Monkey Business Report: NC’s e-cig tax

We posted previously about the General Assembly’s vote to enact a tax on e-cigarettes.  E-cigs are a relatively new phenomenon.  They are devices that emit odorless vapor instead of that nasty smoke we’ve grown accustomed to.  I know a number of people who have turned to e-cigarettes as a way to help wean themselves off of traditional cigarettes.

Many people were frustrated by the efforts of a GOP-led legislature to enact a new tax.  I am SURE it had a lot to do with lobbying and campaign contributions from Winston-Salem’s RJ Reynolds — a giant in the cigarette business. 

I am really starting to be come a fan of The John Locke Foundation’s Sarah Curry.  She has been slapping her name on a whole lot of copy that makes a whole lot of sense.   Here’s her latest, questioning the enactment of this e-cigarette tax: 

 […] All excise taxes, by definition, distort economic and personal decision making by penalizing some consumer

choices relative to others. For economists, the first principle of efficient taxation is neutrality, that is, the government

should extract the money it needs from taxpayers without distorting their freely made decisions. As a matter of pure

economics, it is not appropriate for the government to tax some goods and services more heavily than others. This

distorts relative prices and therefore efficient resource allocation. Currently North Carolina’s tax policy with respect

to the sale of e-cigarettes gets it right.  They are taxed at the same state and local sales tax rates that apply to other

consumer goods throughout the economy.

In May, state legislators decided to change this by placing a new excise tax on e-cigarettes. Defying sound principles

of taxation, beginning on June 1 of 2015, the liquid in e-cigarettes will be taxed at an additional 5 cents per milliliter.

What is particularly hypocritical is that many, if not most, members of the General Assembly who voted for this tax,

Democrats and Republicans alike, clearly understand the principle of neutrality and have invoked it to rightfully

 argue in favor of extending the state sales tax to services like haircuts and legal assistance. At the present time, it only

applies to tangible goods. However, there was never any movement to block the new e-cigarette excise tax on these

same grounds. For this legislature, with its ushering in of tax reform in 2013, the neutrality argument has turned out

to be one of convenience rather than principle.

North Carolina’s e-cigarette tax piqued the interest of legislators when it was requested by Winston-Salem based

R. J. Reynolds Tobacco Company.   While not currently in the e-cigarette market, R. J.Reynolds is expected to be a big, if

not the biggest, player in the near future. They argued the Minnesota tax was too high, and they asked North Carolina

legislators to set an example for other states proposing taxes on e-cigarettes. In other words, the imposition of this

tax is primarily about yielding to pressure from a special interest in the tobacco industry. There appears to be no other

explanation, since it clearly is not about good tax policy or even the need for additional revenues. The new tax is only

expected to raise about $5 million,  which is meaningless in the context of a $20+ billion budget.

Making this process even more suspicious is the manner in which the tax made its way through the legislature.

During the interim between the long and short sessions, the Revenue Laws Study Committee met to address issues

that arose from the 2013 tax reform legislation. The committee drafted a bill to correct and clarify some of the

provisions in the tax reform law but decided to add the e-cigarette tax to the Omnibus Tax Law Changes bill at the

request of lobbyists representing R. J. Reynolds. The bill was later heard in a House committee, but due to political

maneuvering, the only amendment submitted to remove the tax from the bill was defeated.

The point is that this brand new tax has little to do with the overall purpose of the omnibus legislation, and

the only way to vote against the e-cigarette tax was to vote against the entire bill, which most people believed to be

necessary. The legislative leadership made sure that this new tax would not get an up or down vote on its own merits.

Had they been concerned about having an above board and transparent legislative process rather than pushing the

new tax through, this proposal would have been pulled from the omnibus tax bill, debated separately, and voted

on as freestanding legislation, allowing it to rise or fall on its own merits. The citizens of North Carolina deserve

transparency in the law making process, and they did not receive it in this case. […]