BOHANON & CUROTT: Raising taxes, even on tobacco, can have unintended effects

Should Indiana tax electronic cigarettes? While several states and jurisdictions impose such taxes, neither Indiana nor the federal government do at this time. On the surface, it seems an e-cigarette tax is a good idea. But upon further examination, it turns out the answer is tricky.

Recently, a team of six research economists, including our own Ball State colleague Erik Nesson, analyzed consumer purchases of traditional cigarettes, e-cigarettes and other tobacco products. Data was compiled from 30,000 retail outlets over a six-year time frame from 2011 to 2017. The study estimates a 10% increase in e-cigarette prices leads to a 26% decrease in e-cigarette sales. So, a tax on e-cigarettes certainly reduces consumption.

However, the study also estimates that a 10% increase in e-cigarette prices leads to a 9.7% increase in traditional cigarette sales. The reason is simple: If obtaining nicotine from electronic cigarettes becomes more costly, nicotine users switch to old-fashioned cigarettes.

Nearly 70 years of data indicates that the carcinogens and carbon monoxide inhaled from traditional cigarette smoke are unhealthy. E-cigarettes, however, deliver nicotine without the carcinogens and carbon monoxide of traditional smokes. Although the data on the health implications of e-cigarettes is not quite in, many suspect that e-cigarettes pose less of a health risk than their traditional combustible alternatives. This implies that a tax on e-cigarettes might lead to increased illness via increased use of traditional cigarettes.

We can anticipate the response of public health advocates: Increase the existing state tax on traditional combustible cigarettes to drive nicotine users back to e-cigs and some out of nicotine altogether. Point taken. But as economists, we’d also add the following proviso: Watch out for a rise in black market provision of both types of nicotine-delivery devices. The recent study does not directly comment on this, but it is a factor to consider. Black markets enrich criminals and degrade product quality—both of which are unhealthy.

Our guess is that, under either scenario—a tax on e-cigs, or a tax on e-cigs plus a hike in the tax on traditional cigarettes—there will be an increase in state revenue. This, of course, makes the tax even more attractive for those looking to expand Indiana spending. Pay for new programs and nudge nicotine addicts off their drug of choice.

Whatever your perspective on this issue, a hard-headed look at the data confirms what economists preach: There are no solutions, just trade-offs.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com. In the 1980s, Bohanon worked on tobacco policy public relations projects funded by tobacco interests.