In light of the widespread nullification of federal marijuana prohibition, the rising public support for legalization, and the potential excise revenues, policymakers are compelled to seriously consider significant reforms to federal marijuana policy. Last December, members of Congress introduced the STATES 2.0 Act, which would remove marijuana from the Controlled Substances Act, federally legalize its sale and use, and allow for interstate commerce.
A defederalized marijuana prohibition policy would allow states to decide for themselves whether cannabis would be legal within their borders—which they have already been doing for decades—and how that legal cannabis market would be taxed, writes the Tax Foundation.
What legal markets already exist are burdened by federal prohibition and punitive taxation, which keeps prices substantially higher than illicit markets. Bolstering black markets is a common unintended consequence of prohibition, and marijuana has been no different—even with existing state legalization. Revisions to federal cannabis policies, such as those in the STATES 2.0 Act, would give much-needed reform to a market struggling with a messy policy landscape.
Regulating Cannabis Markets
Instead of enforcing marijuana prohibition through the Drug Enforcement Administration, the STATES 2.0 ACT would rely on the Food and Drug Administration to regulate marijuana products permissible in US markets and the Alcohol and Tobacco Tax and Trade Bureau (TTB) to track products and collect taxes. Federal and state law enforcement would be able to shift focus and budgets away from petty offenses for marijuana possession toward removing more dangerous substances from illicit markets and preventing violent and property crimes.
The recent failings of the FDA to properly facilitate a legal vaping market may call into question its ability to do the same for cannabis, and there are more efficient ways to ensure product safety. However, the STATES 2.0 Act specifies that no premarket approval would be required, which would preclude the type of disaster inflicted on the vaping market.
Allowing legitimate businesses to manufacture and sell cannabis products, as well as allowing banks to do business with a legal cannabis industry, would do much to enable a safe, legal market to undercut the existing black markets dominated by cartels.
The STATES 2.0 Act would allow interstate commerce in cannabis and cannabis products when traveling between states that have provided for legalized cannabis within their borders, even if passing through states that have chosen to keep marijuana illegal.
TTB would be responsible for administering a national track-and-trace system. Similar track-and-trace systems are already in place within states that have legalized recreational marijuana, allowing states to track marijuana plants from seed to consumer sale.
A federal system administered by TTB could incorporate existing state systems into a national database. TTB would also enforce consistent and timely tax collections.
New Zealand’s Associate Health Minister Casey Costello has cut the excise tax on Heated Tobacco Products (HTPs) as she aims to make them more attractive as an alternative to smoking.
Costello, also the Customs Minister, has cut the excise rate on HTPs by 50 percent effective 1 July—a move silently dropped on the Customs website, media reports claim.
Costello refused to be interviewed, but a spokesman said she had reduced the cost of the products to encourage smokers to switch to safer alternatives.
But Janet Hoek, a Professor of Public Health at the University of Otago, said the move seemed weighted in favor of the tobacco industry.
“Certainly that is something that tobacco companies would have been keen to see happen,” Hoek said. “This is not advice that is coming from the Ministry (of Health). It certainly seems to be advice that is suiting tobacco industry interests.”
Tobacco giant Philip Morris owns a leading brand in the HTP market, the IQOS, where sticks of tobacco are inserted into a device and heated, rather than burned.
Philip Morris has lobbied for a cut to the excise tax on HTPs, telling the Tax Working Group in 2018 that the government should “establish a tax rate for heated tobacco products significantly below the tax rate” for tobacco.
In a statement to media, Costello said that vaping had been a successful quit-smoking tool, and she wanted to see whether HTPs would also be a useful cessation device.
“Vaping does not work for everyone and some attempting to quit have tried several times. HTPs have a similar risk profile to vapes and they are currently legally available, so we are testing what impact halving excise on those products makes.”
Among the bills with a presumably higher impact is one that would create a new state registry that would limit sales to only FDA-approved products.
“It’s an important step to address childhood vape use,” said Rodney Willet, a cosponsor of the registry effort, according to media reports. The Henrico-based delegate says it would still open the door to sell plenty of vape products for consumers, but Midgette said the trendiness of the industry makes it hard for any one brand to stay popular.
“It’s an evolving business. There’s one brand everyone wants, then a few months later people want a different one,” Midgette said.
Midgette also pushed back on the FDA approval requirement, suggesting the products the federal government had approved represent a small and low-quality collection of brands.
Another bill would block any new shops from opening within 1000 feet of a school or daycare center.
But the business owner also noted a carve out made in Lopez’s bill for convenience stores and gas stations.
Last on the list is a new six-cent-per-mil of nicotine tax on vape products currently in the Senate budget.
“Six cents? That’s nothing,” Midgette joked, noting North Carolina added a five-cent tax already, and it’s handled by his distributors before being passed down to consumers.
Beginning January 1, 2024, Belgium will introduce a new tax on e-liquids used in electronic cigarettes. The tax will be set at 15 cents per milliliter.
The move has received criticism from both users and retailers who fear that it will lead to increased costs and a potential shift back to traditional tobacco cigarettes.
The spokesperson for the federal Finance Minister defended the tax, stating that it aligns with Germany’s tax rate, which is also set to increase in the coming years, according to media reports.
They further clarified that the goal is not to encourage people to return to smoking combustible cigarettes but to recognize that e-cigarettes are also tobacco products and should be used as a temporary measure to quit smoking.
Louisiana passed a law that raised taxes on nicotine e-liquids. However, the new rules could result in most vape products being taken off the shelves.
The legislation, Act 414 by Rep. Paul Hollis, started out as a bill to increase the tax on vapes, with Hollis saying he wanted to discourage their use. But it quickly morphed into a broader law that dramatically scales back what vapes can be sold, after wholesalers, major tobacco companies and legislators concerned with youth use got involved.
The law Edwards signed triples the tax on vape liquid from 5 cents per milliliter to 15 cents per milliliter and earmarks the revenue the tax will generate for pay raises for state troopers, according to NOLA.com.
But the bigger impacts have to do with a new registry pushed by the major tobacco companies and large wholesalers.
The law, which goes into effect in November, will require any vapes sold in Louisiana to be authorized by the U.S. Food and Drug Administration to be marketed in the U.S.
Some other products could be sold if litigation is ongoing, but the state Office of Alcohol and Tobacco Control will be able to fine retailers for unapproved products.
The new rules allow for only a handful of companies to sell vaping products in Louisiana, including R.J. Reynolds and Altria, major tobacco companies that sell Vuse and NJoy products, respectively.
Both companies lobbied significantly on changes to the bill, including the registry.
Effectively, the law could ban the vast majority of flavored vapes being sold in Louisiana. A wholesaler testified in a committee hearing that the list would tamp down on popular disposable vapes such as EscoBars, Puff Bars and Elf Bars, which have drawn the ire of regulators and lawmakers across the country.
The FDA has cracked down on Elf Bars recently, telling retailers to stop selling them and halting imports.
Hollis said Altria and Reynolds, along with wholesalers who argued the state was missing out on tax revenue by allowing retailers to bypass it and buy products from vape manufacturers, were among those who negotiated the final law.
The new law now requires products to go through wholesalers.
The law could also mean a de facto ban on flavored vapes because the FDA has not approved any flavored products other than tobacco. Reynolds, with its top-selling Vuse brand, only sells tobacco and menthol-flavored products.
A Reynolds spokesperson said in a statement that “illegally marketed disposable” vapes, often imported from other countries, have “subpar regulatory oversight,” and that getting such products off the shelves will protect youth while allowing adult smokers options beyond combustible cigarettes.
“The creation of a marketing order registry, and the state tax increase which will fund it, will help the public and retailers in assessing the legitimacy of vapor products before hitting the store shelves,” the company said. “Reynolds also urges the FDA to put together a list of products that can be legally sold in the US.”
iMiracle, the maker of Elf Bars, said it was “concerned that the true objective of this law has been obscured from both the general public and Louisiana voters.”
“Louisiana legislators should take a careful look at who promoted and who benefits from this legislation, and whether they want to limit their adult constituents’ access to harm-reduction products,” a company spokesperson said, adding it is evaluating the law’s “applicability and legality.”
The state Office of Alcohol and Tobacco Control will be tasked with enforcing the new law by fining retailers who sell products not authorized by the FDA.
ATC chief Ernest Legier said he hasn’t yet had time to closely review which products will be allowed, but that industry representatives have suggested as much as 60 percent of the products currently on the shelves could be removed.
Last week, the Alaska Senate voted 14-6 in favor of S.B. 89, a bill that would change the state’s minimum age to purchase and possess vaping and other tobacco products from 19 to 21 years old.
If approved, the bill would align Alaska’s state law with the federal standard.
The bill also would impose a statewide tax of 25 percent on e-cigarettes. A similar bill was vetoed by Gov. Dun Mike Dunleavy last fall.
The 25 percent statewide tax would add to Alaska municipal nicotine taxes already in place, such as Juneau, which currently taxes 45 percent, or $3 a pack, on the wholesale price of tobacco products, according to City and Borough of Juneau Finance Director Jeff Rogers.
The action would also allow local law enforcement to enforce the federal Tobacco 21 standard and ensure the state doesn’t lose out on grants and other funds it can receive for having its tobacco laws in line with the federal standard, reports Charlie Minato with Halfwheel.
S.B. 89 would make it illegal for anyone to sell or give tobacco or vaping products to anyone under the age of 21 years old. Those caught selling or giving tobacco or vaping products to someone under the age of 21 would be subject to a fine of at least $300.
The bill would also introduce fines for those under the age of 21 years old caught possessing tobacco or vaping products. They would be subject to a fine of no more than $150 and could be subject to a tobacco education program.
While the federal law already exists, its enforcement is restricted to those who sell tobacco products and not the consumers. The vast majority of U.S. states have updated their laws to make them consistent with the federal standard.
S.B. 89 now moves onto the Alaska House of Representatives.
Last year, Alaska’s governor vetoed a Tobacco 21 bill because it included a 35 percent tax increase on vaping products.
The Alaska Legislature gave its approval to SB 45, a bill that raises the minimum age to purchase, sell, exchange, or possess electronic nicotine-delivery system (ENDS) products to 21-years-old, as well as makes changes to the tax rate on electronic smoking products.
The bill includes an imposed tax rate of 35 percent of the wholesale price for ENDS products, a notable difference from the state’s tax rate for other tobacco products, which is 75 percent of the wholesale price.
If signed into law, it would bring the state into alignment with the federal minimum age. As such, it allows state and local law enforcement agencies to enforce the federal minimum age, including fining retailers or others for selling or otherwise providing tobacco products to a person under 21-years-old, according to Halfwheel.
It also amends the state’s minimum age to possess ENDS and other tobacco products to 19-years-old. Violators of that law will be subject to a fine of up to $150.
For retailers, they will now be required to only allow tobacco products to be sold by employees who are at least 21-years-old, unless they were at least 19-years-old at the time the bill goes into effect.
The bill now heads to Gov. Mike Dunleavy for his signature. If the governor does not veto the bill, the changes will go into effect on July 1, 2023.
Experts say Congress’ latest attempt to tax nicotine is complicated, confusing and harmful to public health.
By Timothy S. Donahue
To help pay for an infrastructure bill, the U.S. Congress has again introduced an excise tax on next-generation nicotine products, such as e-cigarettes and snus. The excise tax would apply to nicotine vapor products using both natural and synthetic nicotine as well as nicotine pouches. Experts say the provision, which would ultimately be paid by tobacco consumers, goes against U.S. President Biden’s campaign promise to not increase taxes on those making less than $400,000, negatively impact tobacco harm reduction efforts, increase sales of combustible tobacco products and boost an already growing black market.
The nicotine tax has been removed and reintroduced to Biden’s Build Back Better (BBB) legislation at least three times. The proposed vapor tax provision is now part of the latest version of the administration’s social spending and climate bill. According to Ulrik Boesen, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, taxes on tobacco and nicotine products tend to serve at least two purposes: to improve public health and raise revenue. He claims that a nicotine tax could do that if it is properly designed.
Ulrik Boesen / Credit: Tax Foundation
“A good design means internalizing externalities related to consumption of a product,” Boesen stated. “With tobacco and nicotine product consumption, these externalities are the health risks connected to frequent use and [the] quantity consumed. Nicotine is the addictive substance in the products but not the harmful ingredient. In other words, the proposal does not target the harmful behavior directly.”
Taxing based on nicotine content would favor low-nicotine liquids and could encourage increased consumption in the quantity of liquid, according to Boesen. “For example, a vapor pod that has a nicotine content of 3 percent and contains 1 mL of liquid would be taxed at $0.83 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 mL of liquid would be taxed at $1.39 even if there is no difference, or even a negative differential, in broader health effects of the two pods,” he states, adding that the effects of the tax are most substantial for nicotine pouches, such that the category is unlikely to survive.
Other estimates show that a 60 mL bottle of e-liquid with 12 mg of nicotine e-liquid would be taxed at $20.02. A four-pack of 8 mL pods with 5 percent nicotine salt pods would be taxed at $4.45 and a 15-pouch can of 8 mg nicotine pouches would be taxed at $3.34 (alongside state and local taxes, the cost of a single can could grow to $20 in some states).
Bryan Haynes, a partner with the law firm Troutman Pepper who specializes in tobacco and vapor regulations, said that, at a minimum, the proposed nicotine tax is “a hastily written addition” that will “have a negative impact on tobacco harm reduction efforts and public health.” He said that it’s the first time the tobacco industry has seen an excise tax placed on an ingredient instead of a finished good. “This is an unprecedented type of tax that will ultimately drive former smokers back to combustible products,” said Haynes, adding that taxing an ingredient could also cause unforeseen issues for manufacturers, such as moving material between factories.
Bryan Haynes / Credit: Troutman Pepper
“If a company is producing nicotine or even synthetic nicotine, moving product from one factory to another could trigger the need for an Alcohol and Tobacco Tax and Trade Bureau (TTB) license, and when product is removed, so to speak, from their factory, they would be responsible for remitting the taxes,” explained Haynes. “There may be a way, for example, if the company removed the nicotine from their factory and transported it in-bond to another TTB factory that you could make that work. But it’s just not clear. There is the potential for a lot of unforeseen issues to arise the way the tax is currently being proposed.”
States often tax nicotine products by its cost. Boesen says the tax on the product will pyramid since the federal tax would be levied at the manufacturer level and the state tax is levied at the distribution level. “In effect, the state tax base includes the federal tax and becomes a tax on a tax. This means that even if the taxes on tobacco and other nicotine products are approximately equal at the federal level, by the time it reaches the consumer, the nicotine product will carry a higher tax (and often a higher price),” he states. “This is highly problematic when considering that cigarettes are much more harmful than nicotine products. That makes the federal tax proposal look like a harm-maximizing strategy.”
Credit: Tax Foundation
The bill also subjects synthetic nicotine products to the nicotine tax. Many in the industry have expressed concern that this provision could allow the U.S. Food and Drug Administration to assert authority over the substance. Synthetic nicotine is covered not only in the proposed tax bill but also in the Prevent All Cigarette Trafficking (PACT) Act, which bans the U.S. Postal Service from mailing any vaping products.
Azim Chowdhury, a partner at the law firm Keller and Heckman who specializes in vapor, nicotine and tobacco product regulation, said that’s just not possible and Haynes agrees. “The definition of a tobacco product in the Tobacco Control Act (TCA) is clear. It’s just not ambiguous; a product must be made or derived from tobacco, or a component or part of a tobacco product, to be a tobacco product,” said Chowdhury.
Azim Chowdhury
“Congress would have to change the Tobacco Control Act’s definition of a tobacco product in order to give FDA’s Center for Tobacco Products the authority to regulate synthetic nicotine products as tobacco products. That won’t happen overnight. I also see a scenario where synthetic nicotine could be regulated as a drug and that would be a whole different and more onerous regulatory regime.”
The FDA could, however, cite the inclusion of synthetic products in the PACT Act and the latest nicotine tax proposal in its lobbying efforts to change the TCA’s definition of tobacco, said Haynes. “I could see the FDA telling Congress, ‘You just amended the Internal Revenue Code to make these products subject to federal excise taxes just like tobacco-derived nicotine, so it’s not a big stretch to amend the Tobacco Control Act’ in the same way,” he explains. “That’s how I would do it. It’s not really a legal argument, but it could be a decent lobbying argument.”
It isn’t just vapers, business owners and attorneys that find fault with the proposed nicotine tax; researchers suggest the tax could also harm public health. Michael Pesko, an associate professor in the Department of Economics at Georgia State University, used a $1.4 million dollar grant from the National Institutes of Health (NIH) to conduct e-cigarette policy evaluation research, including the evaluation of e-cigarette taxes (Pesko receives no funding from the tobacco industry or related groups). Pesko found that e-cigarettes and other nicotine vaping products function as what economists call “substitutes” for conventional cigarettes.
“In practical terms, if e-cigarettes and cigarettes are substitutes, then raising the price of one on average leads people to increase use of the other. Given extensive peer-reviewed evidence indicating that these products are substitutes, an unintended but inevitable effect of increasing taxes on e-cigarettes is to increase cigarette use,” Pesko said. “Given that cigarettes are believed to be substantially more harmful than e-cigarettes, this effect on [combustible] cigarette use is concerning …. A wide array of research suggests that this boost in cigarette use as a result of large e-cigarette tax increases would significantly increase overall tobacco-related death and disease.”
Michael Pesko / Credit: GSU
These findings prompted Pesko to send a letter to Congress concerning the proposed vape tax. In the letter, he states that his research team’s economic evaluations of existing state and county e-cigarettes taxes found that increasing e-cigarette taxes to parity with the combustible cigarette tax rate would “sizably increase cigarette use across teens, adults and pregnant women compared to taxing tobacco products differentially in proportion to their health risk.”
Pesko said researchers found several concerning consequences of large e-cigarette tax increases:
Simulating the current bill’s e-cigarette tax on teen tobacco use indicates that this policy would reduce teen e-cigarette use by 2.7 percentage points but that two in three teens who do not use e-cigarettes due to the tax would smoke cigarettes instead. This would result in approximately a half million extra teenage smokers overall. This finding that teens substitute to cigarettes in response to e-cigarette taxes has also been documented using National Youth Tobacco Survey data.
The tax would raise the number of daily adult cigarette smokers by 2.5 million nationally and reduce adult e-cigarette users by a similar number.
For every e-cigarette pod eliminated by an e-cigarette tax, more than 5.5 extra packs of cigarettes are sold instead.
For every three pregnant women that do not use e-cigarettes due to an e-cigarette tax, one smokes cigarettes instead (study).
Pesko told Vapor Voice he was surprised to find that increased e-cigarette tax consistently resulted in substitution across various data sources. “And the magnitudes are fairly sizable,” he noted. “This is an unusual level of accordance for academic research.” Pesko believes that any tax on nicotine products should be based on quantity.
Boesen agreed. He stated that for vapor products, the “obvious choice” is taxing the liquid by volume (per mL), and for nicotine pouches, a tax by weight or per pouch is a straightforward solution. “It is the administratively simplest and most straightforward way for the federal government to tax these goods as it does not require valuation and as such does not require expensive administration,” he stated. “The nicotine tax proposal in the Build Back Better Act neglects sound excise tax policy design and by doing so risks harming public health. Lawmakers should reconsider this approach to nicotine taxation.”
Chowdhury said that the industry must do more and that interested stakeholders and consumers should reach out and push back on the nicotine tax because it will be devastating to the vapor industry. “It seems like the general industry feels like [this nicotine tax] won’t get through somehow, that some people will prevent it from being in the final bill, but I think it’s a huge risk,” said Chowdhury. “Without serious pushback, it could end up there; it could very well end up becoming law.”
Haynes said that if the nicotine tax bill ever makes it to Biden’s desk, “he’s going to sign it.”
The nicotine tax in the U.S. Build Back Better Plan bill will negatively affect public health and hurt lower- and middle-class Americans, according to Guy Bentley, director of consumer freedom research at the Reason Foundation.
The current version of ever-changing proposal would introduce a new tax on e-cigarettes and other smoking alternatives, which research suggests are dramatically safer options for smokers.
A 6 milligram nicotine/30 milliliter bottle of e-liquid, for example, would be taxed at a rate of $5.01 under the proposal. A typical pack of e-liquid pods would be taxed at $4.59. The federal tax on cigarettes is $1.01 per pack. Thus, e-cigarettes would be taxed more than regular cigarettes, and dramatically more so in states that already levy their own high e-cigarette taxes.
Writing on the Reason Foundation’s website, Bentley cites Michael Pesko of Georgia State University, who estimates the new tax on nicotine alternatives would cause 2.7 million more daily adult smokers, 530,000 more teen smokers and 29,000 more prenatal smokers.
This is because e-cigarettes are substitutes, not complements to combustible cigarettes, and millions of American ex-smokers have used these products to get off smoking traditional cigarettes.
Bentley says the tax is also highly regressive and would violate President Biden’s campaign promise not to raise taxes on people earning less than $400,000 a year. According to a recent Gallup poll, Americans with an annual household income of less than $40,000 are significantly more likely to vape than higher-income groups.
“With more than 15 million adult vapers now in America, many of whom attribute their ability to quit or reduce smoking traditional cigarettes to their use of e-cigarettes, it’s baffling House Democrats would consider targeting this group with a huge tax increase that could push many of them back to smoking and worsen public health,” wrote Bentley.
U.S. Lawmakers have reintroduced a tax on vapor products into the Biden administration’s Build Back Better Act, reports the Winston-Salem Journal. Earlier a series of controversial tobacco hikes had been removed from the legislation.
The latest version of the bill calls of $50.33 per 1,810 milligrams of nicotine for “any nicotine product that has been extracted, concentrated or synthesized.” The previously proposed vapor tax was $100.66 per 1,810 mg.
Vapor industry representatives were unimpressed. “American voters are already livid with paying high prices at the pump and the grocery store,” Amanda Wheeler, president of the American Vapor Manufacturers Association, was quoted as saying by the Winston-Salem Journal.
“It’s a certainty they will be outraged with a gigantic tax on a product that millions use to quit cigarettes.”
