In interviews I’m often asked why, if vaping is 95% safer than smoking, there are plenty of negative stories around vaping. My response is that vaping is a disruptive industry which threatens a lot 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 chose to put some data behind the assertion.
The results are astonishing. Not just is E Cig Kit costing billions in tax revenue, it may force some of the very states which have lead the charge against vaping into effective bankruptcy. Graph showing world tobacco revenue vs tax.
Vaping and Tobacco Tax in the us – We’ll begin with tobacco revenues in the us – not because they’re insignificant in the UK and the EU (as we’ll see, the contrary is the case) but because that is certainly where the majority of opposition to vaping is apparently 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 were 34.3 million smokers in the USA – and 10.8 million vapers, equivalent to almost 32% in the smoking population. If we divide total tax revenue by the quantity of smokers, we end up with $400 per smoker. Multiply that by the quantity of vapers and that we obtain a total tax expense of $4.3 billion.
Needless to say, those are incredibly 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 see some taxes on vaping. But nevertheless you cut it, 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 be $3.65 trillion in 2019. But things start to look a great deal worse once we examine individual US states – and also the bonds they have issued which can be backed by tobacco revenues.
In 1997 tobacco companies agreed to pay 46 states a lot more than 200 billion dollars over twenty-five years. The idea ended up being to cover the expense of treating smoke related diseases, although in practice the money was often used on other purposes. For instance, 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 exact amount will not be set in stone, and one of the variants is the amount of cigarettes sold. The fewer cigarettes sold, the less cash state governments receive, developing a perverse incentive to keep tobacco sales high. (Intriguingly, in the event the sales from the tobacco companies in the agreement fall below those of companies not within the agreement, the states will also get less money, making a second perverse incentive to stifle competition.) Crucially, while original estimates allowed to get a slow decline in smoking rates, they did not enable vaping, and vaping is not 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 money through the tobacco settlements, at that time investors considered these bonds a safe and secure option.
However the states didn’t want to pay any interest at the outset of the bonds. Instead, they desired to enable the interest to roll-up, kicking along the actual interest payments to later down the road. In exchange, they agreed to pay uubnmg often the first 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 billions of dollars in interest payments. And because the repayments are so high, Moody’s estimates that 80% of the bonds will probably 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 history downgraded, making it more expensive for the state to borrow money.
What will happen if the bonds are certainly not paid back? Unfortunately, they don’t disappear. Bond holders have priority over taxpayers, and states need to foot the bill – and pay additional interest as a result. So when for all the cash raised to start with – well, for a few states that’s gone. David Rosseau, at that time Deputy Treasurer of New Jersey, admitted that: “We basically burned everything in 2 years. It had been not certainly one of New Jersey’s better financial moves.”