Democrats’ new legislation will leave billions of potential tax revenue on the table from millionaires and try to make it up with regressive vape and e-cigarette taxes on the poor.
The Build Back Better Act that the House Rules Committee released Wednesday was amended to protect tax avoidance schemes used by the ultrawealthy and made up the revenue lost by expanding tobacco taxes to additional nicotine products; replacing a tax that was highly progressive with one that is highly regressive.
Experts like those at the Tax Foundation recently released a report showing that the framework could increase nicotine and harmful chemical consumption. The new bill places an excise tax on “any nicotine that has been extracted, concentrated, or synthesized.” The new tax will add to the dollar amount for small cigarettes or $50.33 per 1,810 milligrams of nicotine — whichever is greater. This will drastically increase the prices of popular tobacco products. Furthermore, taxing based on nicotine content could encourage increased consumption. For example, a vapor pod that has a nicotine content of 3 percent and contains 1 ml of liquid would be taxed at $0.83 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 ml of liquid would be taxed at $1.39 even if there is no difference, or even a negative differential, in broader health effects of the two pods. For those reasons, using nicotine as a proxy is not a desirable structure. Moreover, nicotine content alone does not determine nicotine absorption since absorption depends on the delivery method.
It will also mean that thousands of people making less than $400,000 will end up paying increased taxes, contradicting the President’s promise that the middle class and low-income people will not face hikes under his administration. The Tax Foundation observed that “States often tax nicotine products by price, and the tax on the product will pyramid since the federal tax would be levied at the manufacturer level and the state tax is levied at the distribution level. In effect, the state tax base includes the federal tax and becomes a tax on a tax. This means that even if the taxes on tobacco and other nicotine products are approximately equal at the federal level, by the time it reaches the consumer, the nicotine product will carry a higher tax (and often a higher price). This is highly problematic when considering that cigarettes are much more harmful than nicotine products. That makes the federal tax proposal look like a harm-maximizing strategy.”
For all of these reasons, Democrats should focus their attention on legislation that accomplishes their intended goals and doesn’t hurt lower-income and middle-class families.