A new bill in Oklahoma, HB 3983, could become a template for taxing moist snuff tobacco (MST). Currently, Oklahoma taxes MST at 60 percent of the wholesale value. HB 3983 would convert this to a specific weight-based 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. of $1.72 per ounce.
Simple, direct taxes work best for non-cigarette tobacco products. A weight-based tax for MST ensures neutral taxation across products and is less volatile because revenue doesn’t fluctuate with market prices.
Alternative nicotine products present a challenging case for tax policy. Historically, the best excise taxes on harm-generating products are the ones that specifically target the harm-causing element. This allows market participants to internalize the external harm into their decision-making. Taxes on hard alcohol, for example, increase based on alcohol content or proof gallon to reflect the greater harms from the additional alcohol. Similarly, a tax placed on carbon emissions can price in external damages from pollution and climate change into energy consumption and production decisions.
Alternative tobacco products don’t create similar kinds of external costs, nor is there a clear ingredient in these products that can be targeted with 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.. Nicotine does not directly create external harm. Thus, without a target ingredient to tax, policymakers are forced to use a broader base determined by consumption, typically with several different tax rates based on product and category.
In this scenario, quantity-based specific taxes are also better than price-based ad valorem taxes at aligning the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to the tax’s purpose. For nicotine products, the number of cigarettes smoked or the amount of vapor inhaled has a much clearer connection to any harm caused by this consumption than the retail sales price of the products. Specific taxation is often simpler because the tax can be calculated based on weight, volume, or amount instead of an estimated value.
Table 1. Proposed Tax Structure for Alternative Nicotine Products
Taxing products by weight eliminates disparities among differently priced products. If a 1.2-ounce can of snuff carries a $5.00 wholesale price, Oklahoma would charge $3.00 in tax. If a discount product enters the market that is the identical size as the original can, but half the wholesale price, $2.50, the state would only charge $1.50 in tax, collecting half of the revenue for the same amount of snuff. A weight-based tax would charge both products the same tax—$2.06 under HB 3983.
Taxing based on price rather than quantity incentivizes consumers to purchase lower-priced products to reduce their tax burden. In addition to possible concerns with driving consumers down the quality ladder toward cheaper products, this incentive is likely to drive revenue decline over time as consumers switch to discounted products.
However, a specific tax rate that does not change would be subject to its own revenue decline over time as the currency is debased. As the real value of $1.72 is diminished, the real value of the tax collections will diminish as well.
Nearly half of states already use a weight-based tax for MST. The per-weight rates range from only $0.02 per 1.2-ounce package of snuff in Alabama to $3.54 per ounce in Maine. Oklahoma HB 3983’s $1.72 per ounce tax would be the fifth-highest weight-based MST tax in the country and would be significantly above the national average of states that tax MST by weight, $1.18 per ounce.
The Oklahoma Legislature’s Fiscal Analysis of the change does not estimate any impact on the overall amount of revenue the state receives, but this change would make those collections significantly more principled. HB 3983’s weight-based tax would provide more stable revenues, levy a more neutral burden, and be simpler and easier for consumers to understand.
Principled taxation should be the goal of policymakers everywhere, and Oklahoma HB 3983 would make the state’s MST tax regime an example for other states to follow.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.
Subscribe
Share this article
