RALEIGH — North Carolina lawmakers should “make history” by becoming the first legislative body to repeal a state tax targeting electronic cigarettes. John Locke Foundation researchers make that recommendation in a new Spotlight report.
A vote to scrap the tax would mark an about-face for the N.C. General Assembly, which voted in May to make North Carolina just the second state in the nation to adopt an add-on e-cigarette tax, following Minnesota’s lead. Eighteen other states have considered and rejected similar taxes.
“No matter how you slice it, the e-cigarette tax is bad tax policy,” said report co-author Sarah Curry, JLF Director of Fiscal Policy Studies. “It runs counter to basic principles of economic efficiency and individual liberty. It hurts small businesses. Plus the legislative process that produced the tax lacked transparency. It’s time to reverse course.”
The new law is scheduled to take effect June 1, 2015. It would add 5 cents of tax on each milliliter of “consumable product,” meaning the liquid solution, or e-liquid, that’s used in e-cigarettes. Until the law takes effect, e-cigarettes will continue to be subject to state and local sales taxes.
“The current North Carolina tax policy with respect to the sale of e-cigarettes gets it right,” said report co-author Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “They are taxed at the same state and local sales tax rates that apply to other consumer goods throughout the economy.”
The new tax violates the first principle of efficient taxation, Cordato said. “That principle is neutrality — that is, the government should extract the money it needs from taxpayers without distorting their freely made decisions,” he said. “All excise taxes, including this e-cigarette tax, distort decision making by penalizing some consumer choices relative to others. As a matter of pure economics, it is not appropriate for the government to tax some goods and services more heavily than others.”
Beyond economic theory, the report examines the potential impact on businesses that sell e-cigarettes in North Carolina.
“More than 80 small e-cigarette businesses operate in North Carolina, and small businesses dominate the market, at least for now,” Curry said. “The e-cigarette tax stands to hurt those small businesses, in addition to potentially tens of thousands of other retailers and wholesalers, because it classifies an e-cigarette vapor product as a tobacco product and will therefore require a tobacco license to sell, distribute, and import e-cigarette products.”
In addition to an increased regulatory burden, the new tax will increase the product’s cost. The new tax also provides an unfair advantage to large companies that already deal with tobacco-related rules and licenses, Curry said.
“Small businesses will be forced to increase spending on lawyers and accountants to comply with new licensing and reporting requirements,” she said. “These extra costs could cause some existing e-cigarette businesses in North Carolina to shut down, to the benefit of big competitors.”
Speaking of big competitors, Winston-Salem-based R.J. Reynolds Tobacco Company requested the new tax in the first place, Curry said. “While not currently in the e-cigarette market, R.J. Reynolds is expected to be a big, if not the biggest, player in the near future,” she said. “RJR argued that the Minnesota tax was too high and asked North Carolina legislators to set an example for other states proposing taxes on e-cigarettes. In other words, imposition of this tax is primarily about yielding to pressure from special interests.”
Curry and Cordato take aim at the process used to approve the new tax. Legislators inserted it in a 48-page law originally dubbed “Omnibus Tax Law Changes.” “The point of this brand new tax has little to do with the overall purpose of the omnibus legislation, and the only way to vote against the e-cigarette tax was to vote against the entire bill, which most people believed to be necessary,” Curry said.
Lawmakers interested in an aboveboard legislative process would have pulled the e-cigarette tax from the omnibus tax bill, debated it separately, and voted on it as freestanding legislation, she said. “The citizens of North Carolina deserve transparency in the lawmaking process, and they did not receive it in this case.”
The report documents 18 other states’ rejection of e-cigarette tax proposals over the past two years, including New York’s rejection of the idea two years in a row.
Curry and Cordato also note a minimal potential impact for North Carolina’s nearly $21 billion General Fund budget. “The new tax is expected to raise only $5 million, which is almost meaningless in the context of the overall budget picture,” Curry said.
North Carolina should forgo that money and instead adopt a better policy, Curry said. “The N.C. General Assembly should recognize its mistake and come clean with the citizens of the state, who clearly deserve better,” she said. “Lawmakers can do this by making history and becoming the first state in the country to repeal an e-cigarette tax.”
Sarah Curry and Dr. Roy Cordato’s Spotlight report, “North Carolina’s E-Cigarette Tax: Where bad tax policy meets special-interest politics,” is available at the JLF website. For more information, please contact Curry at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].