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The 2020-21 Budget: Taxation of E-Cigarettes

The Legislative Analyst’s Office has just published the following report:

The 2020-21 Budget: Taxation of E-Cigarettes

The Governor has proposed a new state tax on e-cigarettes at a rate of $1 for every 20 milligrams of nicotine in a product (in addition to the existing 59 percent tax on the wholesale price). The stated goal of this proposal is to reduce youth use of e-cigarettes.

In this report, we discuss a variety of issues for the Legislature to consider as it weighs the Governor’s proposal, including:

  • Tax Structure. If the Legislature wishes to enact a new tax on e-cigarettes, the proposed nicotine-based tax structure makes sense. If the Legislature agrees with the Governor’s focus on reducing youth e-cigarette use, we suggest it consider alternative nicotine-based taxes that place relatively high rates on products that tend to encourage or enable youth use.
  • Tax Rate. The administration estimates that its proposed tax rate would result in roughly the same state tax rate on nicotine intake, whether that intake comes from e-cigarettes or conventional cigarettes. The administration, however, has not presented a compelling argument for this rate. We suggest that the Legislature consider a wide range of possible rates.
  • Revenue Allocation. We recommend that the Legislature take an approach to revenue allocation that prioritizes flexibility. Ideally, this would mean depositing the revenue into the General Fund. If, however, the Legislature prefers to deposit the revenue into a special fund, the Governor’s proposed approach is better than a restrictive, formulaic approach.

This report is available using the following link: https://lao.ca.gov/Publications/Report/4171

This article was released by the Legislative Analyst’s Office.