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A Taxing Problem

One reason for impatience with FDA footdragging on its promised deeming regulations for e-cigs is that states are eager to begin taxing the product, reports Jake Grovum of the Pew Charitable Trusts.

Taxes on traditional cigarettes have been a steady income source for the states, so the downturn in smoking in recent decades has cut into state budgets, already hurting for a variety of other reasons. Of course cigarettes are taxed in order to discourage people from killing themselves by smoking, but the filling of state coffers is a side effect that is not without its benefits.

There are three ways to tax e-cigs. Currently they are simply taxed just like any other consumer products, shoe polish or breakfast cereal, for instance. Such sales taxes are comparatively low, and in the unregulated environment of the past six years, e-cigs have benefitted from finding themselves in this product category.

An FDA classification as therapeutic products could raise the tax level and also the level of regulatory control, but this product classification was barred by the courts in their landmark 2010 decision. It could also drive smaller companies out of business with cumbersome rules that are expensive to fulfill, essentially placing the e-cig industry into the blood-stained hands of wealthy Big Tobacco companies.

If e-cigs are deemed to be tobacco products, they can be taxed at a high, punitive rate, along with combustible cigarettes, in order to deter their use. This brings us to the tormented question of the relative dangers of e-cig use and cigarette use.

Impatient with the shilly-shallying FDA, some states are beginning to take matters into their own hands. Minnesota has begun, and it now has the most punitive rate: in 2012 the state slapped a 95% surcharge on the wholesale price of e-cigarettes, significantly higher than the tax of $1.29/pack on combustible cigarettes.

Deterring e-cig use is exactly the opposite of the appropriate goal, argues Ray Story of the Tobacco Vapor Electronic Cigarette Association, as well as others who are not industry advocates. "We should expand the use, not restrict it," Story says.

Ohio Attorney General Mike DeWine, who authored a letter to the FDA which was cosigned by 40 state Attorneys General, advocating expeditious regulation, says the decisions will be localized: "It's going to be fought out in 50 states," he opined, ". . . in one jurisdiction after another."

As with the issue of sales bans to minors, something the e-cig industry accepts and advocates, by and large, there is a patchwork of local and state regulations instead of uniform federal policy.

Tax analyst David Brunori says there is zero justification for punitive taxation on e-cigs. "This . . . is a money grab . . . a way of trying to find revenue to replace lost tobacco taxes," he claims.