Vaporized: with cigarette sales down and e-cigarettes hot, lawmakers find themselves in a bit of a revenue quagmire.

• Author: Rafool, Mandy
• Position: TAX POLICY

It's a cigarette. It's a pipe. No, it's a vaporizer.

Electronic cigarettes--or personal vaporizers--may look like cigarettes but they don't contain tobacco and they don't require a match to light up. They run on batteries and convert liquid nicotine (of varying strengths) into a vapor that is inhaled in the same way as smoke from cigarettes. The user is "vaping"--a whole new term and concept to the public policy world that is causing some confusion. This inability to neatly classify e-cigarettes has been particularly taxing on state policymakers.

Perceived by many to be safer than cigarettes, these devices have grown rapidly in popularity since they were first introduced in the United States in 2005. Many smokers are turning to e-cigarettes for their nicotine dose. At the same time, related or not, sales of regular cigarettes decreased by 30 percent from 2004, according to the Centers for Disease Control and Prevention, and that brought down state revenues too, because cigarettes are among the highest taxed products in the country.

The Vapors Are Blowing

For lawmakers looking to replace that shrinking revenue stream, one option is to tax e-cigarettes as tobacco products. The new devices do contain nicotine, after all. But if long-term research proves that vaping is safer than smoking and that smokers are indeed abandoning an unsafe product for one that is healthier, wouldn't the wise policy choice be to encourage smokers to switch to the safer option--e-cigarettes?

Maybe, but states rely on tobacco tax revenues to fund a number of popular programs, including education about the harmful effects of smoking. Without the funds from tobacco sales, these programs may have to be cut or funded with other state revenues.

This has not escaped the attention of lawmakers who are looking at e-cigarettes with an eye toward generating revenue and wondering just exactly where they may fit in.

Minnesota lawmakers, in 2012, were the first to tax electronic cigarettes. Their rationale was that since the nicotine in e-cigarettes comes from tobacco, the product is a taxable tobacco product. They set the tax at the already-established 95 percent of the wholesale cost of any product containing or derived from tobacco. In 2014, North Carolina jumped in too, and became the only other state to levy a tax on e-cigarettes. Lawmakers there chose to tax the liquid nicotine at $0.05 per milliliter.

The fact that only two states have imposed taxes so far does not mean...