States plan to make bank off of taxing e-cigarettes

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Breanna Deutsch Contributor
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Cash-hungry states are not wasting opportunities to capitalize on the sale of electronic cigarettes, a popular alternative to tobacco products, reports Fox News.

One method used by some states is placing an excise tax on the devices. Excises taxes, also known as “sin taxes,” aim to deter consumers from using a product by placing additional fees on the original market price. This tactic has also been used on tobacco cigarettes as a means to collect extra revenue for the state, and to make the product socially discouraged.

At the moment, Minnesota is leading the pack in the race to regulate and tax e-cigarettes.  In 2012, lawmakers voted to place a 95 percent tax on the wholesale price of the vapor devices. Currently, Minnesota is the only state to have a specific tax policy in place regarding the sale of the tobacco alternative.

The Minnesota Department of Revenue recognizes e-cigarettes as tobacco products and therefore subjects them to the same lofty taxes.  If distributors in the state fail to pay the tobacco tax they risk losing their license. And retailers are only permitted to purchase the devices from licensed distributors and are required to “collect and remit sales tax on e-cigarette sales.”

These excises taxes, on both e-cigarettes and tobacco cigarettes, will land the state a big pay-day. Minnesota estimates that it will collect $1.16 billion from all of its tobacco taxes in fiscal year 2014-2015.

Although other states do not yet have e-cigarette excise taxes on the books, they are moving in that direction.

Last month in his 2015 budget proposal, New Jersey Gov. Chris Christie announced a plan to tax e-cigarettes at the same rate as tobacco cigarettes — roughly $2.70 per pack.

Those who endorse the initiative believe the extra costs will help make the devices taboo and deter teens from using them.

Much of these concerns stem from the lack of long-term research conducted on the devices. However, the Centers for Disease Control and Prevention found that vapor from e-cigarettes has “far fewer of the toxins found in smoke compared to traditional cigarettes.”

Opponents of the measure argue that e-cigarettes could actually benefit the public’s health by providing a substitute to tobacco cigarettes and that drowning them in excises taxes will only hurt small businesses looking to make a buck off of the growing industry.

“Small businesses like convenience stores and especially brick and mortar vape shops will be hardest hit by this $35 million tax increase,” Americans for Tax Reform President Grover Norquist wrote in a March letter to the New Jersey legislature, according to Fox News.

Norquist noted that sin taxes also have adverse consequences, including criminal activity and lost state revenue.

He explained that in recent years, as much as 40 percent of all tobacco cigarettes smoked in New Jersey were smuggled into the state illegally, resulting in a loss of more than $500 million in uncollected tax revenue each year.

“By making New Jersey uncompetitive in e-cigarette pricing, the state would encourage smuggling, which will cost New Jersey small businesses tens of thousands of dollars in lost revenue,” he wrote in the letter.

Washington state recently attempted to pass a similar measure, but it was voted down by lawmakers. If the bill would have made it passed the governor’s desk, vapor products would have been reclassified as tobacco products, subjecting them to the same excise taxes that tobacco cigarettes face. Lawmakers estimated that this proposed 95 percent tax would have raked in $40 million in annual revenue for the state.

Some suspect that states are hoping to turn the e-cigarette industry into a reliable source of cash, much like the Master Settlement Agreement — a 25-year settlement that requires America’s leading tobacco companies to pay out billions of dollars in revenue to help compensate smoking-related health care costs in states across the country.

All together, the agreement forces tobacco product manufacturers to make $206 billion in payments to 46 states and U.S. territories.

Currently, more than two dozen states are making plans to regulate e-cigarettes as a new source of revenue.

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