Vaping Tax Economics

A new study of the e-cigarette tax in Minnesota has verified the first rule of economics: the more something costs, the less people buy. The study's authors, mostly National Bureau of Economic Research economists, found Minnesota’s tax levied on e-cigarettes “increased adult smoking and reduced smoking cessation in Minnesota.” Although the findings agree with previous studies, showing that higher taxes successfully reduce vaping, they also find that e-cigarette taxes have re-incentivized the use of conventional cigarettes.

Despite an abundance of literature that shows excessive e-cigarette taxes are bad for public health, policymakers in states like Minnesota have increased vaping taxes so much that they make traditional cigarettes relatively less expensive—and consumers have responded. According to the NBER authors, an estimated 32,400 fewer people quit smoking cigarettes in Minnesota because of its recent 95 percent excise tax on e-cigarettes. They then postulate that if the same tax was levied across the entire United States, 1.8 million fewer people would quit smoking over a 10-year period.

When it comes to issues like vaping, the policy goals aren’t always straightforward. E-cigarette taxes are in a category of taxation known as a ‘sin’ tax, where price premiums are levied by the government to disincentivize use. Sin taxes often decrease use at the expense of government tax revenue, but that is often by design, as they seek to add value through promoting public health. However, vaping is odd because it’s a habit that central planners want to both disincentivize and promote, simultaneously.

Fear of nicotine addiction drives many public health officials to disincentivize nicotine consumption as much as possible. That goal inevitably requires reducing the vaping rate and possibly levying e-cigarette taxes. However, what have been shown to be even more harmful than the stimulant effects of nicotine are the burnt carcinogens found in all combustible products, like conventional cigarettes. That’s why public health officials also almost unanimously support smokers switching to e-cigarettes. 

When releasing recommendations to combat the vaping-related lung illness outbreak, the Director of the Centers for Disease Control and Prevention tweeted: “If you are using e-cigarette, or vaping, products to quit smoking, do not return to smoking cigarettes.”

Basic economics supports setting the price of vapor products like e-cigarettes lower than much-more-carcinogenic conventional cigarettes. Unfortunately, much of the U.S. hasn’t followed that approach.

As there are with any research, there are legitimate limitations of the Minnesota study findings. The study hints that the findings have yet to be challenged by similar statistical analyses by admitting it’s “some of the first evidence on how e-cigarette taxes impact adult smokers,” and the difference-in-difference model it employs has been criticized by leading economists. Because of this, it might be more accurate to say the e-cigarette tax “predicts” a 1.14 percent decrease in cessation instead of “causes.” But the study still applies some of the most rigorous statistical tools developed for the available data, and the findings support an omnibus of literature with similar conclusions. 

For example, in another NBER study that evaluated national survey data, the authors determined “that higher traditional cigarette taxes reduce adult traditional cigarette use and increase adult e-cigarette use, suggesting that the products are economic substitutes” while “[e]-cigarette tax adoption reduces e-cigarette use.” NBER economists have also measured public health outcomes, determining that “e-cigarette tax adoption increases pre-pregnancy and prenatal smoking,” the latter of which has been linked to pregnancy health issues, like low birth weights. 

With such similar outcomes to the vast conventional cigarette tax literature, most economists aren’t arguing whether the Minnesota e-cigarette tax reduced smoking cessation rates—they are at most debating the size of the decrease. This research confirms that if policymakers want smokers to switch to vaping, they shouldn’t support policies that make the preferable habit more expensive. And with a study in The BMJ, previously known as The British Medical Journal, finding that 6.6 million fewer people would die prematurely if all adult smokers switched to e-cigarettes, it’s painfully obvious that additional e-cigarette taxes do nothing but hurt the health of the American public.

Jacob James Rich is a policy analyst at Reason Foundation and a Young Voices Consumer Freedom Fellow.