Vapor Products, Harm Reduction, and Taxation

Posted: 30 May 2019

See all articles by Eric Fruits

Eric Fruits

International Center for Law & Economics (ICLE); Portland State University; Economics International Corp.

Date Written: October 1, 2018

Abstract

Policymakers face a wide range of strategies regarding the taxation of vapor products. On the one hand, principles of harm reduction suggest vapor products should face no taxes or low taxes relative to conventional cigarettes, to guide consumers toward a safer alternative to smoking. On the other hand, the precautionary principle as well as principles of tax equity point toward the taxation of vapor products at rates similar to conventional cigarettes.

Analysis of tax policy issues is complicated by divergent — and sometimes obscured — intentions of such policies. Some policymakers claim that the objective of taxing nicotine products is to reduce nicotine consumption. Other policymakers indicate the objective is to raise revenues to support government spending. Often missed in the policy discussion is the effect of fiscal policies on innovation and the development and commercialization of harm-reducing products. Also, often missed are the consequences for cur-rent consumers of nicotine products, including smokers seeking to quit using harmful conventional cigarettes.

Policy decisions regarding taxation of vapor products should consider both long-term fiscal effects, as well as broader economic and welfare effects. These effects might (or might not) suggest very different tax policies to those that have been enacted or are under consideration....

The small body of research on consumer demand response to e-cigarette pricing finds a wide range of estimates of e-cigarette own-price elasticity and cross-price elasticity with respect to conventional cigarettes, even among studies using the same set of data. Without re-liable empirical research, policymakers face great uncertainty regarding whether specific tax proposals will achieve — or con-found — their stated policy goals.

Despite the innovations that gave rise to the market for vapor products, virtually no empirical research has evaluated the impacts of taxation and regulation on innovation in the industry. Differential taxation of vapor products would like induce a supply-side response, but there is no quantitative research on supply at this time.

Principles of harm reduction recognize that every proposal has uncertain outcomes as well as potential spillovers and unforeseen consequences. Nevertheless, the basic principle of harm reduction is a focus on safer rather than safe. Policymakers must make their decisions weighing the expected benefits and expected costs. With such high risks and costs associated with cigarette and other combustible use, taxes and regulations must be developed in an environment of uncertainty and with an eye toward a net reduction in harm, rather than an unattainable goal of zero harm.

Keywords: Consumer Protection, Tax

Suggested Citation

Fruits, Eric, Vapor Products, Harm Reduction, and Taxation (October 1, 2018). Available at SSRN: https://ssrn.com/abstract=3384295

Eric Fruits (Contact Author)

International Center for Law & Economics (ICLE) ( email )

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HOME PAGE: http://laweconcenter.org/

Portland State University ( email )

United States

HOME PAGE: http://web.pdx.edu/~fruits/

Economics International Corp. ( email )

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HOME PAGE: http://www.econinternational.com/

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