While there is no federal tax, a growing number of state governments (7 states) have introduced excise taxes on e-cigarettes. The most recent is California, where voters approved a referendum that would treat vaping devices as an excise tax on tobacco products. A similar move in North Dakota failed on Election Day.
Four local governments from Alaska to Maryland, as well as the city of Chicago and the District of Columbia, have introduced vaping taxes. Minnesota was the first U.S. state to include a tax on vaping products, and the only state to do so before 2015.
Relative to the European market, there is no generally accepted method of taxing e-cigarettes in the United States.
In Europe, tax laws include "nicotine-containing e-liquids" (Slovenia, Romania and Portugal) or "e-liquids used in electronic cigarettes" (Latvia, Greece and Hungary) as the subject of excise duties and create separate taxes for these products . Several states in the United States, as well as the city of Chicago and Cook County, Illinois, follow a similar approach to imposing specific taxes on the volume logic of e-liquids, which is easy to measure.
Minnesota and Pennsylvania, as well as Washington, D.C. and several counties, have chosen to classify e-cigarettes or nicotine-containing e-liquids under the same tax category as "other tobacco products," a general category that excludes tobacco, but may include, for example, chewing Tobacco, snuff and cigarettes. These are heterogeneous products with no common tax base other than price.
In this case, the most common and easiest to verify tax basis is the wholesale price. Tax rates are usually high because they are designed for mature products and have low price elasticity. High taxes are often used to discourage consumption of other tobacco products. They are not suitable for novel products, as price-conscious consumers will consider switching to lower-risk alternatives.
When Pennsylvania introduced a 40 percent tax on the wholesale price of e-cigarettes, including devices and e-liquids, in October 2016, the impact was devastating, even before the tax took effect. The tax also applies to retail inventory, nearly doubling the price it sells to consumers. Dozens of vape shops across the state have closed for fear of paying huge taxes. It appears that the $13 million tax goal is no longer considered achievable.
California's new tax policy could have a bigger impact. From April 2017, e-cigarettes will be taxed at the same rate the state imposes on tobacco cigarettes, rising to $2.87 on a 20-pack of e-cigarettes in a referendum. Prices would rise sharply, reducing the incentive for smokers to try e-cigarettes as an alternative.
Taxation of e-cigarettes for public health and economic reasons remains controversial. Raising the price of vaping products through taxation reduces the incentive for smokers to try this low-risk alternative. While governments are concerned about the reduction in taxation of traditional tobacco products, the ability of e-cigarettes to generate compensating excise tax revenue is largely unproven.
Both the US and European markets are currently building autonomous fiscal policies. Without the framework of EU directives, European countries have chosen to tax e-cigarettes as a new product that is different from traditional tobacco products. In contrast, many state governments in the United States choose to tax e-cigarettes as traditional tobacco products. This policy has obvious shortcomings.
