With Arizona facing an estimated $1 billion budget shortfall next year, lawmakers may look to the growing electronic cigarette industry to help close the gap.
A recent analysis by the Joint Legislative Budget Committee estimates an e-cigarette tax could bring in as little as $283,700 or as much as $13.4 million in revenue every year, depending on how the tax is structured.
If e-cigarettes were taxed similar to Arizona’s current tax on regular tobacco cigarettes – about $2 per pack – the annual projected revenue would be roughly in the middle of that range at $6 million.
But that would still be a drop in the bucket to what Arizona actually needs, and lawmakers would thus need to find additional ways to boost state coffers, said Dennis Hoffman, and economist and director of the L. William Seidman Research Institute at Arizona State University’s W. P. Carey School of Business.
“Certainly taxing e-cigarettes isn’t going to put much of a dent in that particular challenge,” Hoffman said.
The e-cigarette industry has grown to about $1 billion since it was introduced to the U.S. more than seven years ago. The product is advertised as a healthier and cheaper alternative to regular cigarettes; it’s tobacco free and users inhale a virtually odor-free liquid nicotine vapor.
However, the jury’s still out as to whether e-cigarettes are less harmful in the long term, and the industry’s growth has sparked controversial discussions at the federal and state levels regarding health, regulation and taxation.
Currently, Minnesota and North Carolina are the only states that tax e-cigarettes, bringing in $9.6 million and $5.1 million, respectively, in annual revenue to those states, the JLBC analysis said.
Earlier this year, 15 state legislatures pondered similar taxations, and it’s been a topic of discussion in Arizona.
“The growth in the use of electronic cigarettes has generated questions to the JLBC Staff about the potential for new revenue collections. In response, we have developed a fiscal impact of e-cigarette taxation,” according to the JLBC’s Monthly Fiscal Highlights report for November.
Those who oppose taxation argue that fewer tobacco users would make the switch if e-cigarettes became more expensive. And considering the true health implications are still unknown, opponents say it’d be premature and unfair to place e-cigarettes under the same tax category as tobacco and liquor, which is largely intended to deter consumption due to proven health risks.
“Taxing e-cigarettes is a money grab. If people use e-cigarettes instead of real cigarettes, the state loses money,” David Brunori, deputy publisher of the nonprofit Tax Analyst publication and research professor at George Washington University, wrote in an editorial published by Forbes in June.
But Hoffman at ASU said taxation isn’t really about money or health. It’s about making it fair between competing businesses.
“If the products are really quite similar and they attract the same types of consumers, it would be logical to say ‘level the playing field,’” Hoffman said.
