Declining smoking rates in Europe mean less tax revenue for many fiscally strained governments. Trying to make up for these losses with a tax on e-cigarettes would be a big mistake, writes Alex Brill.
Alex Brill is a research fellow at the American Enterprise Institute, a Washington DC-based think tank.
As cigarette use decreases, it may be tempting to supplement declining tobacco tax revenues with a tax on e-cigarettes – a relatively new, less risky alternative to traditional cigarettes. Following actions by some European nations, the European Commission is now contemplating the proper tax treatment of e-cigarettes and has just finalised a public consultation on the topic. Taxing e-cigarettes would have a negative effect on nascent, but important, public health gains for four reasons.
Cigarettes and e-cigarettes are completely different products with wholly different public health consequences. The reason for taxing cigarettes differently to other consumer goods is that smoking has dire health consequences. E-cigarettes, despite their name, are unlike cigarettes in that they contain no tobacco and no tar, the known carcinogen in cigarettes. Rather, the common ingredient is nicotine, which is addictive but relatively benign for most adults. And the lack of tar means that the second-hand exposure risks are greatly reduced. As Cancer Research UK noted in comments submitted to the European Commission’s public consultation, “e-cigarettes are a far safer alternative to smoking and there is a very low risk associated with long-term use”.
E-cigarettes are effective tools for helping smokers quit. Not only do these products not pose the health risks of traditional tobacco products, but they can also help people quit smoking. A recent review of 687 research articles on e-cigarettes and other electronic nicotine delivery systems (ENDS) concluded that ENDS are “at least as effective” as nicotine replacement therapy (NRT) in helping smokers quit. The Commission’s own Eurobarometer survey shows much the same results: almost half (48%) of smokers and former smokers who have used e-cigarettes reported either quitting (14%), temporarily quitting (13%), or reducing smoking (21%). Ireland’s health agency found that e-cigarettes are more than twice as popular as NRT as a means of smoking cessation. In the UK, half of the 2.3 million people who used e-cigarettes in 2015 did so to quit smoking.
E-cigarette usage is still relatively low and a tax would discourage smokers from switching. In Europe, smoking rates are far higher than e-cigarette use, though there was a distinct increase in e-cigarette use from 2013 to 2016 across markets in the UK, Poland, France, and Italy. While this trend is encouraging, e-cigarettes are still in their infancy. For consumers, restrictions discourage the uptake of these harm-reduction products. Poor public policy choices about the regulation and tax treatment of e-cigarettes have the potential to stifle these innovations before they can effectively reduce smoking rates widely.
Taxing e-cigarettes has not proven to successfully address budget woes. Based on actual experience with taxing e-cigarettes, it is reasonable to conclude that these taxes may actually do little to address government budget challenges. Minnesota (a US state with a population similar to Finland or Slovakia) collected just over $5 million in e-cigarette taxes in fiscal year 2014, or roughly $1 per capita. By comparison, annual revenue from all cigarette and tobacco taxation in Minnesota recently totalled nearly $660 million. A similar picture appears to have emerged in Italy and Portugal – the two European countries with the highest e-cigarette taxes. The e-cigarette markets in both countries contracted dramatically following the introduction of the tax, likely making it difficult to achieve revenue targets.
Last month, the British medical journal Lancet reported that “a crucial challenge facing tobacco control initiatives is that demographic forces are poised to heighten smoking’s global toll, unless progress in preventing initiation and promoting cessation can be substantially accelerated”. The good news is that the clinical evidence clearly indicates that e-cigarettes are less risky substitutes for conventional cigarettes. Given that a core objective of the European Commission Tobacco Products Directive is to ensure “a high level of health protection for European citizens”, the proper tax to levy on e-cigarettes should be self-evident: none.
In their desire to close fiscal gaps with any revenue they can secure, European regulators should not make the mistake of putting short-term budget concerns before the long-term welfare of their residents.