The Legislature’s Interim Committee on Fiscal Policy is scheduled to take up the issue at an Oct. 15 meeting at the Statehouse, which could lead to recommendations for the 2020 session.

Republican Gov. Eric Holcomb is already on board. He said he’ll pursue the tax as he tries to tackle the ongoing problem of youth vaping, which has increased 300% since 2012, according to the latest Indiana Youth Tobacco Survey.

Holcomb has announced a three-pronged attack, and the plan includes educating parents, students and teachers; a text-to-quit program; and a statewide social media campaign.

The program does not address taxes on vaping products, but Holcomb said, “Nicotine is nicotine,” and e-cigarettes and vaping devices should be taxed like cigarettes.

“I am for parity,” he said. “And I will need to take another run at that in the future, whether it be [the 2020] session or the [2021] budget session.”

Lawmakers failed to agree on a proposed tax during the 2019 session, sending the issue to a study committee instead.

Senate Democratic Leader Tim Lanane of Anderson called the Legislature’s failure to act last year inexplicable.

“Taxation is a proven method to prevent and reduce the use of harmful products and could have provided muchneeded revenue to fund the governor’s ideas, which will cost over $2.1 million,” Lanane said in a statement. “During the next legislative session, I will advocate once again for an e-cigarette tax to give the supermajority another chance to do the right thing.”

He urged Holcomb to persuade Republican legislative leaders “to back this common-sense solution to a very real problem in our state.”

But those in the vaping industry argue that e-cigarettes shouldn’t be taxed because they’re healthier than traditional cigarettes.

“They’re literally day and night products,” said Amy Netherton, president of the Indiana Smoke-Free Alliance, a trade group representing companies that make and sell vaping products. “It’s really a shame that these products are being equivalated to tobacco.”

Instead, Netherton said, vaping should be seen as a way for individuals to learn to stop smoking—like using nicotine gum or patches, which are not targeted with specific taxes.

“It’s difficult for me to understand why they want to tax the product,” Netherton said. “It’s more of a transition product.”

No uniform model

Modern electronic cigarettes were introduced in the United States in the mid-2000s. And by 2017, 2.8% of all U.S. adults were e-cigarette users, according to the Centers for Disease Control and Prevention. In addition, the CDC found in 2017 that more than 3.6 million U.S. middle- and high-school students reported using e-cigarettes in the past 30 days.

As more people moved from traditional cigarettes (which have long been heavily taxed) to e-cigarettes and vaping, governments took notice. By 2012, states were starting to impose taxes as a way to raise revenue and deter vaping.

But vaping industry officials and tax experts say there is no easy way to do it.

“It’s a fairly complicated and complex market,” said Ulrik Boesen, senior policy analyst with The Tax Foundation, a Washington, D.C.-based conservative think tank.

That’s in part because of the variations in devices and types of e-liquids they use.

In general, e-cigarettes heat a liquid that typically contains nicotine, flavorings and other chemicals to create a water vapor users inhale, according to Johns Hopkins Medicine.

There are generally two types of vaping systems: Open systems have a permanent, refillable tank, while closed systems have a one-time-use, disposable cartridge.

The most common closed system is Juul, a rechargeable device that heats disposable pods of liquids with nicotine. Juul has been accused of causing health problems and is facing multiple lawsuits, including one from a Carmel family.

The liquids in both systems can vary in their nicotine level, from none at all to a high concentration.

Those factors make taxation more complicated.

Sixteen states, and some local governments, have approved a tax on vaping products—and almost every law is different. In general, they take one of two approaches: either a tax on the wholesale price of a cartridge or the vaping liquid, or a tax on the amount of e-liquid purchased.

In both cases, the tax rates vary substantially.

The cities and states taxing the wholesale price impose rates ranging from 15% to 96%. Those taxing the amount of e-liquid charge rates from 5 cents per milliliter to 10 cents per milliliter. Taxing the liquid typically doesn’t take into consideration the amount of nicotine it contains.

Some states have also taxed retailers and distributors for their existing inventory, taxed the devices used to vaporize the e-liquid and set different rates for open and closed systems.

“We’re in a whole new territory with this product,” Netherton said, because there’s no “widespread model out there.”

She argued that, if the products must be taxed, a fair tax would take into account the differences among them.

“Taxes shouldn’t be born out of fear,” she said. “We can do other policies before we really think about a damaging tax.”

Testing the waters

House Ways and Means Co-Chairman Tim Brown, R-Crawfordsville, authored a bill last session that would have imposed the state’s first vaping-products tax, but lawmakers couldn’t agree on the best way to structure it.

Brown’s initial proposal would have imposed a tax of 8 cents per milliliter of e-liquid—whether it’s sold in a cartridge for a closed system or a bottle for an open system. Committee members reduced the tax to 4 cents per milliliter.

Later, the Senate Appropriations Committee switched directions, changing the per-milliliter tax to a 20% excise tax that would have applied to the vaping devices, pods and liquids. That passed out of committee to the full Senate, where lawmakers amended the bill to recommend studying the issue over the summer.

Legislators kept trying to reach an agreement, but failed to do so before the last day of the session in April.

Indiana wasn’t alone this year—lawmakers across the country filed more than 300 vaping-tax bills in 2019, according to conservative Chicago-based think tank The Heartland Institute.

Boesen said the motivation to implement a vaping-products tax is often driven by both a desire for more tax revenue and to protect individuals from health risks.

But he said the revenue some states have collected so far is “peanuts.”

In Indiana, the Indiana Legislative Services Agency estimated that a tax rate of 8 cents per milliliter would have brought in $4.16 million to $7.33 million annually. To compare, cigarette tax revenue generated $232.4 million for the state in fiscal 2019.

Brown said he expects the issue to resurface in Indiana, but he’s uncertain any proposal will have the support to pass, at least next year.

That’s because the 2020 legislative session will be in the middle of an election year for all the House members and half the senators. It’s also not a budget year, which is when legislative leaders prefer to discuss taxes.

Brown said any tax on vaping products should be similar to or slightly less than that imposed on traditional cigarettes. In Indiana, cigarettes are subject to a $1 perpack tax, but some lawmakers and business leaders have advocated for years to raise that.

“You don’t want it more expensive than cigarettes,” Brown said, given that vaping is seen by some as a way for people to stop smoking cigarettes.

Boesen also recommended against taxing vaping products at the same level as cigarettes or higher if a state wants to see the number of traditional smokers drop.

Bryan Hannon, Indiana government relations director for the American Cancer Society’s Cancer Action Network, said his group is advocating for parity between cigarette and vaping taxes, but acknowledged “that’s difficult, because they’re very different products.”

Brown said he’s not tied to any specific taxing method but wants to “keep it simple.”

“Simple to collect, simple to calculate, simple to remit to the state,” he said.

So what might work?

Boesen said the Tax Foundation recommends taxing vaping products based on e-liquid amounts.

“We believe it is more fair to say the product, regardless of the price, has the same harm attached to it,” he said.

But Hannon said that method wouldn’t generate a high enough tax to make an impact because some cartridges or pods are too small.

“That’s nothing,” Hannon said. “It would have no effect whatsoever.”

And Netherton said that method could lead to giving high-tobacco products, like Juul, a “free ride” because they’d be taxed at the same level as a lownicotine product.

She said Indiana Smoke-Free Alliance members typically sell a 60 milliliter bottle that contains 3 milligrams of nicotine per milliliter, while other products could be as high as 50 milligrams per milliliter.

Boesen said the foundation doesn’t view nicotine as “the right trigger” for the tax, which is why its recommended model doesn’t take nicotine levels into account.

“Nicotine might be addictive, but it’s not what’s harming your lungs,” he said.

Netherton pointed to the New Mexico model that differentiates between open and closed systems.

That state imposes a 12.5% tax on the wholesale price of e-liquids used in open systems. It taxes pods or cartridges (with less than 5 milliliters) in closed systems at 50 cents each.

But Netherton cautioned that it’s too early to determine the impact of the New Mexico taxes.

Even Boesen said not enough research is available yet to say which tax systems are working well and which aren’t.

“There are very few states that have had this implemented for a time when you can really make decisive conclusions on it,” he said.

Joe Lackey, president of the Indiana Grocery and Convenience Store Association, said if the state is going to tax vaping products, he wants it done at the wholesale level to ensure that retailers are using licensed wholesalers.

“Is there going to be a tax?” Lackey said. “I’d be surprised if there’s not, because it’s a very unpopular item.”

The American Cancer Society has suggested taxing vaping products at the wholesale level at a rate of 20% to 24% or the retail level at 24%. Hannon said that might reduce vaping rates, including among teens, because tobacco taxes have produced similar results, but he admitted vaping taxes are too new to analyze.

“We just don’t have a ton of evidence to know how consumers will respond,” he said.

The American Cancer Society recommends a multi-pronged attack to the problem, he said, with steps like prevention funding, raising the tobacco age to 21, and increasing the cigarette tax as well.

But vaping industry experts argue that taxing e-liquids won’t prevent consumers from getting the product, and will instead push them to order online from out-of-state sellers or drive them across the border to a state without a tax or with a lower tax.

High taxes could even force existing vape shops to close.

In Pennsylvania, for example, after a 40% wholesale tax was imposed in 2016, 120 vape shops closed within a year. Yet the youth vaping problem doesn’t seem to have improved there. From 2015 to 2017, the percentage of youth vaping in Pennsylvania actually increased, from 15.5% to 16.3%.

“I just don’t think a tax is an answer,” Netherton said. “The kids don’t care if you tax it. They’ll get it anyway.”

Lackey agreed that a tax alone won’t necessarily solve the problem.

“It’s a tough issue,” he said. “I’m not criticizing [lawmakers], because I don’t have a solution.”
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