Tax Likely Would Reduce E‑Cigarette Use Substantially. Whether the current rate appropriately balances the trade‑offs discussed above is unclear. The information provided to date, however, does not suggest that the administration has considered them carefully enough to justify the requested appropriation. The administration estimates that its proposal would result in roughly the same state tax rate on nicotine intake, whether that intake comes from e‑cigarettes or conventional cigarettes. Tax policy is not conducted in a vacuum and limiting access to vapor products with high taxes could hurt tobacco-related public health priorities. In 2020‑21, the Governor proposes spending $9.9 million from the new fund on tax administration and $7 million on an enforcement tax force. Consider How Funding Shortfalls Would Be Handled. The state levies a $2.87 per pack tax on cigarettes. In our view, the best available evidence suggests that the proposed tax likely would increase cigarette smoking among adults, at least over the first few years. What Are E‑Cigarettes? The federal government currently taxes cigarettes at $1.01 per pack but does not levy a tax on e‑cigarettes. It is estimated for Fiscal Year 2021-2022 a total of $28 million in grant funding will be available statewide to support local enforcement efforts to reduce the illegal sale of tobacco products to minors. An excise tax is supposed to internalize the externalities related to consumption of a product. As the Legislature considers what tax rate to set on e‑cigarettes, it faces six key questions: Future Tax Rates. “The Effect of Prices and Taxes on Youth Cigarette and E‑Cigarette Use: Economic Substitutes or Complements?” Mimeo, Georgia State University. “The Effects of Traditional Cigarette and E‑Cigarette Taxes on Adult Tobacco Product Use.” National Bureau of Economic Research Working Paper 26017. The tax would take effect January 1, 2021 and is forecasted to raise $32 million in FY 2021. We recommend that the Legislature take an approach to revenue allocation that prioritizes flexibility. A nationwide survey of high schoolers, published in the fall of 2019, found that 27.5 percent of students had vaped at least once in the prior 30 days, though only 10 percent of students were considered regular users (defined as vaping 20 days out the prior 30). Our work depends on support from members of the public like you. On the other hand, to the extent that the tax reduces the number of smokers who switch from cigarettes to e‑cigarettes, it could increase cigarette smoking. The Governor’s proposed trailer bill language designates the monies in the new fund for youth tobacco prevention programs, health care programs, and administration and enforcement of the new e‑cigarette tax. (As noted in the “Background” section, ballot measures have enacted cigarette taxes totaling $2.75 per pack.). California currently taxes vapor products at 59.27 percent of wholesale value, but the proposal would impose an additional tax at a rate of $2 for each 40 milligrams of nicotine in the product. The Governor proposes that revenue from the proposed e‑cigarette tax be deposited into a new special fund. If the Legislature wishes to enact a new tax on e‑cigarettes, the proposed nicotine‑based tax structure is reasonable. New Tax on E‑Cigarettes. As a result, staff Researchers and public officials have raised a variety of health concerns related to e‑cigarettes and to vaping more generally. Oregon’s measure increases tobacco taxes $2 per pack, from $1.33 to $3.33, as well as creates a new tax for e-cigarettes. California levies an excise tax on non‑cigarette tobacco products. The amount of nicotine contained in e‑cigarette liquid can vary widely, even for a given volume and price. The Superior Court for the County of Sacramento approved an agreement between the parties in its case which will suspend the Jan. 1, 2021 date of enforcement until, at the very least, after the signatures are verified for a ballot measure proposal that seeks to repeal the law. If the Legislature chooses to enact a new tax on e‑cigarettes, it has a range of options for allocating the resulting revenue. As a result, the vendor needs to produce just two denominations of stamps, and taxpayers can comply with the tax by affixing just one stamp to each pack. That said, the administration has emphasized that the amount of revenue raised is highly uncertain at this time. Initial Tax Rate. A slate of … Consider Wide Range of Rates. Tax Stamps. The intent of this proposal is to create a system of tax stamps analogous to the ones used in the state’s cigarette tax program. Given potential substitution between cigarettes and e‑cigarettes, we suggest considering the two tax rates in relation to each other. Stay up on the tax news and analysis that matters to you. Governor’s Revenue Estimates. The 2020‑21 Governor’s Budget assumes that the proposed e‑cigarette tax would raise $34 million in 2020‑21 and $55 million in 2021‑22. Also: The pandemic surges in Los Angeles. The resulting budget discussions revolve around questions like, “How cost‑effectively does this proposal advance our policy goals?” or “Would these resources be better spent in a different program?” In contrast, when the state uses formulas or special funds to commit excise tax revenues to specific purposes, budget discussions often revolve around questions like, “How much revenue will this tax raise this year?”. At this time, the scope and timing of further FDA actions are unclear, but the agency appears to be taking a more active role in e‑cigarette regulation than it had in the past. Tax Likely Would Raise Tens of Millions of Dollars Annually. At one end of the spectrum, the Legislature could take a very flexible approach, depositing the revenue into the General Fund and appropriating it through the annual budget process along with other General Fund revenue. Instead, absent policy changes, they tend to decline over time. Separately from the issues related to the high rates proposed by Gov. & Tax. The cigarette tax will increase by $2 per pack of 20 and $2.50 per pack of 25. Recommend Very Flexible Approach. Additional Cost to Add Tax to Information Technology (IT) System. Inflation Can Reduce Real Tax Rates Over Time. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. The estimates included in the 2020‑21 Governor’s Budget are reasonable, but actual revenue could be much higher or lower than those estimates. Newsom, the tax base may also create some problems. The fund would be available for three purposes: administration and enforcement of the new tax, tobacco youth prevention programs, and health care programs. E‑Cigarette Health Concerns. We find that a tax based on nicotine content has some advantages. As shown in Figure 1, youth e‑cigarette use has grown rapidly in the U.S. over the last few years. As a result, the proposed e‑cigarette tax either would require the vendor to produce stamps in a much wider variety of denominations than cigarette stamps, or would require taxpayers to affix multiple stamps per item. Explore our weekly European tax maps to see how countries rank on tax rates, structure, and more. Section 1 of the bill added Article 5, which is titled, “Tobacco Sale Prohibition.” Key sources of uncertainty include: Useful Data Could Be Available Soon. We work hard to make our analysis as useful as possible. (e).) Cotti, Chad, Erik Nesson, and Nathan Tefft (2018). Effective Date of Increase Amount of Increase Tax Rate After Increase 2021 Colorado†1/1/21 $1.10 $1.94 Oregon 1/1/21 $2.00 $3.33. The administration argues that adjusting the new tax for inflation would not be consistent with its goal of aligning the state’s tax on e‑cigarettes with its tax on cigarettes, which is not subject to an inflation adjustment. The amount of revenue raised by the proposed tax is highly uncertain at this time. The administration estimates that the proposed e‑cigarette tax rate of $ 1 p er 20 m illigrams of nicotine, combined with the existing tax rate of 59 p ercent of the wholesale price, would bring the state’s overall tax rate on e‑cigarettes roughly in line with its tax rate on conventional cigarettes. General Fund Could Help Address Revenue Uncertainty. California income tax withholding in December to date is up 19 percent from 2019, and collections since March 23 are up 5 percent. In contrast to cigarettes, the size, shape, and amount of tax due on e‑cigarettes would vary widely under the Governor’s proposal. Even if the Legislature shares the administration’s intent of taxing e‑cigarettes and cigarettes at the same rate, a key question remains: what should that rate be? For example, in addition to the existing cigarette tax, the Legislature could create a new cigarette tax that starts at zero dollars per pack and increases annually by the amount required for the combined rate to keep pace with inflation. One‑fifth of daily users are under 18 and another fifth are 18 to 24 years old. If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s proposed approach much more favorably than a restrictive, formulaic approach. Most notably, the January proposals do not include the cost of adding the tax to CDTFA’s new IT system. Ideally, this would mean depositing the revenue into the General Fund. 1325 G St NW If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s relatively flexible approach much more favorably than a restrictive, formulaic approach. On the other hand, the Legislature would appropriate the funds during the annual budget process, and a wide range of programs would be eligible to receive the funds. At the other end, the Legislature could take a very restrictive approach, depositing the revenue into a special fund and directing the administration to appropriate it continuously to specific departments or programs based on a detailed formula. Cantrell, Jennifer, Jidong Huang, Marisa S. Greenberg, Haijuan Xiao, Elizabeth C. Hair, and Donna Vallone (2019). Year. The initiative allocates a portion of annual revenue to the California Department of Justice. To address this issue, some of the state’s tax policies—such as fuel tax rates, cannabis cultivation tax rates, and income thresholds used to calculate income taxes‑include statutory language directing the administration to adjust these policies annually to account for inflation. California laws coming in 2021. If the Legislature chooses to enact a new tax on e‑cigarettes, we recommend that it take an approach to revenue allocation that prioritizes flexibility. The Governor’s e‑cigarette tax proposal does not include annual inflation adjustments. Many States Tax E‑Cigarettes. Prices tend to rise over time. Saffer, Henry, Daniel Dench, Michael Grossman, and Dhaval Dave (2019). Black market liquids and cigarettes have the problem of being extremely unsafe and cost governments billions in lost taxes. Explore our weekly state tax maps to see how your state ranks on tax rates, collections, and more. The excise tax increased by $2 from 87 cents to $2.87 per pack of 20 cigarettes on distributors selling cigarettes in California with an equivalent excise tax rate increase on other tobacco … State Has Taken Other Actions. E‑cigarettes come in a variety of forms, and the mix of available products has changed rapidly in recent years. The FDA additionally announced that e‑cigarette manufacturers would need to submit applications for FDA approval by May 2020. tax directly levied on certain goods by a state or federal government The administration estimates that the proposed e‑cigarette tax rate of $1 per 20 milligrams of nicotine, combined with the existing tax rate of 59 percent of the wholesale price, would bring the state’s overall tax rate on e‑cigarettes roughly in line with its tax rate on conventional cigarettes. Recommend Inflation Adjustments. In principle, the new tax could lead to higher or lower conventional cigarette smoking. Cigarette Price / Tax Map for 2021 . Pesko, Michael, Charles Courtemanche, and Johanna Catherine Maclean (2019). As a result, the state did not collect any administrative data on e‑cigarette sales. Public Health England, an agency of the English Ministry for Health, concludes that vapor products are 95 percent less harmful than cigarettes. California Governor Gavin Newsom signed Senate Bill (SB) 793 into law, banning the retail sale of flavored tobacco products in the state, effective January 2021. Due to this inflation, the real economic value of any fixed amount of money—such as one dollar per 20 milligrams of nicotine—diminishes over time. The Legislature would appropriate the monies in this fund during the annual budget process. The cost of implementing the proposed e‑cigarette tax includes some items that are not included in the Governor’s January budget proposals. Why Not Consider Federal Taxes? In 1989, California began to tax tobacco products. Governor’s Proposal Does Not Include Inflation Adjustments. How would the tax rate affect e‑cigarette use? Revenue Allocation. The rate currently is 59 percent of the wholesale price. State lawmakers still have to approve the governor’s new budget by mid-June. The tax also likely would increase adult cigarette smoking. As long as the Legislature is considering changes to the e‑cigarette tax rate, we see no reason to rule out changes to the cigarette tax rate as well. State Taxes Cigarettes and E‑Cigarettes. As discussed in The 2020‑21 Budget: Transportation, for example, the Legislature could consider a variety of options for funding the proposed enforcement task force, rather than relying exclusively on the new e‑cigarette fund. We also suggest that the Legislature consider a wide range of possible tax rates. The annual certification and other required forms are available online on our Directory Forms web page. For example, the Legislature could levy a higher tax rate on types of e‑cigarettes that are smaller or easier to use, and a lower tax rate on other types. Tobacco Grant 2020-2021 grantees, pdf Proposition 56, pdf Rev. Connection Between Proposed Language and Enforcement Proposal Unclear. Accordingly, if the Legislature decides to appropriate money from the new e‑cigarette fund to this proposal, we recommend that it modify the trailer bill language to authorize this use of the fund. Revenue Would Go to New Special Fund. Below is a recap of some of the most noteworthy laws, courtesy of Cap Radio. In November 2019, the Attorney General and local officials sued JUUL, a leading e‑cigarette manufacturer, for allegedly marketing its products to youth and failing to provide required health warnings. That said, the size of these effects is uncertain. The Tax Foundation works hard to provide insightful tax policy analysis. The proposed tax would go into effect on January 1, 2021. California is one of 18 states that currently levy statewide excise taxes on e‑cigarettes. On top of the dangers to consumers, the legal market would suffer, as untaxed and unregulated products have significant competitive advantages over a limited selection of high-priced legal products. How would the tax rate affect other outcomes, such as cigarette smoking? Collections would be allocated to administration, enforcement, youth prevention, and health care workforce programs. The rate of the new tax would be roughly $1 for every 20 milligrams of nicotine in a product (in addition to the existing tax). Flexibility allows budgeting to focus on key issues like the costs and benefits of different proposals. (The new tax would be in addition to the existing tax described above.) California is the latest state to try to increase vapor taxes. The state currently taxes other tobacco products—including e‑cigarettes—at 59 percent of the wholesale price. The administration’s comparison also does not account for federal taxes. The administration, however, has not presented a compelling argument for this rate. Key sources of uncertainty include recent changes in the e‑cigarette market, potential major state and federal policy changes besides the proposed tax, and the novelty of the proposed tax structure. In the cigarette tax program, stamps help distinguish tax‑paid cigarettes from others. California currently taxes vapor products at 59.27 percent of wholesale value, but the proposal would impose an additional tax at a rate of $2 for each 40 milligrams of nicotine in the product. In the context of vapor products and cigarettes, it is important because the risk profiles for the two products are wildly different. The Legislature could create a cigarette tax inflation adjustment without amending any ballot measures. Alternative Nicotine‑Based Structures Worth Considering. We anticipate a budget proposal to cover this one‑time cost—likely in the range of $6 million to $8 million—later this spring. Cigarettes are already being smuggled into and around the country in large quantities, and nicotine-containing liquid is coming into the U.S. from questionable sources. Gov. As shown in Figure 6, for example, tax rates set in fixed dollar terms—such as the state’s taxes on cigarettes and distilled spirits—do not remain fixed in economic terms. Is the Cigarette Tax Currently Set at the Right Rate? Suite 950 With excise tax policy, increases or decreases in tax rates of certain goods can affect consumption of other goods that might be substitutes. Questions regarding the application process may be directed to the California Department of Justice at TobaccoGrantRFP@doj.ca.gov. A second, less common type of pack contains 25 cigarettes and requires a $3.59 tax stamp. The administration does not appear to have considered this complexity carefully enough to justify the requested appropriation. Nicotine‑Based Tax Reasonable. The Governor’s recent executive order directed CDTFA to require taxpayers to list e‑cigarette sales separately from other tobacco sales starting in January 2020. Stamps could have similar enforcement benefits for e‑cigarettes, but they would need to be more complex. Instead, it would conduct enforcement activities related to the illicit vaping market broadly, including devices that deliver nicotine, tetrahydrocannabinol (THC), and other substances. This focus on nicotine—rather than some other measure of the chemical composition of e‑cigarette liquid—is reasonable for two reasons: (1) many e‑cigarette health concerns are nicotine‑related; and (2) information about e‑cigarettes’ nicotine content generally is readily available. The administration has not presented a compelling argument in favor of its proposed tax rate. Although the federal government levies excise taxes on conventional cigarettes and most other tobacco products, it does not levy such a tax on e‑cigarettes. The Governor’s official January proposals include $17 million of expenditures from the new fund. “The Relationship Between Cigarettes and Electronic Cigarettes: Evidence From Household Panel Data.” Journal of Health Economics 61:205‑219. California $2.87 12th Michigan $2.00 18th South Carolina $0.57 46th Colorado $1 ... Table shows all cigarette tax rates effective January 1, 2021 (CO, OR on 1/1/2021). Under this formula, the tax rate on e‑cigarettes depends on the ratio of the state cigarette tax rate to the average wholesale price of cigarettes. Ideally, this would mean depositing the revenue into the General Fund. If the Legislature chooses to enact a nicotine‑based e‑cigarette tax, we recommend that it direct the administration to adjust the tax rate for inflation. For instance, a vapor pod that has a nicotine content of 3 percent and contains 1 ml of liquid would be taxed at $1.50 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 ml of liquid would be taxed at $2.50. Options Range from Very Flexible to Very Restrictive. If the Legislature would like to set the e‑cigarette tax rate based on a comparison to the cigarette tax rate, the comparison should include federal taxes, since they also affect consumers’ behavior. Are E‑Cigarettes and Cigarettes Equally Harmful? Daily E‑Cigarette Users Disproportionately Young, but Most Are Adults. Washington, DC 20005, Tax Expenditures, Credits, and Deductions, Small Business, Pass-throughs, and Non-profits, Research & Analysis of Digital Tax Policies, Sources of Government Revenue in the OECD, Opportunities for Pro-Growth Tax Reform in Austria, Tax Proposals, Comparisons, and the Economy. Help us continue our work by making a tax-deductible gift today. Vaping products are electronic devices that heat liquid to create an aerosol inhaled, or “vaped,” by the user. In other words, the governor’s proposal does not target the harmful behavior. The City of Pleasanton adopted in September 2020 a ban on the sale of flavored tobacco and nicotine products that will go into effect starting January 1, 2021. If the Legislature wants to maintain a consistent relationship between tax rates on cigarettes and e‑cigarettes, we recommend that it adjust both tax rates for inflation, rather than neither. (For example, this is the current method for allocating alcoholic beverage tax revenues.) When Governor Gavin Newsom (D) submits his revised budget proposal on Thursday, it will include a vapor tax increase. The bill, which banned flavored tobacco, added Article 5 (commencing with Section 104559.5) to Chapter 1 of Part 3 of Division 103 of the Health and Safety Code. This year, Kentucky, Utah, Virginia, and Wyoming have already passed increases to vapor taxes, which means 25 states and the District of Columbia now tax vapor products. This would make the proposed tax structure more effective at discouraging nicotine consumption than the alternative tax structures. The administration has indicated that it intends to tax nicotine intake at the same rate, regardless of whether the nicotine is vaped or smoked. Funded by Proposition 56 Tobacco Tax Funds Allocated for the 2019-2021 State Fiscal Year Frequently Asked Questions (FAQ) This document is a compilation of Proposition 56 (Prop 56) tobacco tax funds FAQ and responses about the supplemental payments for certain dental services. A tax on vapor products (and other recreational nicotine products) should be based on quantity. Required Adjustments Reduce Tax Rate Over Time. 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