Source: California governor’s budget; Tax Foundation calculations. It is estimated for Fiscal Year 2021-2022 a total of $28 million in grant funding will be available statewide to support local enforcement efforts to reduce the illegal sale of tobacco products to minors. The California Department of Tax and Fee Administration (CDTFA) must adjust the tax rate on non‑cigarette tobacco products (including e‑cigarettes) annually based on a formula originally established by Proposition 99 of 1988 and modified by subsequent ballot measures. The state levies a $2.87 per pack tax on cigarettes. Effects on Vaping and Smoking. With excise tax policy, increases or decreases in tax rates of certain goods can affect consumption of other goods that might be substitutes. Additional Cost to Add Tax to Information Technology (IT) System. In other words, the governor’s proposal does not target the harmful behavior. Explore our weekly state tax maps to see how your state ranks on tax rates, collections, and more. With smoking and vaping, these externalities are the health risks connected to frequent use. The tax would take effect January 1, 2021 and is forecasted to raise $32 million in FY 2021. Justin Garosi; Brian Uhler Is the Cigarette Tax Currently Set at the Right Rate? That said, the administration has emphasized that the amount of revenue raised is highly uncertain at this time. As a result, the state did not collect any administrative data on e‑cigarette sales. 1. Governor’s Proposal Does Not Include Inflation Adjustments. The administration has indicated that it intends to tax nicotine intake at the same rate, regardless of whether the nicotine is vaped or smoked. The Legislature could create a cigarette tax inflation adjustment without amending any ballot measures. Currently available answers to these questions likely do not provide clear guidance on the tax rate. Researchers and public officials have raised a variety of health concerns related to e‑cigarettes and to vaping more generally. Initial Tax Rate. Connection Between Proposed Language and Enforcement Proposal Unclear. California is one of 18 states that currently levy statewide excise taxes on e‑cigarettes. Oregon’s measure increases tobacco taxes $2 per pack, from $1.33 to $3.33, as well as creates a new tax for e-cigarettes. However, cigarette prices tend to grow over time, so the tax rate as a share of the overall price tends to decline over time. Packs typically contain 20 cigarettes and thus require a $2.87 tax stamp. As a result, the vendor needs to produce just two denominations of stamps, and taxpayers can comply with the tax by affixing just one stamp to each pack. The Governor’s proposal falls somewhere in between these two approaches. Policymakers should not lose sight of these unintended consequences as they set tax rates for nicotine products—especially in light of the strain businesses are already under due to the coronavirus pandemic. In fact, research that looked at the effect of vapor taxes in Minnesota concluded that 32,400 people who would otherwise have quit smoking traditional cigarettes still smoked them as a result of the tax. We recommend that the Legislature index the tax rate to inflation to keep its economic value steady over time. A second, less common type of pack contains 25 cigarettes and requires a $3.59 tax stamp. We recommend that the Legislature take an approach to revenue allocation that prioritizes flexibility. If, however, the Legislature prefers to deposit the revenue into a special fund, the Governor’s proposed approach is better than a restrictive, formulaic approach. In the cigarette tax program, stamps help distinguish tax‑paid cigarettes from others. This administrative change could yield data that could help us refine our revenue estimates in the coming months. As lawmakers thread the needle between protecting adult smokers’ ability to switch and barring minors’ access to nicotine products, they would be well-advised to remember the policy spillover effects. The tax also likely would increase adult cigarette smoking. If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s relatively flexible approach much more favorably than a restrictive, formulaic approach. Cantrell, Jennifer, Jidong Huang, Marisa S. Greenberg, Haijuan Xiao, Elizabeth C. Hair, and Donna Vallone (2019). For example, the Legislature could levy a higher tax rate on types of e‑cigarettes that are smaller or easier to use, and a lower tax rate on other types. The administration estimates that its proposal would result in roughly the same state tax rate on nicotine intake, whether that intake comes from e‑cigarettes or conventional cigarettes. Prices tend to rise over time. The estimates included in the 2020‑21 Governor’s Budget are reasonable, but actual revenue could be much higher or lower than those estimates. The administration argues that adjusting the new tax for inflation would not be consistent with its goal of aligning the state’s tax on e‑cigarettes with its tax on cigarettes, which is not subject to an inflation adjustment. If the Legislature would like to set the e‑cigarette tax rate based on a comparison to the cigarette tax rate, the comparison should include federal taxes, since they also affect consumers’ behavior. Income Tax Withholding Tracker: December 1 - December 23 December 23, 2020. Nationwide, the share of high school seniors who report using e‑cigarettes at least once in the past month rose from 11 percent in 2017 to 25 percent in 2019. At this time, the scope and timing of further FDA actions are unclear, but the agency appears to be taking a more active role in e‑cigarette regulation than it had in the past. The administration estimates that the proposed e‑cigarette tax rate of $ 1 p er 20 m illigrams of nicotine, combined with the existing tax rate of 59 p ercent of the wholesale price, would bring the state’s overall tax rate on e‑cigarettes roughly in line with its tax rate on conventional cigarettes. As shown in Figure 6, for example, tax rates set in fixed dollar terms—such as the state’s taxes on cigarettes and distilled spirits—do not remain fixed in economic terms. As a result, the proposed e‑cigarette tax either would require the vendor to produce stamps in a much wider variety of denominations than cigarette stamps, or would require taxpayers to affix multiple stamps per item. (For example, this is the current approach for allocating most tobacco tax revenues.). In principle, careful implementation could overcome these challenges. This focus on nicotine—rather than some other measure of the chemical composition of e‑cigarette liquid—is reasonable for two reasons: (1) many e‑cigarette health concerns are nicotine‑related; and (2) information about e‑cigarettes’ nicotine content generally is readily available. California currently taxes vapor products at 59.27 percent of wholesale value, but the proposal would impose an additional tax at a rate of $2 for each 40 milligrams of nicotine in the product. Correspondingly, the e‑cigarette tax rate tends to decline over time as well, as illustrated in Figure 4. Furthermore, the vendor would need to offer stamps that could fit on all manner of e‑cigarette packages. If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s proposed approach much more favorably than a restrictive, formulaic approach. Native American, Native Hawaiian, Alaska Native or LGBT by the end of 2021. The following legislative update was contributed by the Cigar Association of America (CAA) The California Department of Tax and Fee Administration (CDTFA) announced today that it is withdrawing Special Notice L‑698 [], Clarifying the Wholesale Cost Basis for Out‑of‑State Licensed Tobacco Products Distributors – Effective Oct. 1, 2019, effective immediately. Stamps could have similar enforcement benefits for e‑cigarettes, but they would need to be more complex. Accordingly, we recommend that the Legislature revisit the e‑cigarette tax rate at least once every two years to assess the need for changes. The Governor has proposed a new state tax on e‑cigarettes with the stated goal of reducing youth use of e‑cigarettes. The tax would take effect January 1, 2021 and is forecasted to raise $32 million in FY 2021. In contrast to cigarettes, the size, shape, and amount of tax due on e‑cigarettes would vary widely under the Governor’s proposal. California income tax withholding in December to date is up 19 percent from 2019, and collections since March 23 are up 5 percent. That said, the size of these effects is uncertain. New Tax on E‑Cigarettes. We discuss in detail a number of advantages of flexibility in our 2018 report, Taxation of Sugary Drinks. To address this issue, some of the state’s tax policies—such as fuel tax rates, cannabis cultivation tax rates, and income thresholds used to calculate income taxes‑include statutory language directing the administration to adjust these policies annually to account for inflation. A slate of … Tax Stamps. The state currently taxes other tobacco products—including e‑cigarettes—at 59 percent of the wholesale price. Code, § 30165.1, subd. Our review of available evidence suggests that the proposed tax likely would reduce both youth and adult e‑cigarette use substantially. Many States Tax E‑Cigarettes. Tobacco Grant 2020-2021 grantees, pdf Proposition 56, pdf Rev. (The new tax would be in addition to the existing tax described above.) This year, Kentucky, Utah, Virginia, and Wyoming have already passed increases to vapor taxes, which means 25 states and the District of Columbia now tax vapor products. Deng, Xueting and Yuqing Zheng (2019). Some e‑cigarettes create aerosols that are unflavored or tobacco‑flavored, while others taste like fruit, candy, menthol, or mint. In this report, we have discussed many issues for the Legislature to consider as it decides whether to change the state’s approach to taxing e‑cigarettes. Designing a tax for vapor is challenging because of the variety of vapor products. Cigarette Price / Tax Map for 2021 . “The Effect of Prices and Taxes on Youth Cigarette and E‑Cigarette Use: Economic Substitutes or Complements?” Mimeo, Georgia State University. How would the tax rate affect other outcomes, such as cigarette smoking? Our review of available evidence suggests that the proposed tax likely would reduce both youth and adult e‑cigarette use substantially. If the Legislature wants to maintain a consistent relationship between tax rates on cigarettes and e‑cigarettes, we recommend that it adjust both tax rates for inflation, rather than neither. The administration, however, has not presented an argument that they should be considered equally harmful. If the Legislature chooses to enact a nicotine‑based e‑cigarette tax, we recommend that it direct the administration to adjust the tax rate for inflation. “E‑Cigarettes and Cigarettes: Complements or Substitutes?” Mimeo, University of California, Berkeley. Examples include: The Legislature currently is considering further actions, including a bill that would ban flavored tobacco products (including flavored e‑cigarettes) and the tax proposal discussed in this report. When Governor Gavin Newsom (D) submits his revised budget proposal on Thursday, it will include a vapor tax increase. If the Legislature agrees with the Governor’s focus on reducing youth e‑cigarette use, we suggest it consider alternative nicotine‑based tax structures that could target youth use more effectively. California $2.87 12th Michigan $2.00 18th South Carolina $0.57 46th Colorado $1 ... Table shows all cigarette tax rates effective January 1, 2021 (CO, OR on 1/1/2021). The Governor’s proposed trailer bill language designates the monies in the new fund for youth tobacco prevention programs, health care programs, and administration and enforcement of the new e‑cigarette tax. This would impact not only the large number of small business owners operating vape shops around the state but also convenience stores and gas stations relying heavily on vapers as well as tobacco sales. The proposal also includes a one‑time tax on e‑cigarette inventories to deter businesses from stockpiling untaxed products in advance of the tax increase. (As noted in the “Background” section, ballot measures have enacted cigarette taxes totaling $2.75 per pack.). Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. State. Year. Recommend Inflation Adjustments. We find that a tax based on nicotine content has some advantages. We estimate that the new tax would raise tens of millions of dollars annually. Public Health England, an agency of the English Ministry for Health, concludes that vapor products are 95 percent less harmful than cigarettes. The remaining three‑fifths are 25 or older. This report uses the term “e‑cigarettes” to refer to devices that create aerosols containing nicotine—the substance that makes tobacco products addictive. California Governor Gavin Newsom signed Senate Bill (SB) 793 into law, banning the retail sale of flavored tobacco products in the state, effective January 2021. What Are E‑Cigarettes? As a 501(c)(3) nonprofit, we depend on the generosity of individuals like you. Accordingly, if the Legislature decides to appropriate money from the new e‑cigarette fund to this proposal, we recommend that it modify the trailer bill language to authorize this use of the fund. Zhao, Juliana (2019). Are E‑Cigarettes and Cigarettes Equally Harmful? Options Range from Very Flexible to Very Restrictive. We also suggest that the Legislature consider a wide range of possible tax rates. The administration has not presented a compelling argument in favor of its proposed tax rate. The fund would be available for three purposes: administration and enforcement of the new tax, tobacco youth prevention programs, and health care programs. How would the tax interact with other state and federal policies? Due to this variation, the Governor’s proposal to tax e‑cigarettes based on nicotine content would raise the cost of nicotine more directly and consistently than a price‑based, volume‑based, or cartridge‑based tax. E‑cigarettes come in a variety of forms, and the mix of available products has changed rapidly in recent years. $8 million of the Governor’s $10 million tax administration proposal would be for a stamp contract. This inconsistency goes against the concept of harm reduction, which is the approach that it is more practical to reduce harm associated with use of certain goods than avoiding it completely through bans or punitive level taxation. “Impact of E‑Cigarette and Cigarette Prices on Youth and Young Adult E‑Cigarette and Cigarette Behaviour: Evidence From a National Longitudinal Cohort.” Tobacco Control. While youth uptake is a very real concern which deserves the public’s attention, punitive level taxes and outright bans could impede historically high smoking cessation rates. By edhat staff There are a ton of new laws on the books in California for 2021. Current Cigarette and E‑Cigarette Policies. By Marie Tae McDermott Good morning. The stated goal of this proposal is to reduce youth use of e‑cigarettes. Help us continue our work by making a tax-deductible gift today. New Tax on E‑Cigarettes. Pesko, Michael and Casey Warman (2019). California is the latest state to try to increase vapor taxes. The administration does not appear to have considered this complexity carefully enough to justify the requested appropriation. As it considers what tax rate to set, the Legislature faces six key questions: Recommend Revisiting Rate Frequently. The federal government currently taxes cigarettes at $1.01 per pack but does not levy a tax on e‑cigarettes. Revenue Allocation. In September 2019, the Governor issued an executive order directing CDTFA and the California Department of Public Health (CDPH) to develop recommendations and take actions related to e‑cigarettes, including a vaping awareness campaign. Also: The pandemic surges in Los Angeles. As shown in Figure 2, e‑cigarettes were roughly five to six times as popular as conventional cigarettes among California high school students during the 2017‑18 school year. Ideally, this would mean depositing the revenue into the General Fund. 2020‑21 Spending Proposals. The proposed tax would go into effect on January 1, 2021. At the other end, the Legislature could take a very restrictive approach, depositing the revenue into a special fund and directing the administration to appropriate it continuously to specific departments or programs based on a detailed formula. Two of the key tools used to enforce this tax include: State Taxes E‑Cigarettes. As shown in Figure 3, daily e‑cigarette users are disproportionately young, but the majority are adults. We classify these concerns into three categories: Youth Use of E‑Cigarettes Has Grown Rapidly. In particular, it has not made a case that e‑cigarettes and cigarettes are equally harmful, nor that the current cigarette tax is set at the right rate. Revenue Would Go to New Special Fund. Ideally, this would mean depositing the revenue into the General Fund. The impetus for this proposal is increased youth vaping in the state. For example, retailers often sell ten‑milliliter bottles of a given brand of liquid for the same price, regardless of whether that liquid’s nicotine concentration is high, low, or somewhere in between. The bill, which banned flavored tobacco, added Article 5 (commencing with Section 104559.5) to Chapter 1 of Part 3 of Division 103 of the Health and Safety Code. In particular, the state could levy a relatively high tax rate on products that tend to encourage or enable youth use, and a relatively low tax rate on other products. Although the federal government levies excise taxes on conventional cigarettes and most other tobacco products, it does not levy such a tax on e‑cigarettes. The Governor’s recent executive order directed CDTFA to require taxpayers to list e‑cigarette sales separately from other tobacco sales starting in January 2020. Tax likely would reduce both youth and adult e‑cigarette use has Grown rapidly quantity liquid... 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