In interviews I’m often asked why, if vaping is 95% safer than smoking, there are so many negative stories around vaping. My response 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 going to be opposition to vaping. But I’m always uneasy this might be interpreted as being a conspiracy theory. So to illustrate the scale of the problem, we decided to put some data behind the assertion.
The results are astonishing. Not just is E-Cig costing billions in tax revenue, it could force a number of the very states that 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 begin with tobacco revenues in the united states – not because they’re insignificant throughout the uk and also the EU (as we’ll see, the contrary is the case) but because that is where nearly all 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 move to alternative kinds 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 were 34.3 million smokers in the USA – and 10.8 million vapers, comparable to almost 32% from the smoking population. Whenever we divide total tax revenue by the quantity of smokers, we end up having $400 per smoker. Multiply that by the quantity of vapers so we get a total tax cost of $4.3 billion.
Obviously, those are incredibly rough figures. Some vapers individuals will be dual users (both vape and smoke), so will still be contributing towards some tobacco tax revenues, and naturally you will have some taxes on vaping. But however, you work, vaping is unquestionably costing the united states government billions in lost tax revenues.
That sounds a whole lot, but does look insignificant as compared to the total US tax receipts, estimated to become $3.65 trillion in 2019. But things start looking a lot worse when we look at individual US states – and also the bonds they have issued which are backed by tobacco revenues.
In 1997 tobacco companies agreed to pay 46 states a lot more than 200 billion dollars over 25 years. The concept was to cover the expense of treating smoke related diseases, although in practice the money was often used on other purposes. For instance, one state chose to spend 75% in the total on tobacco production. The largest recipient was California, which would be to receive over 12% of the total amount.
Remember that. The total amount is not placed in stone, and one of many variants is the quantity of cigarettes sold. The fewer cigarettes sold, the less money state governments receive, making a perverse incentive to keep tobacco sales high. (Intriguingly, if the sales in the tobacco companies within the agreement fall below those of companies not inside the agreement, the states get less cash, developing a second perverse incentive to stifle competition.) Crucially, while original estimates allowed for a slow decline in smoking rates, they did not enable vaping, and vaping will not be within the master settlement agreement.
Tobacco Secured Bonds and Looming Bankruptcy. As opposed to waiting around for 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 cash through the tobacco settlements, at that time investors considered these bonds a safe and secure option.
But the states didn’t desire to pay any interest at the start of the bonds. Instead, they wanted to enable the interest to roll up, kicking on the actual interest payments to later down the road. In exchange, they consented to pay uubnmg many times the original amount borrowed.
Just how much? Well, in some cases payments are likely to be 76 times the first payment. Millions in initial advances translated into billions of dollars in interest payments. And because the payments are extremely high, Moody’s estimates that 80% of 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. Furthermore, New Jersey has experienced its credit score downgraded, making it higher priced for the state to borrow money.
What happens when the bonds are certainly not paid back? Unfortunately, they don’t disappear. Bond holders have priority over taxpayers, and states must foot the bill – and pay additional interest because of this. So when for all of the cash raised to begin with – well, for many states that’s long gone. David Rosseau, at the time Deputy Treasurer of New Jersey, admitted that: “We basically burned it all by two years. It was not one of New Jersey’s better financial moves.”