A new paper in the Journal of Health Economics indicates that heavy taxes on e-cigarette products have led to an increase in the sales of traditional cigarettes.
The co-authors of this peer-reviewed article used NielsenIQ Retail Scanner Data (NRSD) from 2013 to 2019, which tracks weekly sales data from many national retailers including drugstores, grocery stores, dollar stores, club stores, and big box stores, where electronic cigarettes make up a significant portion of total sales. They found that e-cigarette taxes are almost fully passed onto consumers in the form of higher retail prices, meaning that e-cigarette users typically bear most of the tax burden. The authors calculated that for every $1 increase in e-cigarette taxes, e-cigarette prices increase by 90 cents. Therefore, policymakers have a significant impact on e-cigarette retail prices through tax legislation.
Our research has found that levying a tax on e-cigarettes has led to an increase of 1.9 packs of cigarette sales for every Juul-sized e-cigarette eliminated.
Electronic cigarettes are considered a commodity with elasticity of demand, meaning that changes in pricing can cause significant shifts in consumer demand. As a cheaper alternative to traditional cigarettes, proponents of tobacco harm reduction and public health economics argue that increasing prices of electronic cigarettes could deter both current and potential users, inadvertently driving them towards the cheapest source of nicotine: traditional cigarettes.
In 2021, federal legislation increased taxes on e-cigarettes in an attempt to match those on traditional cigarettes. Supporters and critics of reducing the harm of tobacco products viewed the move as illogical at best. If the goal is to encourage people to transition from cigarettes to safer alternatives, it would make sense to incentivize this behavior by making the safer products cheaper than the deadly ones.
As the author notes, between the end of the research period in December 2019 and June 2022, 13 states have implemented taxes on electronic cigarettes, bringing the total number of states taxing e-cigarette products to 30. Perhaps most notable is California Governor Gavin Newsom's approval of a 12.5% sales tax effective October 2021, bringing the tax rate on e-cigarettes in the state closer to the current tax rate on traditional cigarettes.
The author stated that "our research findings also revealed that cigarette taxes greatly reduced cigarette sales; therefore, if the goal is to put an end to cigarette usage, then increasing cigarette taxes is the way to achieve that goal.
Supporters of reducing tobacco harm are united in their opposition to taxing e-cigarettes. "Cigarettes are a more dangerous product, so taxing e-cigarettes seems to be a misplaced alternative," says Pesco.
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