tax applied to e-cigarettes, which have been shown conclusively to be less toxic than cigarettes and are more effective in helping smokers quit than traditional nicotine replacement therapies. Raising taxes on these products disincentivizes smokers from switching to a less harmful alternative and could cause some vapers to relapse to smoking. A study funded by the National Institutes of Health (NIH) published in February of 2020 showed that for every 10 percent increase in e-cigarette prices, the use of traditional cigarettes rose by 11 percent.
However, one bright spot is the provision to ensure that products which the FDA deems are safer or less toxic than traditional cigarettes would be taxed at a lower rate. Safer nicotine alternatives to cigarettes should always be taxed at substantially lower rates than combustible cigarettes, as they do not place burdens on non-users in the form of higher health care costs.
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