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An Open Letter to the Rhode Island General Assembly Regarding Governor Chafee's Budget Proposal

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Dear Legislator:

On behalf of National Taxpayers Union’s 362,000 members nationwide and more than 1,100 members in Rhode Island, I write to express our concerns over the increased spending and “vapor tax” schemes within Governor Chafee’s budget proposal (H7133), which was recently referred to the House Finance Committee.  Now is the time to amend this plan and protect Rhode Islanders from the negative consequences of several fiscal policies.

Our members certainly agree that the Governor should be commended for his commitment to lowering Rhode Island’s corporate income tax rate from 9 to 6 percent, which would be the lowest rate in the Northeast and could attract businesses to the state. However, the budget proposal would also increase state spending (which soared by more than 25 percent between 2001 and 2011, after inflation and population growth, according to the Tax Foundation) – a sign that the state should seek to roll back expenditures more aggressively to sustainable levels. One of the smaller but more bizarre provisions would define e-cigarettes as tobacco products, and impose an 80 percent ad valorem tax on these new goods. While some may view the budgetary impact of the e-cigarette tax ($750,000 in new revenue) as insignificant, this ill-advised move is perhaps the most egregious part of H7133 from a policy perspective. Not only would this tax hike harm small businesses, but it could be detrimental to public health by discouraging the use of a tobacco-free alternative to smoking.

Before implementing this 80 percent tax, Ocean State lawmakers should consider the make-up of an e-cigarette. The main ingredients that produce the water vapor—propylene glycol and glycerin—are considered harmless by the FDA and can be found in everything from toothpaste and fog machines to foods and cosmetics. Such products contain no tobacco, and a recent study by Dr. Joel Nitzkin of the R Street Institute found that e-cigarettes can actually reduce the risk of tobacco-related deaths or illnesses by 98 percent or more. By inaccurately defining e-cigarettes as tobacco products and imposing a tax rate of 80 percent, the Governor’s proposed budget would discourage the use of an option that can save lives.

Small businesses would also be negatively impacted by the unfair tax burden of H7133. The e-cigarette stores opening up throughout Rhode Island (as well as existing establishments stocking them) would be hit hardest, as consumers are likely to avoid the 80 percent tax by purchasing from out-of-state vendors over the Internet. As a result policymakers cannot easily predict the consequences for revenues by effectively punishing sales of a new product that can be purchased through other means. Will the projected $750,000 in collections actually materialize? This is an entirely legitimate question, based on past history of other so-called “sin” tax increases.

Last month, The Washington Post’s Editorial Board wrote that “…e-cigarettes might be a useful tool to reduce harm rather than a gateway to a life of smoking.” Based on the current research surrounding smoking, this certainly appears to be true. For lawmakers genuinely concerned about the financial future and health of citizens, the answer is clear: stop the overspending and counterproductive “vapor tax” provision in H7133. Rhode Islanders are counting on you to build on the better parts of the Governor’s budget – such as lower corporate rates – for a more prosperous state economy.

Sincerely,

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Lee Schalk
State Government Affairs Manager

         cc: Governor Lincoln Chafee