The resulting budget discussions revolve around questions like, “How cost‑effectively does this proposal advance our policy goals?” or “Would these resources be better spent in a different program?” In contrast, when the state uses formulas or special funds to commit excise tax revenues to specific purposes, budget discussions often revolve around questions like, “How much revenue will this tax raise this year?”. E‑Cigarette Health Concerns. The annual certification and other required forms are available online on our Directory Forms web page. As lawmakers thread the needle between protecting adult smokers’ ability to switch and barring minors’ access to nicotine products, they would be well-advised to remember the policy spillover effects. The information provided to date, however, does not suggest that the administration has considered them carefully enough to justify the requested appropriation. As shown in Figure 5, these taxes come in four forms: 13% of wholesale price or $0.50 per cartridge. Native American, Native Hawaiian, Alaska Native or LGBT by the end of 2021. Revenue Would Go to New Special Fund. If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s proposed approach much more favorably than a restrictive, formulaic approach. The evidence regarding youth cigarette smoking is more ambiguous. How would the tax interact with other state and federal policies? Nicotine‑Based Tax Reasonable. 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 tax). We also suggest that the Legislature consider a wide range of possible tax rates. Instead, it would conduct enforcement activities related to the illicit vaping market broadly, including devices that deliver nicotine, tetrahydrocannabinol (THC), and other substances. The Legislature would appropriate the monies in this fund during the annual budget process. In the context of vapor products and cigarettes, it is important because the risk profiles for the two products are wildly different. Most notably, the January proposals do not include the cost of adding the tax to CDTFA’s new IT system. With excise tax policy, increases or decreases in tax rates of certain goods can affect consumption of other goods that might be substitutes. If the Legislature wishes to enact a new tax on e‑cigarettes, the proposed nicotine‑based tax structure is reasonable. Consider Wide Range of Rates. At one end of the spectrum, the Legislature could take a very flexible approach, depositing the revenue into the General Fund and appropriating it through the annual budget process along with other General Fund revenue. Flexibility allows budgeting to focus on key issues like the costs and benefits of different proposals. Justin Garosi; Brian Uhler In addition to levying an excise tax, the state has undertaken a variety of efforts related to e‑cigarettes, with a particular focus on reducing youth use. Tax Stamps. One‑fifth of daily users are under 18 and another fifth are 18 to 24 years old. In other words, the governor’s proposal does not target the harmful behavior. As a result, the state did not collect any administrative data on e‑cigarette sales. Examples include: The Legislature currently is considering further actions, including a bill that would ban flavored tobacco products (including flavored e‑cigarettes) and the tax proposal discussed in this report. We discuss in detail a number of advantages of flexibility in our 2018 report, Taxation of Sugary Drinks. 2020‑21 Spending Proposals. “The Effects of E‑Cigarette Taxes on E‑Cigarette Prices and Tobacco Product Sales: Evidence From Retail Panel Data.” National Bureau of Economic Research Working Paper 26724. As shown in Figure 1, youth e‑cigarette use has grown rapidly in the U.S. over the last few years. “The Effect of Prices and Taxes on Youth Cigarette and E‑Cigarette Use: Economic Substitutes or Complements?” Mimeo, Georgia State University. Two of the key tools used to enforce this tax include: State Taxes E‑Cigarettes. It is the administratively simplest and most straightforward way for the state government to tax a good, as it does not require valuation and as such does not require expensive administration. (For example, this is the current method for allocating alcoholic beverage tax revenues.) We anticipate a budget proposal to cover this one‑time cost—likely in the range of $6 million to $8 million—later this spring. California laws coming in 2021. As noted above, the revenues raised by the new tax are highly uncertain. Newsom’s proposal would, if the tax is passed on to the consumer, increase the price of a JUUL 4-pack by $8.25 (JUUL is the most popular vapor product)—not including the existing wholesale tax. In the cigarette tax program, stamps help distinguish tax‑paid cigarettes from others. If, however, the Legislature prefers to deposit the revenue into a special fund, we view the Governor’s relatively flexible approach much more favorably than a restrictive, formulaic approach. Current Cigarette and E‑Cigarette Policies. Correspondingly, the e‑cigarette tax rate tends to decline over time as well, as illustrated in Figure 4. In particular, the state could levy a relatively high tax rate on products that tend to encourage or enable youth use, and a relatively low tax rate on other products. This year, Kentucky, Utah, Virginia, and Wyoming have already passed increases to vapor taxes, which means 25 states and the District of Columbia now tax vapor products. Some e‑cigarettes create aerosols that are unflavored or tobacco‑flavored, while others taste like fruit, candy, menthol, or mint. The estimates included in the 2020‑21 Governor’s Budget are reasonable, but actual revenue could be much higher or lower than those estimates. For example, the Legislature could levy a higher tax rate on types of e‑cigarettes that are smaller or easier to use, and a lower tax rate on other types. Chapters 7 and 8, Statutes of 2016 (SB X2 5, Leno and SB X2 7, Hernandez) raised the minimum age to purchase e‑cigarettes (and other tobacco products) from. In contrast to cigarettes, the size, shape, and amount of tax due on e‑cigarettes would vary widely under the Governor’s proposal. As shown in Figure 6, for example, tax rates set in fixed dollar terms—such as the state’s taxes on cigarettes and distilled spirits—do not remain fixed in economic terms. Tobacco Grant 2020-2021 grantees, pdf Proposition 56, pdf Rev. (The new tax would be in addition to the existing tax described above.) Researchers and public officials have raised a variety of health concerns related to e‑cigarettes and to vaping more generally. California levies a $2.87 per pack excise tax on cigarettes. The proposed tax would go into effect on January 1, 2021. Prices tend to rise over time. On the other hand, the Legislature would appropriate the funds during the annual budget process, and a wide range of programs would be eligible to receive the funds. Tax Rate. The tax would take effect January 1, 2021 and is forecasted to raise $32 million in FY 2021. Considering that cigarettes are taxed at $2.87 per pack of 20, the proposal means that nicotine users could lower their tax liability by switching from vaping to smoking. Accordingly, we recommend that the Legislature revisit the e‑cigarette tax rate at least once every two years to assess the need for changes. Tax Likely Would Raise Tens of Millions of Dollars Annually. (In particular, the rate is equal to this ratio multiplied by roughly 117 percent.) & Tax. Black market liquids and cigarettes have the problem of being extremely unsafe and cost governments billions in lost taxes. Key sources of uncertainty include recent changes in the e‑cigarette market, potential major state and federal policy changes besides the proposed tax, and the novelty of the proposed tax structure. The rate currently is 59 percent of the wholesale price. We recommend that the Legislature take an approach to revenue allocation that prioritizes flexibility. Explore our weekly European tax maps to see how countries rank on tax rates, structure, and more. Administration Aims to Tax Vaped and Smoked Nicotine at Same Rate. Suite 950 In California, cigarettes are subject to a state excise tax of $0.87 per pack of 20. The administration’s comparison also does not account for federal taxes. The effects on youth cigarette smoking are unclear. The new tax would go into effect on Jan. 1, 2021, and would add to existing taxes on e-cigarettes, which are already taxed as tobacco products. The proposal does not include an inflation adjustment. The administration estimates that its proposal would result in roughly the same state tax rate on nicotine intake, whether that intake comes from e‑cigarettes or conventional cigarettes. Consequently, we suggest that the Legislature consider a wide range of possible rates. Revenue Would Go to New Special Fund. In principle, careful implementation could overcome these challenges. Monday: A look at a few of the laws that went into effect on Jan. 1. Recommend Very Flexible Approach. The Governor’s official January proposals include $17 million of expenditures from the new fund. For instance, a vapor pod that has a nicotine content of 3 percent and contains 1 ml of liquid would be taxed at $1.50 whereas a vapor pod that has a nicotine content of 5 percent and also contains 1 ml of liquid would be taxed at $2.50. Initial Tax Rate. DHCS will update this document as necessary. A tax on vapor products (and other recreational nicotine products) should be based on quantity. COVID-19 Workplace Rules AB 685: Requires employers to notify workers of potential worksite COVID-19 exposures, report outbreaks to public health departments and gives Cal/OSHA more teeth to enforce pandemic safety The “tobacco products” definition was amended (Proposition 56, November 2016) under the California Cigarette and Tobacco Products Tax Law (Revenue and Taxation Code section 30121) to include additional tobacco products (identified as “New!” below).Beginning April 1, 2017, the distribution of these newly classified tobacco products are subject to the tobacco products tax. Income Tax Withholding Tracker: December 1 - December 23 December 23, 2020. The administration has indicated that it intends to tax nicotine intake at the same rate, regardless of whether the nicotine is vaped or smoked. SACRAMENTO, Calif. — California state officials have agreed to delay the effective date of what state lawmakers intended as a Jan. 1 ban on flavored tobacco products. Until recently, the state did not require tobacco taxpayers to distinguish e‑cigarettes from other types of tobacco products (such as cigars or chewing tobacco) on their tax returns. To what extent do vapers’ choices account for these harms? Instead, absent policy changes, they tend to decline over time. The administration, however, has not presented a compelling argument for this rate. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. Our review of available evidence suggests that the proposed tax likely would reduce both youth and adult e‑cigarette use substantially. For example, in January 2020, the Food and Drug Administration (FDA) banned the sale of certain types of flavored e‑cigarettes. California’s flavored tobacco ban will not take effect on Jan. 1, 2021. Newsom, the tax base may also create some problems. Cotti, Chad, Charles Courtemanche, Johanna Catherine Maclean, Erik Nesson, Michael Pesko, and Nathan Tefft (2020). 2020 Virginia 7/1/20 30 cents 60 cents. The Legislature could create a cigarette tax inflation adjustment without amending any ballot measures. The federal government currently taxes cigarettes at $1.01 per pack but does not levy a tax on e‑cigarettes. (e).) Collections would be allocated to administration, enforcement, youth prevention, and health care workforce programs. Even in the best‑case scenario, however, many of the uncertainties described above will remain. New Tax on E‑Cigarettes. 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 higher rates on products that tend to encourage or enable youth use. Cigarettes are also subject to California sales tax of approximately $0.43 per pack, which adds up to a total tax per pack of $1.30. The Governor’s recent executive order directed CDTFA to require taxpayers to list e‑cigarette sales separately from other tobacco sales starting in January 2020. We find that a tax based on nicotine content has some advantages. This focus on nicotine—rather than some other measure of the chemical composition of e‑cigarette liquid—is reasonable for two reasons: (1) many e‑cigarette health concerns are nicotine‑related; and (2) information about e‑cigarettes’ nicotine content generally is readily available. Including the additional administrative costs described below, we expect the administration’s overall 2020‑21 expenditure plan for e‑cigarette tax revenues to total roughly $24 million. As long as the Legislature is considering changes to the e‑cigarette tax rate, we see no reason to rule out changes to the cigarette tax rate as well. Section 1 of the bill added Article 5, which is titled, “Tobacco Sale Prohibition.” Gov. The fund would be available for three purposes: administration and enforcement of the new tax, tobacco youth prevention programs, and health care programs. (For example, this is the current approach for allocating most tobacco tax revenues.). We work hard to make our analysis as useful as possible. To address this issue, some of the state’s tax policies—such as fuel tax rates, cannabis cultivation tax rates, and income thresholds used to calculate income taxes‑include statutory language directing the administration to adjust these policies annually to account for inflation. Questions regarding the application process may be directed to the California Department of Justice at TobaccoGrantRFP@doj.ca.gov. “Impact of E‑Cigarette and Cigarette Prices on Youth and Young Adult E‑Cigarette and Cigarette Behaviour: Evidence From a National Longitudinal Cohort.” Tobacco Control. “E‑Cigarettes and Cigarettes: Complements or Substitutes?” Mimeo, University of California, Berkeley. How would the tax rate affect other outcomes, such as cigarette smoking? If the Legislature wants to maintain a consistent relationship between tax rates on cigarettes and e‑cigarettes, we recommend that it adjust both tax rates for inflation, rather than neither. Due to this inflation, the real economic value of any fixed amount of money—such as one dollar per 20 milligrams of nicotine—diminishes over time. Deng, Xueting and Yuqing Zheng (2019). This would make the proposed tax structure more effective at discouraging nicotine consumption than the alternative tax structures. In this section, we provide information and perspectives for the Legislature to consider as it weighs not just the Governor’s proposal, but also the design of e‑cigarette taxes more broadly. Vaping products are electronic devices that heat liquid to create an aerosol inhaled, or “vaped,” by the user. Federal Government Has Taken Actions. (Rev. The Governor proposes that revenue from the proposed e‑cigarette tax be deposited into a new special fund. State Has Taken Other Actions. More generally, the evidence we reviewed does not indicate any “sweet spot” that would make one specific tax rate preferable to others. Consider How Funding Shortfalls Would Be Handled. Packs typically contain 20 cigarettes and thus require a $2.87 tax stamp. Ideally, this would mean depositing the revenue into the General Fund. The Tax Foundation is the nation’s leading independent tax policy nonprofit. This administrative change could yield data that could help us refine our revenue estimates in the coming months. California levies an excise tax on non‑cigarette tobacco products. “The Effects of Traditional Cigarette and E‑Cigarette Taxes on Adult Tobacco Product Use.” National Bureau of Economic Research Working Paper 26017. In November 2019, the Attorney General and local officials sued JUUL, a leading e‑cigarette manufacturer, for allegedly marketing its products to youth and failing to provide required health warnings. Even if the Legislature shares the administration’s intent of taxing e‑cigarettes and cigarettes at the same rate, a key question remains: what should that rate be? The administration estimates that the proposed e‑cigarette tax rate of $1 per 20 milligrams of nicotine, combined with the existing tax rate of 59 percent of the wholesale price, would bring the state’s overall tax rate on e‑cigarettes roughly in line with its tax rate on conventional cigarettes. Saffer, Henry, Daniel Dench, Michael Grossman, and Dhaval Dave (2019). As a result, staff Consequently, depositing the revenues into the General Fund would allow the Legislature to provide some insurance against this revenue uncertainty by pooling the risk across many areas of the budget. Key sources of uncertainty include: Useful Data Could Be Available Soon. The feasibility and effectiveness of cigarette tax stamps is due, in part, to the high degree of consistency in the size, shape, and amount of tax due on a pack of cigarettes. The bill, which banned flavored tobacco, added Article 5 (commencing with Section 104559.5) to Chapter 1 of Part 3 of Division 103 of the Health and Safety Code. Alternative Nicotine‑Based Structures Worth Considering. “E‑Cigarettes and Adult Smoking: Evidence from Minnesota.” National Bureau of Economic Research Working Paper 26589. As a result, the proposed e‑cigarette tax either would require the vendor to produce stamps in a much wider variety of denominations than cigarette stamps, or would require taxpayers to affix multiple stamps per item. The state levies a $2.87 per pack tax on cigarettes. The tax also likely would increase adult cigarette smoking. California is the latest state to try to increase vapor taxes. In September 2019, the Governor issued an executive order directing CDTFA and the California Department of Public Health (CDPH) to develop recommendations and take actions related to e‑cigarettes, including a vaping awareness campaign. Our work depends on support from members of the public like you. The 2020‑21 Governor’s Budget assumes that the proposed e‑cigarette tax would raise $34 million in 2020‑21 and $55 million in 2021‑22. California $2.87 12th Michigan $2.00 18th South Carolina $0.57 46th Colorado $1 ... Table shows all cigarette tax rates effective January 1, 2021 (CO, OR on 1/1/2021). If the Legislature chooses to enact a new tax on e‑cigarettes, it has a range of options for allocating the resulting revenue. Separately from the issues related to the high rates proposed by Gov. Would you consider contributing to our work? Effective Date of Increase Amount of Increase Tax Rate After Increase 2021 Colorado†1/1/21 $1.10 $1.94 Oregon 1/1/21 $2.00 $3.33. California's cigarette … Our review of available evidence suggests that the proposed tax likely would reduce both youth and adult e‑cigarette use substantially. The rate of the new tax would be roughly $1 for every 20 milligrams of nicotine in a product (in addition to the existing tax). It is estimated for Fiscal Year 2021-2022 a total of $28 million in grant funding will be available statewide to support local enforcement efforts to reduce the illegal sale of tobacco products to minors. A second, less common type of pack contains 25 cigarettes and requires a $3.59 tax stamp. Likely Increase in Adult Smoking; Effects on Youth Smoking Unclear. 1. Many States Tax E‑Cigarettes. As shown in Figure 2, e‑cigarettes were roughly five to six times as popular as conventional cigarettes among California high school students during the 2017‑18 school year. Cotti, Chad, Erik Nesson, and Nathan Tefft (2018). The administration, however, has not presented an argument that they should be considered equally harmful. On one hand, to the extent that the tax reduces the number of people who become addicted to nicotine, it could reduce cigarette smoking. California currently taxes vapor products at 59.27 percent of wholesale value, but the proposal would impose an additional tax at a rate of $2 for each 40 milligrams of nicotine in the product. A nationwide survey of high schoolers, published in the fall of 2019, found that 27.5 percent of students had vaped at least once in the prior 30 days, though only 10 percent of students were considered regular users (defined as vaping 20 days out the prior 30). Aside from harming public health, exceptionally high tax rates and flavor bans can create incentives for illicit activities. This report uses the term “e‑cigarettes” to refer to devices that create aerosols containing nicotine—the substance that makes tobacco products addictive. The California Department of Tax and Fee Administration (CDTFA) must adjust the tax rate on non‑cigarette tobacco products (including e‑cigarettes) annually based on a formula originally established by Proposition 99 of 1988 and modified by subsequent ballot measures.
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