R Street Testimony in Opposition to House Bill 2488 for Local Taxation of Nicotine Vapor Products in Virginia

Testimony from:

Jeffrey S. Smith, Senior Fellow, Integrated Harm Reduction, R Street Institute

R Street Testimony in Opposition to House Bill 2488: “Local tax authority; nicotine vapor products.”

January 27th, 2025

House Finance Committee, Subcommittee #1

Chairwoman Mundon King and members of the committee,

My name is Jeff Smith, and I am a senior fellow on the Integrated Harm Reduction team at the R Street Institute. The R Street Institute is a nonprofit, nonpartisan public policy research organization. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including harm reduction. Our efforts to promote tobacco harm reduction are why we are particularly interested in HB 2488.

The R Street Institute has been a committed proponent of limiting the sale of nicotine-related products to those who are 21 years of age and older, and supported national efforts in 2019 to raise the age to 21 to purchase such products. In tandom to that support, R Street understands the health-related consequences of inhaling combustible cigarette smoke by adult consumers and we strongly support varied pathways for quitting smoking, which also include access to a wide array of alternative, reduced-risk nicotine vapor products colloquially known as electronic nicotine delivery systems (ENDS).

HB 2488 would authorize local governments in Virginia to impose additional taxes on nicotine vapor products, like electronic nicotine delivery systems (ENDS) such as “vapes,” beyond what is already levied through state taxation. Though this approach may be considered a relatively quick avenue to generate additional revenue for the locality, in this case, the decision to increase the cost of reduced-risk products (RRPs) would cause unintentional effects. These consequences put citizens at risk and may cost much more than the funds they may generate in the short term.

For decades, one of the primary U.S. tobacco control strategies has been reducing  tobaccouse through taxation.^[1]  This approach assumes that high consumption costs will dissuade individuals from using tobacco products. Unfortunately, although this construct may seem logical, the actual impact of inflating the cost of combustible tobacco products (in isolation and without additional strategies) has had little impact on tobacco use.^[2] Today, alternative products are available that provide experiences similar to combustible products with significantly lower health risks.^[3] As more and more of these products enter the marketplace, lawmakers can consider novel economic tools that reduce combustible cigarette use without relying on punitive pricing as with HB 2488. Specifically, substitution pricing models would be more effective, where two relatively equivalent products (one harmful, the other significantly less harmful) could be priced to encourage movement toward the less harmful product. This is also known as risk-proportionate taxation.

Risk-proportionate taxation is one strategy that has not yet been widely implemented but could help state and local governments recover revenue while offering additional behavioral and public health benefits. In this taxation model, the government imposes no or significantly lower taxes on products with lower health risks and much higher taxes on more harmful products. This strategy is worth considering, as research indicates that risk-proportionate tobacco taxation can significantly reduce consumption rates, particularly among youth and vulnerable populations. For instance, one study highlighted that increasing taxes on combustible products while keeping taxes low on reduced-risk products generally leads to decreased cigarette affordability, reducing consumption of the more harmful product.^[4]  In Virginia, the state tax on cigarettes remains relatively low at only $.60 per pack, one of the lowest rates in the country.^[5] It may be more prudent to increase the tax rate for cigarettes in an attempt to meet the fiscal needs of local governments while maintaining the much lower rates for reduced-risk products like e-cigarettes.

Most U.S. states seem to be adopting a revenue-generation strategy of taxing all tobacco/nicotine products the same. Unfortunately, the tax rates imposed on reduced-risk products typically do not reflect their lower risk, and many states still lack comprehensive taxation policies for ENDS products altogether.  We hope Virginia would reconsider this strategy of blanket taxation because it fails to (1) distinguish between the risk of combustible products and other reduced-risk products and (2) financially incentivize consumers to migrate from a deadly habit toward one with significantly lower health consequences.

Although lowering or eliminating taxes on reduced-risk products will reduce tax revenue in the short term, as cigarette sales decrease, lower healthcare utilization costs, and longer survival rates may offset lost revenue over time.^[6] For example, Sweden has effectively implemented strategic taxation to encourage its population to move away from combustible products and toward reduced-risk alternatives.  In early 2024, the country’s tax on snus was lowered by an additional 20 percent, and the tax on combustible products was increased. These changes are intended to continue to reduce the number of those who smoke in the country, which already has one of the lowest rates of combustible product use globally.^[7] 

Access to reduced-risk products is critical to supporting adult smokers’ transition to a healthier life. Though generating additional revenue through applying additional taxes to “sin products” like e-cigarettes is often seen as an easy win, the proposed bill is a solution that may generate more significant losses than the income provides. Bills such as the one under consideration will only complicate the ability of adult smokers interested in cessation to obtain safer alternatives to combustible cigarettes. As such, the R Street Institute encourages you to consider how affordable access to reduced-risk products impacts the health of all community members. We strongly urge you to reject HB2488, which will undermine efforts to reduce the harms associated with combustible tobacco use.

Thank you,

Jeffrey S. Smith, PhD

Senior Fellow, Integrative Harm Reduction

R Street Institute

jsmith@rstreet.org

[1] Frank J. Chaloupka et al., “Taxing Tobacco: The Impact of Tobacco Taxes on Cigarette Smoking and Other Tobacco Use,” in Robert L. Rabin and Stephen D. Sugarman, eds. Regulating Tobacco (Oxford University Press, 2001), pp. 39-71. https://books.google.com/books?hl=en&lr=&id=rF3JJDcqkQEC&oi=fnd&pg=PA39&dq=History+of+tobacco+taxation+in+USA&ots=Yfq6cmNI1w&sig=JmFxf6gDGwn6eMMX-gpYYfl9ldo.

[2] Carl V. Phillips, “Understanding the Basic Economics of Tobacco Harm Reduction,” Institute of Economic Affairs Monographs (Aug. 23, 2016). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3852760.

[3] Hartmann-Boyce, J., N. Lindson, A. R. Butler, H. McRobbie, C. Bullen, R. Begh, A. Theodoulou, et al. “Electronic Cigarettes for Smoking Cessation.” Cochrane Database of Systematic Reviews, no. 11 (2022). https://doi.org/10.1002/14651858.CD010216.pub7. https://doi.org//10.1002/14651858.CD010216.pub7.

[4] Warren K. Bickel et al., “Electronic cigarette substitution in the experimental tobacco marketplace: A review,” Preventive Medicine 117 (December 2018), pp. 98-106. https://www.sciencedirect.com/science/article/pii/S0091743518301373?casa_token=KQig8qfJvwAAAAAA:2G1nALyrGESG9kGPknbSF2g3NCo7nBtRTLQqQzXPD7CvbkBXhH5xUCi01p_kahd55vJreB0N7gc.

[5] Estimated Cigarette Tax Avoidance and Evasion by State, Mackinac Institute. https://www.mackinac.org/smokes#map

[6] DeCicca et al. https://www.aeaweb.org/articles?id=10.1257/jel.20201482.

[7] “Swedish Government Moves to Slash Snus Taxes by 20%,” Snusforumet, Feb. 15, 2024. https://snusforumet.se/en/swedish-government-moves-to-slash-snus-taxes.