Alternative Tobacco Product Taxes | ATP Taxation

Nicotine consumers have many options available for purchase in 2026. In an industry once dominated by combustible cigarettes, new products offer individuals nicotine consumption at a sliver of the harm caused by cigarettes.

Oral pouches, vapes, and heated tobacco products (HTPs) have been authorized for sale in the US by the Food and Drug Administration (FDA). And while the number of products legally available in the US are only a fraction of those that have been produced, are awaiting authorization, or have been authorized in other countries, the fact that these products can now be sold in the US means states must decide whether and how they should taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. them.

Every state taxes cigarettes. While individual cigarettes vary somewhat across brands, cigarettes are almost identical in size and weight and are sold in 20-cigarette packs (and 10-pack cartons). As such, cigarette taxes are relatively easy to define as a tax per cigarette, and tax-paid stamps can be applied to cigarette packs.

Every state also taxes tobacco products that aren’t cigarettes, commonly referred to as other tobacco products (OTPs). These include products like loose tobacco, snuff, and chewing tobacco, though the exact products included vary by state. Because products within the OTP category vary, states often tax the entire category using either an ad quantum weight-based tax or an ad valorem tax based on the wholesale price.

Many of the new alternative tobacco products (ATPs), like e-cigarettes and oral pouches, don’t actually contain tobacco, meaning they don’t fit the standard tax definition of OTPs. HTPs do contain tobacco, but states may not want a reduced-harm product to be taxed as heavily as other OTPs. This means that to appropriately tax ATPs, states need to redefine their OTP category or create new tax categories for ATPs.

Most states have already created new tax categories for vaping products and e-cigarettes, though there is little consistency across states in how these products are taxed. As of January 2025, 33 states and the District of Columbia levy an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on vaping products. Some states levy a tax on the manufacturer, wholesale, or retail price. Other states tax based on the product volume or number of cartridges, and some states apply a bifurcated system that has a different structure and rate for open and closed systems.

Coming into 2026, only 18 states levied taxes on modern oral pouches. Several states are eyeing new or increased ATP taxes. We detail a few of those policies below. The following is not an all-encompassing list, and many of the budgets and policy proposals are likely to change throughout the legislative process.

Delaware Governor Matt Meyer’s (D) proposed 2027 budget features an increase in tax on OTPs and proposes raising taxes on vapor products to 10 cents per milliliter.

Nebraska LB 1238 attempts to equalize the excise tax rate for all tobacco, electronic nicotine delivery systems, nicotine analogues, and ATPs by setting the tax rate on these products to 30 percent of the wholesale cost. This change would be a tax increase for all ATPs.

Governor Hochul’s (D) 2027 Executive Budget includes multiple ATP excise tax increases. If passed, New York would expand its definition of OTP to include modern oral pouches, applying the state’s 75 percent wholesale OTP tax rate to all nicotine pouches. The state would also add a $0.55/unit tax on vapor atop the current 20 percent retail tax, combining the complexities of both an ad valorem and an ad quantum tax.

Vermont S-0198 expands the definition of OTP or “tobacco substitute” to include nicotine pouches and electronic vaping devices. S-0198 would also establish the country’s first tax differentiated by nicotine content, despite there being no significant economic or health justification for a nicotine-based tax.

Currently, OTPs are taxed at 92 percent of the wholesale price. S-0198 would levy that 92 percent wholesale price tax on tobacco substitutes with less than 5 mg/g nicotine; those with 5 mg/g or more would be taxed at 100 percent of the wholesale price. All vaping products would likely land in the higher tax category.

Washington State HB 2382 would replace the state’s per mL vaping tax with a 95 percent wholesale tax, a significant tax increase, and would cut in half the tax discount (increase the tax) given to products that have qualified as a modified risk tobacco product (MRTP).

Utah HB 0337 would repeal the state’s existing tax categories for smokeless tobacco and nicotine pouches, moving those products instead to the OTP category. Utah taxes OTPs at 86 percent of the wholesale price. HB 0337 would also repeal the 50 percent reduction given to MRTP, resulting in a tax increase for those products.

ATP Tax Design Should Give Preferential Rates to Less Harmful Products

Previously, we analyzed the existing research on ATP and designed a tax framework for reduced-harm ATP. We assigned product categories based on the degree of harm the product causes, how easily the product acts as a substitute for combustible cigarettes, how easily the product can be (mass) consumed, and whether the product is addictive. The more the product is safe, acts as a cigarette substitute, is slowly consumed, and is less addictive, the lower the product’s tax rate should be.

In this framework, less harmful products receive a tax rate that is 50-100 percent less than the tax rate applied to combustible cigarettes. Creating tax rates as a percentage of cigarette tax rates helps ensure price differentials that incentivize consumers to switch, while being relatively easy for legislators to adopt at any level of government.

Table 1. Alternative Tobacco Product Tax Rates to Optimize Harm Reduction

Creating public policy around new and innovative products can be challenging. As more ATPs receive marketing approval from the FDA, more products will hit US shelves. Establishing appropriate tax policy is essential to create compliant, legal markets and to help encourage smokers to move toward less harmful products.