In interviews I’m often asked why, if vaping is 95% safer than smoking, there are so many negative stories around vaping. My answer is that vaping is a disruptive industry which threatens 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 may be interpreted as a conspiracy theory. In order to illustrate the scale of the problem, we decided to put some data behind the assertion.
The results are astonishing. Not merely is Cheap E Cig Starter Kits costing billions in tax revenue, it could force a few of the very states that have lead the charge against vaping into effective bankruptcy. Graph showing world tobacco revenue vs tax.
Vaping and Tobacco Tax in the united states – We’ll get started with tobacco revenues in the united states – not because they’re insignificant throughout the uk and the EU (as we’ll see, the contrary is the case) but because that is where the vast majority of opposition to vaping is apparently originating. At its peak during 2010 tobacco tax revenues reached 17.16 billion dollars. But that amount has been coming down rapidly as smokers quit or move to alternative kinds of nicotine – predominantly vaping. In 2018 projected revenues were 20% lower at 13.67 billion dollars. (Source: Statista).
So, just how is vaping affecting tax revenues? In 2018 there have been 34.3 million smokers in the united states – and 10.8 million vapers, equal to almost 32% from the smoking population. Whenever we divide total tax revenue by the number of smokers, we end up having $400 per smoker. Multiply that by the number of vapers so we obtain a total tax price of $4.3 billion.
Obviously, those are very rough figures. Some vapers men and women will be dual users (both vape and smoke), so is still contributing towards some tobacco tax revenues, not to mention there will be some taxes on vaping. But however, you cut it, vaping is certainly costing the US government billions in lost tax revenues.
That sounds a great deal, but does look insignificant when compared to the total US tax receipts, estimated to be $3.65 trillion in 2019. But things start looking a lot worse whenever we look at individual US states – and the bonds they may have issued which are backed by tobacco revenues.
In 1997 tobacco companies decided to pay 46 states more than 200 billion dollars over twenty five years. The idea would be to cover the price of treating smoke related diseases, although in reality the amount of money was often spent on other purposes. For instance, one state chose to spend 75% from the total on tobacco production. The biggest recipient was California, which would be to receive over 12% of the total amount.
Remember that. The amount is not set in stone, and among 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, when the sales in the tobacco companies inside the agreement fall below that relating to companies not inside the agreement, the states also get less money, making a second perverse incentive to stifle competition.) Crucially, while original estimates allowed for a slow decline in smoking rates, they failed to enable vaping, and vaping is not really contained in the master settlement agreement.
Tobacco Secured Bonds and Looming Bankruptcy. Rather than waiting around for the tobacco money in advance, states sold bonds to investors. They promised to repay these bonds making use of the money from tobacco settlement. Because of the guaranteed flow of cash through the tobacco settlements, during the time investors considered these bonds a secure option.
But the states didn’t wish to pay any interest at the outset of the bonds. Instead, they wished to enable the interest to roll up, kicking down the actual interest payments to later down the road. In turn, they agreed to pay uubnmg many times the initial amount borrowed.
How much? Well, in some cases payments could be 76 times the first payment. Millions in initial advances translated into vast amounts of dollars in interest payments. And furthermore, as the repayments are so high, Moody’s estimates that 80% from the bonds are likely to default.
California is behind on its payments, while New Jersey has pledged its remaining 406 million dollars in tobacco revenue to rescue two bonds. Additionally, New Jersey has had its credit rating downgraded, which makes it more expensive for your state to borrow money.
What happens when the bonds are certainly not paid back? Unfortunately, they don’t vanish entirely. Bond holders have priority over taxpayers, and states must foot the bill – and pay additional interest because of this. So that as for the cash raised in the first place – well, for many states that’s over. David Rosseau, at the time Deputy Treasurer of New Jersey, admitted that: “We basically burned it all in 2 years. It had been not certainly one of New Jersey’s better financial moves.”