A Standard Cigarette. source

The European Parliament recently rejected a proposal made by the European Commission regarding the increasingly popular, electronic cigarette. The proposal would have classified e cigarettes as a medicinal product therefore, the sale of all electronic cigarettes, under EU law, would have had to be regulated and controlled by the health department of every member state. The proposal generated a certain level of controversy, with many health experts calling it a failed opportunity.

Electronic cigarettes have become an increasingly common sight in everyday life. The light, portable devices generate nicotine filled water vapour which when inhaled offer the same effects as tobacco. Many have attributed their success to the fact that they can be smoked indoors, and seemingly do not inflict the same damage as their tobacco filled counterparts. There are estimated to be 1.5 million users of the e cig in France alone. However many health experts have warned that the electronic substitute should not be hailed as the ideal substitute to cigarettes. A 2009 FDA analysis of e cigarettes found that the samples contained carcinogens and other hazardous chemicals, including di ethylene glycol, which is found in antifreeze. They consider that even though the vapour is not as harmful as the cigarette smoke they replicate, the chemical composure of the vapour is not harmless. According to Medical News Today using e cigarettes increases breathing difficulty in both smokers and non smokers. Nicotine is still present in the vapour therefore the addiction to smoking is still present. There is also the argument that the e cigarette will inspire a new young generation of smokers, who see the electronic cigarette as a harmless alternative to smoking, but who risk eventually becoming tobacco smokers.

Users of the e cigarette, however, are celebrating the parliaments decision. They believe that e cigarettes are still a viable tool in the combat to quit tobacco. A dozen or so protesters of the measure camped outside the parliament holding banners which read TOUCHE PAS A MA VAPOTE! (“Don t touch my e cigarette!”) and E CIG NI MEDICAMENT, NI PRODUIT DE TABAC which when translated, protests that the e cigarette is neither medicine or tobacco . Chris Davies, a Liberal Democrat MEP, hailed the result, speaking to the independent he said, E cigs can be a game changer. Hundreds of former smokers have written to tell me that they have helped them give up cigarettes when nothing else worked. They are successful because they are not medicines but products that smokers enjoy using as an alternative to cigarettes.

A smoker’s map of the world.

The Parliament also passed a series of anti tobacco legislation as the war against tobacco continues. Legislation includes putting mandatory warnings that cover 65% of all tobacco packaging. Menthol cigarettes will also be phased out within the next 8 years. However this is considered as moderate compared to what could have been achieved. Original plans would have called for packaging to be covered by 75%, while menthol cigarettes were supposed to be phased out within 3 years not 8. Proposals to have had slim cigarettes abolished also failed to be passed by the Parliament. Eyebrows will be raised regarding these watered down proposals, the Independent reported that various tobacco firms, such as Philip Morris International, had spent over 1million lobbying to defeat these proposals.

However it seems that e cigarettes are still safe from regulation. European users of the vaporizer will be happily puffing away in the knowledge that their favoured smoking tool is safe. Whether the e cig will be thrust into the EU limelight again will have to wait until after the European elections of 2014. The MEP s of next the parliament may not be so kind to the battery powered cigarette. But the e cigarette is still safe, for now.

Tobacco taxation in the european union and united states

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Tobacco Taxation in the European Union and United States
Sijbren Cnossen
October 19, 2009

Tobacco tax systems differ across countries not only with regard to the overall tax level, but also the mix between specific and ad valorem taxes. What does economics have to say about how governments should tax tobacco?

Both the level and the structure of tobacco taxes differ markedly between, as well as within, the European Union and United States. (The focus here is on cigarettes alone, as they constitute over 90 percent of tobacco consumption.) Within EU member states, the total tax burden (excises and value added taxes, or VAT) is around three quarters of the retail price of cigarettes, or over 300 percent of the pre tax price. The southern member states favor predominantly ad valorem taxes (that is, percentage rates on the value of a pack of cigarettes) whereas in the northern member states, specific taxes constitute more than half of the total tobacco tax burden.

In the United States, tobacco taxes are almost wholly specific. The federal government levies a tax of 39 cents per pack (of 20 cigarettes), state governments levy taxes that average about 60 cents per pack, and the Master Tobacco Settlement Agreement, concluded in 1998 (under which tobacco companies are expected to pay $206 billion to settle product liability suits) effectively added a further 30 cents per pack. Nonetheless the total tax (excise and retail sales taxes), about $1.30 per pack, amounts to about 37 percent of the retail price, or about half the rate in the European Union.

What does economics have to say about the appropriate level, and structure, of tobacco taxation?

What Costs do Smokers Impose on Others?

The causal link to future health problems from smoking is extremely well documented smoking is a primary cause of lung cancer, emphysema, chronic bronchitis, and a major cause of heart disease and stroke. Smoking by pregnant women leads to low birth weight babies, neonatal death, and sudden infant death syndrome.

While the health consequences of smoking are important, in principle they are irrelevant to public policy unless the costs imposed are external (that is, imposed on others rather than borne privately by the smoker). The principle of consumer sovereignty implies that a rational person who weighs all the costs and benefits of his actions should be free to smoke as long as he does not impose costs on others and is fully informed about the consequences of his choices.

Virtually all empirical research suggests that the external costs of smoking are relatively small. The burden of medical payments on government due to smoking related illness is one potential source of external cost. However, this near term burden is at least partly offset in a lifecycle context, as the average smoker lives a shorter life, which saves on pensions and health care costs of age related disease. Bans on smoking in public places have greatly reduced the external costs of environmental or second hand tobacco smoke. However, little has been or can be done about the health problems experienced by children and nonsmoking partners within the family at home. Perhaps economists assume too easily that such costs are largely internalized by the smoker through altruism or negotiation among family members.

Sijbren Cnossen is Professor of Economics at the University of Maastricht and Emeritus Professor of Tax Law at Erasmus University, Rotterdam.

Information and Addiction Failures

If smokers, especially teenagers, are poorly informed about the costs of smoking, then to that extent, the costs of smoking are effectively external. However, if inadequate information is the problem, this is best addressed through warning labels and information dissemination programs about health hazards. In fact, evidence suggests that 90 percent of U.S. consumers are aware of the long term health effects of smoking.

Nonetheless, the fact that nicotine is addictive may undermine the consumer sovereignty argument against government intervention. If smokers behave myopically in choosing to consume an addictive drug, the rationality condition ceases to apply, because the addictive smoker is, to some extent, a different person than the one who decided to start smoking. Furthermore, consumers may excessively discount the longer term costs of addiction. Consequently, they may therefore have self control problems, referred to as internal costs, where they continually plan to smoke less in the future than they actually can. In this case, cigarette taxes may help to reinforce a commitment to quit in the future.

In fact, higher taxes seem to be most effective in reducing smoking prevalence among teenagers who are better able to kick the habit, because addiction has not yet taken hold. Evidence suggests that a 10 percent increase in cigarette prices is associated with about a 4 percent reduction in smoking among adults, but an 8 percent reduction among teenagers.

Evidence suggests that tobacco tax levels, even in the United States, are difficult to justify on externality grounds, let alone those levels prevailing in the European Union. High taxes may reflect a form of paternalism, such as a desire to discourage young people from taking up smoking. The internal cost argument for higher taxes has not yet been settled.

What s the right way to tax tobacco?

Tobacco is far from a homogeneous product. The United States and northern European countries tend to produce higher quality brands than southern European countries. Ad valorem taxes raise the prices of different brands in the same proportion and therefore they do not distort a consumer s choice between high and low quality brands. This makes economic sense, to the extent that the purpose of tobacco taxes is to raise revenue.

Taxing cigarettes according to their external costs leads to a very different conclusion, however. The damage caused by cigarette smoking is independent of the price at which it is sold, so that correction of externalities favors specific over ad valorem taxes. All else equal, the share of specific taxes in total tobacco taxation should be smaller when the importance of raising revenue is greater, and the case for correcting externalities, correspondingly smaller. To some extent, this reasoning is consistent with the high ad valorem tax element in EU tobacco tax systems and its absence in U.S. structures.

Some variation in specific taxes across different tobacco products may in fact be appropriate. Since health damages are correlated with the tar content of cigarettes, taxes on high tar cigarettes should be higher too. However, some research shows that addicts smoke low tar and low nicotine cigarettes differently, inhaling more to increase the amount of nicotine they ingest. So corrective taxes might not be proportional to tar content, but some differentiation is likely to still be appropriate. Moreover, a tar tax would give manufacturers an incentive to develop palatable low tar cigarettes, which would have long term health benefits.

A Complex Question

The question of what the right level and structure of tobacco tax should be is a complex one, given the multiple objectives of policymakers. The reasons for levying high taxes on tobacco products are the predictability of the revenue, the desire to discourage youths from taking up smoking, and the belief that smokers should pay for the burden they impose on others. The reasons for moderating the level of tobacco taxes are the principle of consumer sovereignty and the finding that the external costs of smoking may be low. And the choice between specific and ad valorem taxation depends on whether the primary goal of policy is to discourage smoking or raise revenue.

Further Readings

Cnossen, Sijbren and Michael Smart. 2005. Taxation of Tobacco. In The Theory and Practice of Excise Taxation, edited by Sijbren Cnoss
en. Oxford Oxford University Press.

Manning, Willard G., Emmet B. Keeler, Joseph P. Newhouse, Elizabeth M. Sloss, and Jeffrey Wasserman. 1989. The Taxes of Sin Do Smokers and Drinkers Pay Their Way? Journal of the American Medical Association 261 1604 1609.