In interviews I’m often asked why, if vaping is 95% safer than smoking, there are so many negative stories around vaping. My answer is that vaping is a disruptive industry which threatens more than US$700 billion in tobacco revenues and US$250 billion in tax revenues. It’s inevitable there’s likely to be opposition to vaping. But I’m always uneasy this may be interpreted as being a conspiracy theory. To illustrate the scale of the problem, we decided to put some data behind the assertion.
The results are astonishing. Not only is Cheap Ecig costing billions in tax revenue, it could force a few of the very states who have lead the charge against vaping into effective bankruptcy. Graph showing world tobacco revenue vs tax.
Vaping and Tobacco Tax in the united states – We’ll get started with tobacco revenues in the united states – not because they’re insignificant in the UK and the EU (as we’ll see, the contrary is the situation) but because that is where the majority of opposition to vaping appears to be originating. At its peak during 2010 tobacco tax revenues reached 17.16 billion dollars. But that amount continues to be coming down rapidly as smokers quit or change to alternative forms of nicotine – predominantly vaping. In 2018 projected revenues were 20% lower at 13.67 billion dollars. (Source: Statista).
So how is vaping affecting tax revenues? In 2018 there have been 34.3 million smokers in the us – and 10.8 million vapers, comparable to almost 32% in the smoking population. If we divide total tax revenue by the quantity of smokers, we end up getting $400 per smoker. Multiply that by the amount of vapers and we obtain a total tax price of $4.3 billion.
Obviously, those are extremely rough figures. Some vapers individuals will be dual users (both vape and smoke), so is still contributing towards some tobacco tax revenues, and of course you will have some taxes on vaping. But however, you make the grade, vaping is undoubtedly costing the usa government billions in lost tax revenues.
That sounds a lot, but does look insignificant in comparison to the total US tax receipts, estimated to get $3.65 trillion in 2019. But things start looking a lot worse once we look at individual US states – and also the bonds they have got issued that are backed by tobacco revenues.
In 1997 tobacco companies agreed to pay 46 states greater than 200 billion dollars over twenty-five years. The idea was to cover the price of treating smoke related diseases, although in reality the cash was often invested in other purposes. As an example, one state made a decision to spend 75% of the total on tobacco production. The biggest recipient was California, which is to receive over 12% of the total amount.
Understand that. The amount is not placed in stone, and one of the variants is the volume of cigarettes sold. The fewer cigarettes sold, the less cash state governments receive, making a perverse incentive to maintain tobacco sales high. (Intriguingly, when the sales from the tobacco companies within the agreement fall below that relating to companies not in the agreement, the states will also get less cash, making a second perverse incentive to stifle competition.) Crucially, while original estimates allowed for a slow decline in smoking rates, they failed to enable vaping, and vaping is not contained in the master settlement agreement.
Tobacco Secured Bonds and Looming Bankruptcy. Instead of awaiting the tobacco money in advance, states sold bonds to investors. They promised to pay back these bonds utilizing the money from tobacco settlement. Due to the guaranteed flow of income through the tobacco settlements, at that time investors considered these bonds a secure option.
But the states didn’t desire to pay any interest at the start of the bonds. Instead, they wanted to permit the interest to roll up, kicking on the actual interest payments to later down the line. In turn, they agreed to pay uubnmg often the initial amount borrowed.
Just how much? Well, in some cases payments are likely to be 76 times the initial payment. Millions in initial advances translated into vast amounts of dollars in interest payments. And because the repayments are really high, Moody’s estimates that 80% from the bonds are likely to default.
California is behind on its payments, while New Jersey has pledged its remaining 406 million dollars in tobacco revenue to rescue two bonds. Additionally, New Jersey has already established its credit rating downgraded, making it more costly for that state to borrow money.
What will happen if the bonds usually are not paid back? Unfortunately, they don’t go away. Bond holders have priority over taxpayers, and states must foot the bill – and pay additional interest as a result. So when for the cash raised to start with – well, for some states that’s gone. David Rosseau, at the time Deputy Treasurer of New Jersey, admitted that: “We basically burned it all by two years. It had been not one of New Jersey’s better financial moves.”