We have long recognized that tax policy influences behavior, as consumers and investors respond to changes in tax policy and make more-or-less rational decisions. The entire logic of “sin taxes” on alcohol, cigarettes and other consumer goods deemed undesirable by policy makers is that high taxes will discourage consumption.
Likewise, high taxes on savings and investment also discourage those activities. That’s why we’ve consistently argued for low, neutral tax rates on saving and investment—so saving and investing are encouraged.
Leave it to California to propose the dumbest possible tax policy in pursuit of higher revenue. Yes, the state that once proposed to tax satellites during the time they occupied California air space is at it again.
Governor Gavin Newsom’s revised budget proposal includes a huge tax increase on vape and e-cigarette products. On top of California’s existing enormous 59 percent tax on such products, Newsom would add an additional tax of $2 for each 40 milligrams of nicotine in the product.
Regardless of what you think about products that are an alternative to cigarette smoking, the perverse result of Newsom’s proposal is that many popular smoking alternatives would now be taxed much higher than cigarettes themselves, and smokers would actually save money by switching back to cigarettes.
Newsom’s new vape tax would increase the price of a JUUL 4-pack (the most popular product) by $8.25, according to calculations from the Tax Foundation. By comparison, the total tax on a pack of cigarettes is $2.87. So nicotine users would save significant money by switching back to cigarettes, which are known carcinogens, and which have been the subject of decades of smoking-cessation efforts.
Vape and e-cigarette products are a key part of such smoking-cessation efforts. Remember, nicotine doesn’t cause lung cancer—tar and other byproducts of combustion cause lung cancer. By offering nicotine users an alternative to cigarettes, e-cigarettes have the potential to save and prolong many thousands of lives. Switching cigarette smokers to vapor or e-cigarettes is literally good public health policy, not a “sin.”
It makes far more sense to base sin taxes on relative harm rather than on popularity. By such a rational standard, vapor and e-cigarette products should have lower taxes than cigarettes, not higher.
The other problem with excessively high taxes on products is that they encourage smuggling and other illicit activities. The higher the tax, the greater the incentive to find a way around the tax.
California’s vape tax grab is at the very least ill-advised from a public health standpoint, and could encourage illegal smuggling. The last thing policy makers should do is implement policies that encourage a return to cigarettes, and that’s exactly what Newsom’s new vape tax would do.