Washington State’s Reasonable Approach to Taxing Alternative Tobacco Products

One of the biggest emerging trends in state tax policy for the 2019 legislative session has centered on the taxation of vapor and alternative tobacco products. Lawmakers in state capitols across the country continue to grapple with how to appropriately categorize and tax these products. This debate has heated up in Washington State recently with lawmakers offering proposals on the path forward, but the Legislature has yet to send a bill to the Governor’s desk. While some misguided bills would simply raise taxes on all products regardless of their harm profile, a recently updated proposal is gaining traction and would be a more sensible approach to risk-based taxation of alternative tobacco products.

SB 5986 is a bipartisan proposal that would adopt a new definition for Heat-Not-Burn products, provide a rate reduction for Modified Risk Tobacco Products (MRTP), and establish risk-based excise taxes. NTU has long called for states to adopt excise “sin” tax rates that accurately reflect the product’s level of harm rather than simply raising taxes just to generate more revenue. Thankfully in its current form, SB 5986 takes into account the clear differences between traditional tobacco products like cigarettes, chew, or pipe, and alternative products like vaping, e-cigarettes, and Heat-Not-Burn.

While it is true that SB 5986 does institute a new tax on less harmful alternatives to traditional tobacco products and could therefore impact the ability of smokers to transition away, it is encouraging to see that the proposed excise tax rates are relatively low. Specifically, an excise tax would be imposed on the sale of vapor products at the rate of $0.05 per milliliter of solution and would also subject heated tobacco products to a $.40 per ounce tax. If the Legislature does plan to move forward with some level of taxation, NTU encourages lawmakers to adopt a rate that is low and based on science rather than high and arbitrary.

NTU remains concerned about imposing high taxes on consumers, but is encouraged to see legislation that takes a more thoughtful approach to public policy. Perhaps the most commonsense provision of SB 5986 occurs in Section 303 (d)(2), which provides a fifty percent tax rate reduction for a product that receives a “Modified Risk Tobacco Product” designation by the Department of Health and Human Services pursuant to 21 USC 387k(g)(1). This designation was created specifically to incentivize and encourage manufacturers to develop innovative products that truly reduce the harm caused by cigarette smoking. Additionally, the bill adopts a definition of “heated tobacco product” to ensure these types of products are not subjected to traditional tobacco regulations and tax rates.

SB 5986 is a significant improvement over a competing bill, HB 1873, which would have imposed a 95 percent ad valorem on liquid while also amending the definition of an “Other Tobacco Product” (OTP) to include vapor products, inappropriately subjecting them to the same state regulations and taxation as non-cigarette tobacco products. If this legislation is adopted, it would represent a tax hike of nearly $100 million through 2025, compared to only $38 million under SB 5986 over the same time horizon.

SB 5986 is not a perfect proposal, but key provisions regarding Heat-Not-Burn and other less harmful products make this bill the best option that has been introduced this session. We commend the sponsors for this forward-looking proposal.