Cash-Strapped States Plan Tax on e-Cigarettes to Generate Revenue

In approximately half of the states that are facing budget shortfalls, legislators are evaluating the best way to begin taxing e-cigarettes to generate additional revenue.

e-cigarettes, a term which is short for electronic cigarettes, are battery-powered devices that simulate the look and feel of smoking real cigarettes.  e-cigarettes often work by heating a liquid that generally contains nicotine.  The heated liquid becomes a vapor, allowing the smoker to breathe it in and receive a stimulating effect similar to that provided by real cigarettes.

The goal of e-cigarettes is to give cigarette smokers a healthier alternative as compared to smoking traditional cigarettes.  While the nicotine-laced vapor may still been addictive, it is generally perceived as safer than smoking a real cigarette.

However, while many experts agree the vapor consumed in e-cigarettes contains less toxins than smoke from traditional cigarettes, the product should by no means be considered healthy or safe.

While e-cigarettes are nothing new—they were patented in the early 1960s—they have seen a quick rise in popularity in the past few years.  e-cigarette sales have grown from less than 100,000 in 2008 to over 4 million in 2013.

e-cigarettes have traditionally been subject to only sales tax.  However, the increase in e-cigarette sales has caught the attention of lawmakers, who see them as an opportunity to increase tax revenue through other forms of tax.  One such tax is an excise tax, which would be similar to additional taxes applied today to real cigarettes and alcohol.

e-cigarette Tax Revenue in Minnesota Drives Other States to Consider Similar Tax

Minnesota was the first and to date the only state to enforce a tax on e-cigarettes.  The Minnesota Department of Revenue deemed e-cigarettes a tobacco product, making e-cigarettes subject to the same taxes as other tobacco products.

Based on this decision, Minnesota levied a 95 percent tax on e-cigarettes beginning in 2012.  For the fiscal year ending in 2015, Minnesota estimates it will bring in over 1 billion in revenue from tobacco taxes, an amount leading other states to consider similar legislation.

One such state is New Jersey.  New Jersey currently applies a $2.70 tax on a pack of traditional cigarettes.  The state is considering applying the same tax to a pack of e-cigarettes.

Proponents of taxing e-cigarettes note a tax on the product will curb use of them by minors and make it clear that the state is not promoting the safety of e-cigarettes over traditional tobacco products.

“If e-cigarettes are taxed less than regular cigarettes,” said Dan Benson, New Jersey Democratic  Assemblyman, “we’re sending a message out there that they’re somehow safer, and I think the jury is out on that.”

However, opponents of e-cigarette taxes believe increasing the price to consumers will reduce the incentive for smokers to try them as a healthier alternative to traditional cigarettes.  In addition, the tax may hurt sales of small businesses that carry e-cigarettes.

“Small businesses like convenience stores and especially brick and mortar vape shops will be hardest hit by this $35 million tax increase,” noted Grover Norquist, president of Americans for Tax Reform, in response to New Jersey’s proposed e-cigarette tax.

In addition, Norquist expressed concern that an e-cigarette tax would only increase the rate at which the product is brought into the state illegally.

“By making New Jersey uncompetitive in e-cigarette pricing, the state would encourage smuggling [from surrounding states], which will cost New Jersey small businesses tens of thousands of dollars in lost revenue,” added Norquist.

Connect with Mark on Google+

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.