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 likely to be opposition to vaping. But I’m always uneasy this may be interpreted as being a conspiracy theory. In order to illustrate the scale of the problem, we chose to put some data behind the assertion.
The results are astonishing. Not merely is Pure E Cig costing billions in tax revenue, it could force some 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 USA – We’ll start with tobacco revenues in the us – not because they’re insignificant in the united kingdom and also the EU (as we’ll see, the contrary is the situation) but because which is where nearly all opposition to vaping appears to be originating. At its peak in 2010 tobacco tax revenues reached 17.16 billion dollars. But that amount has been 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 have been 34.3 million smokers in the united states – 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 having $400 per smoker. Multiply that by the amount of vapers so we get a total tax expense of $4.3 billion.
Obviously, those are very rough figures. Some vapers people will be dual users (both vape and smoke), so is still contributing towards some tobacco tax revenues, and of course there will be some taxes on vaping. But however, you cut it, vaping is undoubtedly costing the united states government billions in lost tax revenues.
That sounds a whole lot, but does look insignificant in comparison to the total US tax receipts, estimated to be $3.65 trillion in 2019. But things start looking a lot worse whenever we examine individual US states – as well as the bonds they may have issued that are backed by tobacco revenues.
In 1997 tobacco companies agreed to pay 46 states greater than 200 billion dollars over 25 years. The idea was to cover the cost of treating smoke related diseases, although in reality the cash was often used on other purposes. As an example, one state decided to spend 75% of the total on tobacco production. The greatest recipient was California, which would be to receive over 12% in the total amount.
Remember that. The exact amount is not really set in stone, and among the variants is the quantity of cigarettes sold. The fewer cigarettes sold, the less cash state governments receive, creating a perverse incentive to maintain tobacco sales high. (Intriguingly, when the sales of the tobacco companies in the agreement fall below those of companies not inside the agreement, the states will also get less cash, creating a second perverse incentive to stifle competition.) Crucially, while original estimates allowed for any slow decline in smoking rates, they failed to allow for vaping, and vaping is not really within the master settlement agreement.
Tobacco Secured Bonds and Looming Bankruptcy. As opposed to waiting 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. As a result of guaranteed flow of cash from the tobacco settlements, at that 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 desired to allow the interest to roll-up, kicking on the actual interest payments to later down the road. In return, they agreed to pay uubnmg often the first amount borrowed.
How much? Well, in some instances 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 payments are really high, Moody’s estimates that 80% of 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. In addition, New Jersey has already established its credit history downgraded, rendering it more costly for the state to borrow money.
What happens if the bonds usually are not paid back? Unfortunately, they don’t vanish entirely. Bond holders have priority over taxpayers, and states have to foot the bill – and pay additional interest as a result. And as for the cash raised to start with – well, for many states that’s long gone. David Rosseau, at the time Deputy Treasurer of the latest Jersey, admitted that: “We basically burned all of it in 2 years. It had been not one of New Jersey’s better financial moves.”