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Proposed menthol ban highlights debate over ‘sin tax’ revenue

States are facing a steep drop in revenue if menthol cigarettes are outlawed

States are increasingly taxing vaping products as smoking rates decline.
States are increasingly taxing vaping products as smoking rates decline. (Spencer Platt/Getty Images file photo)

A proposed federal ban on menthol cigarettes has underscored the tension lawmakers face in using “sin tax” revenue to fund critical social programs at the state and federal levels.

For decades, states have used sin taxes — excise taxes placed on things like tobacco, alcohol and gambling — for health, education and other public programs. Revenue has fallen over the years along with smoking rates, and the Food and Drug Administration’s recent proposal to ban menthol cigarettes and flavored cigars could trigger an even sharper decline.

A rise in e-cigarette popularity presents a new opportunity to fill the gap, even as vaping advocates allege that taxes discourage traditional smokers from switching to a potentially less harmful product. More than half of states are now taxing e-cigarettes, although an increasing number are attempting to ban most flavored nicotine products outright.

Vaping critics, for their part, say vapes are not regulated well enough to prevent new people, particularly teens, from becoming addicted. The FDA is still deliberating whether to allow flavored e-cigarettes, including menthol, on the market.

A federal ban on menthol cigarettes could cost $6.6 billion in revenue at the federal and state levels, according to the Tax Foundation. Federal tobacco tax revenue totaled $12.1 billion in 2021. 

“I think if you’re going to collect these taxes, and we have this demand that’s out there for increasing spending on some of these public health programs that have been decimated by caps over the last few years on discretionary spending, let’s refocus those taxes in a way that would be most effective,” said Bipartisan Policy Center Senior Vice President Bill Hoagland, who advocates earmarking federal tobacco and similar taxes for pandemic preparedness funds.

In terms of tobacco, though, that means either increasing taxes on a decreasing number of smokers and/or implementing taxes on e-cigarettes too. Jared Walczak, vice president of state projects at the Tax Foundation, called the approach “reductive.”

“Ultimately, if the public health campaign is to win out and people give up smoking, then states need to be ready to forgo the revenue,” he said.

In the states

Menthol makes up more than one-third of the cigarette market. Federal tobacco revenue is typically directed to the general fund, but state revenue is often earmarked for a variety of purposes.

In Arizona, 42 cents of every dollar in tobacco taxes goes to Medicaid and other health programs, totaling more than $123.4 million in 2021. In California, where voters are set to decide whether to overturn the state’s recent ban on most flavored nicotine products, nearly 79 percent of cigarette taxes are used for health care, including medical research. In New Hampshire, 44 percent of cigarette and little cigar taxes goes toward public education, totaling $99.4 million in 2021.

Additionally, most states get annual payments from a 1998 settlement with tobacco companies based on the number of cigarettes sold each year. In Virginia, that money funds economic revitalization in communities formerly dependent on tobacco revenue.

Limiting tobacco use will reduce health care costs in the long term as rates of conditions like cancer fall and economic output increases. But the drop in revenue is much more immediate, and critics of such limits say a piecemeal approach could encourage users to simply buy products in other states.

Smoking and vaping critics dismiss the concerns as a talking point of the tobacco industry, noting that groups benefiting from tobacco money frequently support laws to limit its consumption.

Matt Myers, president of the Campaign for Tobacco-Free Kids, pointed to studies that show in-state economic spending actually increases with tobacco limits.

“There are very few products where more of the money doesn’t go out of state,” he said.

Battle in Colorado

The tension spilled into view this year in Colorado, where a bipartisan bill to ban all flavored nicotine products died in a state Senate committee. The measure was projected to suction around $25 million from the state’s universal preschool program, a campaign promise of Democratic Gov. Jared Polis that is set to launch next year.

Polis publicly opposed the bill on the grounds that banning flavored products should be a local decision.

“As a general philosophy the Governor prefers local control because our local governments are closest to the people they represent,” spokesperson Conor Cahill said in a statement, pointing to local laws on marijuana. The governor’s stance had “nothing to do with revenue,” he added.

Lobbyists representing Altria and Tobacco-Free Kids were heavily involved in the debate. Myers said he remains concerned that Altria had undue influence in the negotiations.

“There’s no way to know what was agreed to,” he said.

Altria spokesperson David Sutton argued that flavor bans would boost the illicit market and undermine the FDA’s authority.

“We’re opposed to this legislation because it would prevent Colorado adult smokers from accessing products that may reduce the harm of smoking and would hinder tobacco harm reduction goals,” he said.

Massachusetts and California enacted the nation’s first statewide flavored nicotine bans in 2019 and 2020, although both contain exemptions. Hawaii could become the third if Democratic Gov. David Ige decides to go over the heads of public health advocates who turned on the Legislature’s bill once lawmakers added an exemption for any FDA-authorized products.

Hawaii Democratic State Rep. Scot Matayoshi, who sponsored the bill banning flavored nicotine, said revenue issues came up repeatedly during the bill’s passage, but he views it as a “straw man” argument. If revenue were a concern, he said, states would find the money elsewhere.

“How are we funding these programs off of selling drugs to kids?” he told CQ Roll Call.

A federal ban on menthol cigarettes would also likely impact Hawaii the most. Menthol makes up an estimated 68 percent of the cigarette market in the state, according to the Tax Foundation.

Vaping taxes

In 2020, New Jersey, New York and Rhode Island prohibited the sale of flavored e-cigarettes, while on a more local level, the Los Angeles City Council voted 12-0 Wednesday to prohibit the sale of most flavored nicotine products, with exceptions for hookah.

Far more states, however, are opting to tax them instead.

Twenty-nine states and the District of Columbia currently impose vaping excise taxes. Congress has also tried at the federal level, most recently in Democrats’ sweeping social spending and environmental bill.

Critics of vaping taxes allege they discourage smokers from switching from cigarettes. But public health advocates are not yet convinced that e-cigarettes are safer.

“This is a little bit of a challenging situation because there could be some good in these products as well,” said Marcus Plescia, chief medical officer of the Association of State and Territorial Health Officials. “But I think most people would say we need to see more data about that. Frankly, most of the uptake in electronic cigarettes has been amongst kids, so there’s clearly a lot of harm that has been going on.”

The debate will continue as vaping rates increase and smoking rates fall. FDA Commissioner Robert Califf has also suggested the agency could try to scale back the amount of nicotine in traditional cigarettes. The agency has not said when it will finalize the bans on menthol cigarettes and flavored cigars.

States will have to diversify revenue streams regardless of how federal and state tobacco bans shake out thanks to the shrinking tax pool, said Guy Bentley, director of consumer freedom at the libertarian Reason Foundation.

“Over the long term,” he said, “that’s going to be a losing bet.”

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