IARC supports risk-based taxation of vapor products
A new Study by the World Health Organization’s International Agency for Research in Cancer (IARC) has endorsed the use of risk-based taxation as a means of reducing the harm caused by tobacco use.
The report, “Reducing Social Inequalities in Cancer Evidence and Priorities for Research”, cites the important role of taxation in lowering the number of deaths from diseases caused by smoking tobacco. Where tobacco products cause similar levels of harm it is an appropriate strategy to tax them in a comparable way to ensure that “increases in taxes and prices do not result in the substitution of cheaper categories of products.”
While cigarettes remain the most common form of tobacco consumed around the globe the report notes greater diversity of tobacco products in some markets. “The recent growth in the popularity of electronic nicotine delivery systems, including electronic cigarettes, which contain nicotine but not tobacco, has added to product variation”, the report notes.
IARC draws a useful distinction between combustible tobacco products that burn and non-combustible products, such as snus and ENDS. “Combustible tobacco products are considered to be of highest risk” the authors affirm. “Electronic nicotine delivery systems show promise in being substantially less harmful than combustible tobacco” they state, echoing the findings of Public Health England and other researchers that electronic cigarettes are 95% less harmful than conventional tobacco products which are burned.
It follows, therefore, and the report’s conclusions are firm on this point that as less harmful products have become more widely consumed and “a continuum of risk or harm is present, it is appropriate to differentiate taxes according to relative risks.”
Taxation policy in practice
IARC’s recommendation to tax electronic cigarettes and other ENDS products at lesser rates than those applied to more harmful combustible tobacco reflects to a large degree the current fiscal policies of nearly all markets where these vapor products are commercially available.
Despite the absence of a specific mandate or guidance from the European Commission regarding the taxation of vapor products, more than a dozen EU member states levy excise taxes on electronic cigarettes and/or heated tobacco products. Comparing excise tax yields on tobacco products to taxes on e-cigarettes is complex given the physical differences in taxable bases. In nearly all taxing jurisdictions, nicotine containing liquid, often referred to as “e-liquid”, measured in milliliters is the taxable base for electronic cigarettes. Tax yields on conventional cigarettes and fine cut (“roll-your-own”) tobacco are commonly expressed on unit (1000 sticks) or weight (per kilogram) bases, respectively.
European law requires a minimum excise tax (“MET”) of 90 euros per 1000 cigarettes and most member states have their own minimum excise yields well in excess of this standard. For example, in Finland the MET on cigarettes is EUR 260.5 per 1000 units, or 5.21 euros per pack of 20. In contrast, the tax on e-liquid is only EUR 0.30 per milliliter.
The tax rate on e-liquid in Italy was originally fixed at EUR 0.373 per milliliter based on a reduced harm discount of 50% of the tax on the weighted average price (“WAP”) of combustible cigarettes, among other factors. The rate has subsequently been reduced to EUR 0.082 per ml for e-cigarettes and from 50% to 25% of the tax on cigarettes in the case of heated tobacco products.
Several states in the USA including Connecticut, North Carolina and Kentucky have taken similar steps providing 50% tax differentials for products that receive modified risk tobacco products (“MRTP”) authorization from the Food and Drug Administration.
In a recent television interview, the Minister of Health of the Czech Republic, Adam Vojtech, supported lower taxation for heated tobacco products as a better alternative to smoking cigarettes. “Heated tobacco is taxed at a lower level than traditional tobacco,” the Minister stated. “It is already adopted as such and it is intentionally like this. We have agreed on it with the Ministry of Finance. The current tax increase proposal will even increase this difference.” The policy objective of the tax differential is to induce cigarette smokers to switch.
In December 2018, the UK Secretary of State for Health and Social Care released a “Command Paper” in which the Government’s approach to taxation of vapor products was laid out. Issued in response to the House of Commons Science and Technology Committee’s report on e-cigarettes, the Government’s paper fully endorsed the Committee’s proposal that “the level of taxation on smoking-related products should directly correspond to the health risks they present, to encourage less harmful consumption.”
In view of the evidence that e-cigarettes and heat-not-burn tobacco products are substantially less harmful than conventional cigarettes implementation of this policy implies that “e-cigarettes should remain the least-taxed and conventional cigarettes the most, with heat-not-burn products falling between the two.” In fact, e-cigarettes today are considered a consumer product in Britain and are not subject to excise tax. As of 1 July 2019, heated tobacco products will be placed in a newly created category of “Tobacco for Heating” and subject to the same excise rate applied to fine cut rolling tobacco. In most countries where heated tobacco products are sold, the applicable tax is at parity with, or less than, the tax on other tobacco products.
Earlier this week, during a debate in the Philippine Senate on a bill seeking to increase excise taxes on tobacco products President Pro Tempore Ralph Recto announced he would propose amendments that would apply lower rates to alternative vapor products which help smokers to quit. The Senate leader noted that the taxes introduced on vapor products would be based on their health risk relative to the harm posed by combustible cigarettes.
IARC’s support for differential taxes according to relative risks is a welcome addition to the policy discussion of tobacco harm reduction. While the debate surrounding the application of lower tax rates on less harmful products has been part of the fiscal landscape for many years it is perhaps more necessary than ever in view of the current frenzy and near hysteria in some circles regarding the relative safety of vaping versus smoking.