Vapor Products, Harm Reduction, and Taxation: Principles, Evidence, and a Research Agenda

Summary of Study

Bottom Line: Taxation is a key factor in developing e-cigarette and heat-not-burn tobacco product polices in a harm reduction framework. There is a continuum of potential policies regarding regulation. At one end, high taxation could effectively eliminate e-cigarettes as a viable alternative to smoking. At the other, low taxation may promote e-cigarette usage and potentially encourage young people to take-up e-cigarettes. Finding a happy medium can encourage smokers to switch to less harmful e-cigarettes while discouraging young people and other nonsmokers from starting e-cigarettes. 

The concept of tobacco harm reduction began in 1976 when Michael Russell, a psychiatrist and lecturer at the Addiction Research Unit of Maudsley Hospital in London, wrote: “People smoke for nicotine but they die from the tar.” Russell hypothesized that reducing the ratio of tar to nicotine could be the key to safer smoking.

Non-combustible nicotine delivery systems, including e-cigarettes, “heat-not-burn” products, smokeless tobacco and other nicotine delivery systems, are generally considered to be significantly less harmful than combustible cigarettes. Even a small reduction in the number of cigarette smokers can have a big impact on public health, health expenditures, and labor productivity. 

While there is a growing body of research regarding the chemistry, toxicology, and clinical aspects of vapor products, there is little research quantifying how existing or potential policies advance or stifle the objective of harm reduction. Policies that demand further research include: 

  1. Taxation and pricing of vapor products, especially relative to combustible products.
  2. Quantification of the economic impact of increased longevity.
  3. Quantification of the impact of vapor products on smoking related health expenditures.

 Research should be targeted on evaluating which policies would advance harm reduction objectives at the lowest cost to consumers and producers and thereby provide superior net benefits to the public. In particular, policy impacts should be evaluated on empirical evidence demonstrating the extent to which the policy would: 

  1. Increase the number of current users of combustible products who switch to a less harmful non-combustible alternative.
  2. Decrease the number of dual use consumers.
  3. Discourage youth uptake of nicotine containing products.
  4. Encourage investment and innovation in developing safer vapor products and related devices.

Policy decisions regarding taxation of vapor products should consider both long-term fiscal effects, as well as broader economic and welfare effects. These effects might suggest very different tax policies to those that have been enacted or are under consideration.

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Feature Charticle

E-Cigarette Taxes Reduce the Equilibrium Number of Firms, Thereby Stifling Innovation


Vapor Products, Harm Reduction, and Taxation: Principles, Evidence, and a Research Agenda

By Eric Fruits, Ph.D.

International Center for Law and Economics

Page 15

  • E-cigarette taxes raise the marginal cost from MCL to MCH, which reduces the number of firms in the market from NL to NH, thereby stifling innovation.
  • Taxes similarly reduce the number of e-cigarettes sold, which deters use, and increase the price paid, which boosts government revenue.
  • E-cigarette taxation policy should aim to increase the number of current users of combustible products, while discouraging young people and nonsmokers from starting e-cigarettes.