A review of the World Bank Group’s paper on e-cigarette taxation

The World Bank Group believes that all electronic cigarette products, including devices, should be subject to excise tax. A paper, “E-Cigarettes: Use and Taxation”, issued recently by the World Bank Group Global Tobacco Control Project Team, endorses extending to e-cigarettes the same taxation and regulatory policies designed to reduce tobacco use.

Readers hoping for an open-minded and enlightened discussion of risk related taxation will be sorely disappointed. The text reads like an anti-smoking screed from the “tobacco wars” of 15 or 20 years ago. Absent is any recognition of the potential contribution that a harm reduction approach to taxation can bring to public policies toward tobacco.

The paper fails to bring a balanced view to e-cigarette policy despite its claim to present “a summary of available literature on e-cigarette use and taxation in different countries…” The authors begin by conflating e-cigarette use with consumption of tobacco that is smoked. Citing historic mortality statistics associated with tobacco use as reason for controlling the use of tobacco in all its forms, including electronic cigarettes, seems designed to portray vaping as equally deleterious to health as smoking.

That strikes this reviewer as misleading and disingenuous when the “raison d’etre” of e-cigarettes is to provide smokers a less harmful alternative. Studies mentioned in the working note to support the questionable thesis that vapor from nicotine liquid is no less harmful to human health than smoke from a lit cigarette emanate from sources such as the WHO and FCTC which tend to take absolutist positions on tobacco control. Conspicuous by their absence are studies from Public Health England, the Royal College of Physicians and others which assert that the risks of e-cigarette use are unlikely to exceed 5% of the harm from smoking tobacco. It is doubtful that such research was omitted by accident or due to ignorance of their existence when they have been the subject of serious analysis and discussion among stakeholders in the vaping community since their publication a few years ago.

Use of E-cigarettes

E-cigarette use in Europe is growing. The WBG report cites an increase in the percentage of the population who regularly use e-cigarettes from 1.5% in 2014 to 1.8% in 2017. The concurrent decline in cigarette smoking, however, is omitted.

Statistics collected by the European Commission show a 39% drop in releases for consumption (shipments to the trade) of cigarettes from 2002 to 2017, indicating a 3.1% average annual decline over this period. During the latest decade following the commercial introduction of e-cigarettes in 2006, however, the average rate of decline accelerated to 4.0%.

While no one is affirming that the faster decline in smoking is wholly attributable to the availability of e-cigarettes in EU markets, it is certain that these vapor products have played an important role. The available evidence indicates that most e-cigarettes users are former smokers or current smokers who are transitioning to vaping. A study of current vapers in New Zealand appearing in the International Journal or Environmental Research and Public Health shows that nearly all had previously been smokers. Three quarters of the participants in the survey no longer smoked. The remainder have significantly reduced their tobacco use. Although the sale and supply of e-liquids containing nicotine are illegal in the country, vapers may legally import e-liquid from abroad and vaping has become increasingly widespread in New Zealand where it has facilitated significant smoking cessation.

It is opportune to note that the new policy proposal of the Ministry of Health of New Zealand to support smokers to switch to significantly less harmful alternatives clearly states that “the regulatory controls in the Smoke-free Environments Act 1990 were designed primarily for tobacco products that are smoked. They are inadequate for vaping and smokeless tobacco products, which are less harmful to users. There is an opportunity, through better regulation (and public information), to support smokers to switch to significantly less harmful alternative, substantially reducing the risks to their health and those around them.”

Taxation of e-cigarettes

The WBG report postulates that a tax on e-cigarette products could be used to limit youth access. This affirmation is inspired by the recommendation of the FCTC Conference of the Parties in 2016 to tax ENDS (electronic nicotine delivery systems) at a level that makes the devices and e-liquids unaffordable to minors. It may be unfashionable to point this out but such high taxes would also fall on adult smokers attempting to switch and would make their migration to vaping much costlier. Minimum age restrictions and youth access controls would be more appropriately targeted policy tools than regressive taxation on a set of products that contribute to smoking cessation.

Compounding this misjudgment, the WBG provides conflicting and often misleading guidance on how best to administer taxes on e-cigarettes. The report provides an overview of vapor products taxation across the globe. Markets in the European Union, the Caucasus and Central Asia apply a fixed monetary amount of tax per milliliter of e-liquid. In some markets (Croatia, Poland and Kazakhstan), the specific rate of tax is zero, which permits the government to collect data on market trends including consumption levels and the number and identity of traders.

In the United States the majority of jurisdictions which levy a tax on e-cigarettes also impose a specific rate per milliliter of fluid.

In these markets the excise legislation was amended to create a new tax category of e-liquid, liquid for use in e-cigarettes or similarly described consumable product that recognizes the distinct physical properties of these products in contrast to traditional tobacco products. A few jurisdictions in the USA, however, combine e-cigarettes with miscellaneous items such as chewing tobacco in a catch-all category of “other tobacco products”. Because of their heterogeneity these products cannot practically be taxed based on a common physical metric such as volume, units or weight they are subject to an ad valorem tax based on the wholesale selling price.

The WBG report recounts the issuance of a revenue notice from the Department of Revenue of Minnesota stating that because e-cigarettes are a product “containing, made or derived from tobacco” they fall under the definition of “other tobacco products” and are therefore subject to the tobacco products tax. A more precise account of the decision would include the Department of Revenue’s observation that e-cigarettes did not meet the definition of a cigarette set forth in the Minnesota Statutes but did meet the definition of a tobacco product because the nicotine contained in an e-cigarette cartridge was derived from tobacco. The designation as a tobacco product was the result of a restricted menu from which to select and not the proactive and thoughtful creation of a new tax category by an engaged legislature. If the intention of this report is to provide legislators guidance on best practices for taxing e-cigarettes an example of administrative action based on limited choices may not be the optimal paradigm.

This becomes even clearer in the example of Pennsylvania where in 2016 the legislature approved the Governor’s budget proposal to include e-cigarettes in the other tobacco products category which was subject to a 40% tax on the wholesale price. Devices as well as e-liquids were included in the taxable base. The multiplier effect of this ad valorem tax significantly raised the consumer price of e-cigarettes in the state and forced more than 25% of retail vape shops out of business. Smokers and former smokers found it more expensive to switch to vaping as a result.

Two years later, East Coast Vapor, a Pennsylvania vape shop, brought suit against the tax on the grounds that most vaping products lack tobacco, the defined product subject to the tax. The Pennsylvania Commonwealth Court found that while nicotine and vaping liquids could be subject to the excise tax the Department of Revenue had gone beyond the language of the statute in imposing the tax on component parts such as devices, tanks and coils. The Court’s decision allowed vapers to buy parts separately and assemble their own products to avoid paying unnecessary taxes.

The history of Italy’s first tax on e-cigarettes, also not found in the WBG report, is instructive on the issue of tax definitions and structure. In 2013 a tax was applied to e-cigarettes at a rate equal to the current excise incidence of conventional tobacco cigarettes, then 58.5% of the weighted average retail price. Not surprisingly, the high tax multiplier catapulted the retail price of the products well beyond the affordability of most consumers.

Retail sales in Italy evaporated virtually overnight, Ultimately, the Constitutional Court found the tax unconstitutional citing the ambiguity of the taxable base which included devices and parts in addition to e-liquid. Eventually, a new tax category of “inhalation product without combustion” was created and a specific tax per milliliter of e-liquid was introduced.

Despite the complexity and adverse market consequences of high ad valorem taxes on all e-cigarette products including devises, that is precisely what the WBG recommends. It even supports taxes on “batteries, chargers and charging cords if they are sold together with an e-cigarette product”. Bowing to international best practices the authors concede that a specific tax could be applied to e-liquids. However, an ad valorem tax on devices is seen as a way to maintain the “equality of tax across products” and to increase the political acceptance of the tax.

The report recognizes that “high taxes for e-cigarette products could encourage switching to traditional products.” The remedy proposed for such an undesired outcome is to increase the tax on all other tobacco products. Perhaps that has been the WBG’s goal all the time. There’s no room here to discuss the possibility of lower rates of tax on a potentially less harmful product. Just the raise the tax on all tobacco products.

Trojan horses and customs classifications

The WBG is concerned about product definitions that differentiate e-cigarettes from other tobacco products. It fears that such “Trojan horse” policies may exclude e-cigarettes from tobacco regulation and taxation. The means chosen to prevent this Homeric subterfuge is to classify e-liquids and devices under Harmonized System (HS) code 2403 – other manufactured tobacco and manufactured tobacco substitutes.

E-cigarette devices are currently classified for statistical purposes by Customs authorities in many countries under tariff heading 8543 – Electrical machines and apparatus. The WBG, however, suggests that the devices should be classified under tariff heading 2403 as “manufactured tobacco substitutes”. The stated purpose for this classification is to facilitate the inclusion of these devices into existing excise tax laws.

The inadvisability of applying excise taxes to devices and components has already been addressed in this critique. Now we are faced with the proposed inclusion of electronic devices into an agricultural chapter of the Harmonized System of Tariffs.

It appears that this is a case of mission creep on the part of the WBG and they are late to the game. Customs classifications have for decades been the responsibility of the World Customs Organization, a membership organization comprised of the world’s national customs authorities. The Classifications Committee has already approved a comprehensive set of amendments to create a new tariff heading 2404 which includes “products intended for inhalation without combustion” where e-liquids will be classified. A second amendment creates a new subheading 8543.40 for “Electronic cigarettes and similar personal electric vaporizing devices”. These amendments are expected to be approved by the WCO Council in June. One wonders to whom the WBG is proposing its Customs reforms.


The WBG report appears to have a single objective: reject any notion of taxing e-cigarettes at a lower rate than applied to combustible tobacco products based on a potentially lower risk profile. This amounts to a policy of prohibition by means of taxation. It is an imbalanced and misinformed analysis resulting in an unworthy contribution to the serious discussion on vapor products taxation.


Tags: , , , ,

Categorised in: Electronic cigarettes, Excise tax, Tobacco harm reduction

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.