Taxation has long been a primary tool for tobacco control, designed to reduce smoking prevalence by increasing the cost of cigarettes. However, the emergence of novel nicotine products such as Electronic Nicotine Delivery Systems (ENDS), Heated Tobacco Products (HTPs), and nicotine pouches challenges traditional taxation models. Policymakers now face a crucial decision: Should all nicotine products be taxed equivalently, or should taxation reflect their varying levels of harm?
A recent analysis by Marius van Oordt, published in the World Customs Journal, explores the economic rationale behind different taxation frameworks for nicotine products and provides compelling evidence that proportional taxation based on relative risk is the optimal approach.
Two Competing Taxation Approaches
The study identifies two distinct approaches to nicotine taxation:
1. Equal Taxation Across All Nicotine Products
Some jurisdictions apply a uniform tax rate to all nicotine-containing products, treating cigarettes, e-cigarettes, heated tobacco, and nicotine pouches as functionally equivalent. This approach lacks scientific justification, as it ignores the substantial differences in health risks between combustible and non-combustible nicotine products.
Scientific evidence, including assessments by Public Health England and the Royal College of Physicians, indicates that ENDS are approximately 95% less harmful than cigarettes, while Heated Tobacco Products may be 80% less harmful. Taxing all nicotine products at the same rate discourages smokers from switching to lower-risk alternatives, undermining harm reduction efforts.
2. Differential Taxation Based on Relative Harm
A more evidence-based approach is stratified taxation, which sets tax rates according to a product’s relative risk compared to cigarettes. The analysis suggests that:
- ENDS liquids should be taxed at approximately 40% of the cigarette-equivalent rate
- HTPs should be taxed at about 20% of the cigarette-equivalent rate
- Nicotine pouches, which contain no tobacco and no combustion, should have an even lower tax rate to incentivize switching
This model aligns with traditional excise tax principles, which aim to internalize external costs associated with public health risks. By establishing a clear risk-contingent tax framework, policymakers can better encourage harm reduction while maintaining tax revenue.
Key Policy Implications
Several crucial policy takeaways emerge from van Oordt’s analysis:
1. Specific Taxation is Preferable to Ad Valorem Taxation
Taxing nicotine products per gram, milliliter, or stick is more effective than ad valorem taxation, which applies a percentage of the retail price. Specific taxation prevents market distortions where lower-priced products are disproportionately burdened, making harm reduction options less economically attractive.
2. The Regulatory Environment Should Influence Taxation Levels
Tax rates should reflect the degree of regulation surrounding each product. If nicotine pouches and e-cigarettes are strictly regulated, there is less justification for high tax rates, as stringent controls already mitigate potential risks. Conversely, in jurisdictions with weak regulation, tax adjustments may be needed to compensate for the absence of quality controls.
3. Avoid Pushing Consumers Toward More Harmful Products
Excessive taxation on reduced-risk products can have unintended consequences, driving consumers back to cigarettes. Price-sensitive smokers may find that, after tax increases, traditional tobacco products offer a more cost-effective nicotine source than regulated alternatives. To prevent this, policymakers should maintain a clear price advantage for lower-risk products.
4. Balancing Youth Protection and Harm Reduction
While concerns about youth access are valid, overly punitive taxes on nicotine pouches and e-cigarettes can be counterproductive. Policymakers must strike a balance between preventing youth initiation and maintaining affordability for adult smokers looking to switch. Measures such as strict age verification, marketing restrictions, and product quality controls should complement tax policies to create a comprehensive harm reduction strategy.
The Need for Regulatory Flexibility
A key takeaway from the study is the importance of regulatory adaptability. Tax policies should be periodically reviewed and adjusted based on:
- The latest scientific evidence on product risks
- Market trends and consumer behavior
- The effectiveness of harm reduction strategies
Moreover, public education campaigns should accompany tax policy shifts. If smokers are unaware of the harm reduction potential of nicotine pouches or vaping, price incentives alone may not drive behavior change. Well-designed awareness campaigns can reinforce the rationale behind differentiated taxation.
A Smarter Approach to Nicotine Taxation
The current one-size-fits-all taxation model for nicotine products is scientifically flawed and economically irrational. A more nuanced, stratified taxation framework is essential to reflect the continuum of risk and support public health objectives.
By adopting risk-proportionate taxation, policymakers can:
- Encourage smokers to switch to lower-risk alternatives
- Preserve tax revenue without fueling illicit markets
- Avoid economic incentives that keep smokers using combustible tobacco
The European Union and national governments now have a critical opportunity to design evidence-based nicotine taxation policies that align with harm reduction goals. A failure to do so will only sustain cigarette consumption, preventing significant public health gains.
For further analysis, refer to Innovation, Regulation, and Excise Taxation by Marius van Oordt.
