States move on e-cigarette as Washington delays

By Jake Grovum

Stateline.org

Money grab, health concerns, or both? Absent guidance from Washington, states are pressing ahead with their own agendas on electronic cigarettes.

Heading into legislative sessions next year, policymakers, industry representatives, health advocates and tax wonks expect electronic cigarettes — or e-cigarettes for short — to be among the top issues at state capitols. Legislatures are expected to tackle how to classify, regulate and, perhaps most importantly, tax the relatively new products.

The debates in states come as the federal government considers its own answers to similar questions. The Food and Drug Administration is considering classifying e-cigarettes as “tobacco products,” which would extend its reach and potentially subject e-cigarettes to a host of rules and regulations that apply to tobacco cigarettes.

“States are scrambling to figure out how to deal with this,” Ohio Attorney General Mike DeWine said in an interview. “It’s going to be fought out in 50 states; it’s going to be fought out in one jurisdiction after another.”

DeWine was a lead author of an Oct. 23 letter sent by 40 attorneys general – including Greg Zoeller of Indiana – to the FDA pushing for federal rules and for e-cigarettes to be treated as “tobacco products” for regulatory purposes.

So far, Washington hasn’t decided how to proceed with e-cigarettes. A proposed rule, expected to be released for public comment in November, was delayed by the government shutdown and is still pending.

That has left a patchwork of rules, regulations and product definitions across the nation, often at the urging of anti-tobacco advocates. “We think it’s really important that states act,” said Danny McGoldrick, vice president of research at the Campaign for Tobacco-Free Kids.

More than half the states, for example, have banned the sale of e-cigarettes to minors, but others have no restrictions. Currently four states — Utah, North Dakota, Arkansas and New Jersey — have lumped the products in with tobacco under indoor smoking bans, even as research about possible ill-effects from second-hand vapor smoke, if there even are any, remains limited. Arkansas’ ban only covers school campuses for now.

Some local governments have taken similar steps on their own, enacting rules for e-cigarettes that sometimes go beyond those in place at the state level.

The intensity of the debate illustrates both the lack of good research on e-cigarettes as well as the money at stake. Often, those considering limits don’t even agree on whether applying tobacco regulations is appropriate, given how different the products are. Like tobacco cigarettes, nicotine levels in the “cartridges” that are loaded into the e-cigarette device can vary widely, complicating efforts to agree on a standard approach to regulation and taxation.

E-cigarettes first appeared about a decade ago, and sales have grown exponentially in recent years. The number of American adults who said they have tried them doubled to one in five in just one year (from 2010 to 2011), according to a Centers for Disease Control survey. Use among middle and high school students also doubled from 2011 to 2012, according to the CDC, with nearly 1.8 million students saying they’ve used them.

E-Cig Revenue 

In an era of revenue-hungry state governments — some still dealing with declining revenue from traditional tobacco taxes and recovering from the Great Recession — taxing e-cigarettes seems likely to get the most attention from state lawmakers in 2014. Questions of advertising limits, health claims and ingredient disclosure will likely remain federal issues.

So far, only Minnesota has put in place a specific state tax policy for e-cigarettes, a decision reached in 2012. The products are subject to a 95 percent tax that functions like a sales tax, tacked onto the wholesale cost of the product. That generally means they are taxed at a higher rate than traditional cigarettes, which are subject to a $1.29-per-pack levy. The state expects to collect $1.16 billion from all tobacco taxes in the 2014-2015 fiscal year.

For now, most other states apply only a sales tax – if they have one – to e-cigarettes. But at least 30 others are considering e-cigarette taxes of some kind next year.

“I will be watching to see if more proposals like Minnesota are replicated in the states,” said Scott Drenkard of the Tax Foundation, an anti-tax research group, “But I hope they are not.”

As tax experts see it, there’s little rationale aside from simply raising revenue for taxing e-cigarettes as traditional cigarettes. Tobacco, they say, is taxed because it produces negative health consequences that cost the public. For now, there’s little research that shows similar effects from e-cigarettes.

“There is zero, emphasis on zero, justification for taxing e-cigarettes right now,” said David Brunori of the groupTax Analysts, a nonprofit tax analysis group that provides insight to private firms and government agencies. “What this is is a money grab. It’s a way of trying to find revenue to replace lost tobacco taxes.”

According to the nonpartisan Tax Policy Center, state and local tax revenues have somewhat leveled off in recent years as smoking has declined. Collections grew from $7.7 billion in 1997 to $15.8 billion in 2007, but reached just $17.6 billion in 2011, the most recent year available.

Tobacco companies that don’t produce e-cigarettes have often pushed tax parity so their own products are not at a disadvantage. In Minnesota’s case, the state simply said that under its laws, the tax must apply.

But the most popular argument is deterrence—higher taxes might make the product less attractive and less affordable to young people looking for nicotine.

“It has nothing to do with revenue,” Ohio’s DeWine said. “It has everything to do with discouraging use.”

An Alternative to Tobacco

Discouraging use, however, is exactly the opposite goal lawmakers should have, said Ray Story of the Tobacco Vapor Electronic Cigarette Association. It’s an opinion shared by some outside of the industry as well, especially with regard to those already smoking.

“Cigarettes are sold everywhere in the world, and we want to make sure that the e-cigarette is sold as a less-harmful alternative right there next to it,” Story said.

“We should expand the use, not restrict it,” he added, saying that if e-cigarettes can greatly reduce cigarette use the industry “will have made the greatest impact on humanity ever.”

The contrasting approach reflects two key differences in thinking about e-cigarettes: as a new recreational product similar to tobacco cigarettes, or as a potentially less-unhealthy alternative that could even help smokers quit entirely.

E-cigarette producers themselves are divided. Some welcome traditional cigarette-style regulations to a degree, content to play by similar rules as tobacco producers, especially if it saves them from more onerous limits applied to drug manufacturers, for example. Others argue that even thinking about e-cigarettes through the same frame of reference as tobacco is a flawed approach.

Federal officials in Washington will likely be the ones to eventually settle the dispute, and that decision could still be months away. Meanwhile, debates in the states over two key issues within their control – taxes and sales to minors – are likely to rage in 2014.

But the eventual decision from the FDA is sure to affect those debates. “If the FDA says these are essentially tobacco products,” said Brunori of Tax Analysts, “that will give all kinds of cover to state politicians.”