(Microeconomics) Hoosier e-cigarette users can expect to pay more for vaping products

INDIANAPOLIS — Certain vaping products now cost more in the Hoosier state — that's because Indiana's newest vape tax went into effect Friday, July 1.

 

According to the bill's author, Sen. Travis Holdman, a 15% tax now covers closed-system vaping products, like Juuls, for example. These products are pre-filled and ready to be used when purchased.

 

On the other hand, open-system vaping products are filled manually and are often considered more dangerous. Those products have been taxed at 15% since 2021.

Holdman said this new tax was designed to bring parity to the closed-system products.

 

Byran Hannon, the regional government relations director for the American Cancer Society's Cancer Action Network, works at the local, state and federal level to prevent all types of cancers, while also working to help cancer patients get the treatment they need.

 

"One reason why we go after parity in our advocacy work and make sure these things are treated equally is we want to make sure people aren't discouraged to quit, and that they don't seek out cheaper, more affordable products when one product goes up," Hannon said.

Holdman agreed with Hannon's reasoning.

 

"I think if they pay a 15% tax on anything, it would make me think twice about whether or not it's a wise move or not, because typically, when we tax something at that high rate, it's because we have a concern about its use and how it's going to be utilized in our culture,"

 

Holdman said. "I think folks need to think twice if they really want to pay a 15% tax on something that might be questionable." According to Hannon, the long-term effects of using e-cigarettes are still being studied, but

 

he said experts do know vaping can become addictive and act as a gateway to regular cigarettes for young people.

 

This comes as the tobacco tax in Indiana has not been raised in 16 years, according to Hannon. He says nearly one-third of cancer deaths in Indiana are attributed to tobacco use.

 

"Our job, as advocates, is to push lawmakers to do more to protect the health of Hoosiers," Hannon said. "That really starts with what we consider to be low-hanging fruit. Tackling tobacco use really islow-hanging fruit."

 

Hannon said the current Indiana tax is 99 cents per pack, which is almost $1 less than the national average.

 

According to Hannon, taxing vaping products is a step in the right direction when it comes to preventing use in the Hoosier state, but he said more work also needs to be done to increase the state's tobacco tax.

 

"That would generate hundreds of millions of dollars of revenue that we could reinvest in public health, things like tobacco prevention, but many other public health programs are really lagging," Hannon said. "Indiana ranks 48^th in the country in per capita public health funding, so it is kind of a win-win. We can raise the tax, help people quit smoking and then raise that revenue and reinvest in public health programs that improve health across the board."

 

Holdman believes there is room to increase the vaping tax in the future, which is far lower than the tax on tobacco.

 

"I'm open to making a change in that," Holdman said. "I can see where some folks think that the open-system maybe needs to be even higher than the closed-system because we don't know what the product is or what's contained in the product that's being added to the vaping devices itself. I do have some concerns that the open-system maybe should have been higher in the 2021 session, but that's an argument for another day."

 

"It's important that we not just pass taxes but that we pass them in ways that are effective," Hannon said.

 

 

The government of Hoosier state aims to intervene by decreasing the consumption of vapes through the imposition of an indirect tax. This tax is intended to discourage consumers from buying vapes, which are considered demerit goods that have negative effects on society. By increasing the price of pre-filled vape pods, the tax aims to reduce the over-consumption of vapes and address the market failure caused by negative externality of consumption. The tax will not only discourage consumers but also generate revenue for the government to use. The article highlights the concept of government intervention in markets to address social issues and ensure a more efficient allocation of resources. By the article it can be inferred that the Marginal Social Benefit (MSB) is smaller than the Marginal Private Benefit (MPB), meaning that the market is failing due to over-consumption of these goods/services as only the private costs are considered by the consumers and not the external costs (Negative Externalities (2.8.2) | SL IB Economics Revision Notes 2022 Membership, 2022) It is shown in figure 1 set below.

In figure 1, there is an overconsumption of e-cigarettes, as MPB is exceeding MSB. Additionally, the good is over-supplied in Q1, concerning the socially optimal output, which should be at the point where the MSB curve crosses the MSC curve at Q*, which is the ideal quantity to produce from a society’s perspective. The vertical difference between MSB and MPB represents the externality. Therefore, there is welfare loss, which is shown by the yellow triangle, this means that all the units consumed of pre-filled vapes from Q* to Q₁ have a higher cost for society in terms of health than the benefit they bring to it (MSC>MSB). According to the article, the Hoosier government wants to intervene in the market by imposing a 15% tax on closed-system vaping products for correcting the market failure. The type of indirect tax is an ad valorem tax, meaning that the amount of the tax increases as the price of the good increases (tax is not aligned because of that)

Figure 2 shows the tax imposed by the Hoosier state on pre-filled e-cigarettes. This tax leads to an inward shift of the supply curve by the amount of the tax per unit, from MPC=MSC toMPC+Tax. Hence, this will reduce the quantity demanded nearer to Qp, as the price of the good has become more expensive, from P* to Pc, therefore according to the law of demand, people will tend to consume less of it. Consequently, the Vaping companies will face an increase in the cost of production, so the Vaping companies will be less willing and able to produce the same quantity of pre-filled vapes, making a decrease in the production of quantity supplied from Q* to Qp and therefore the new equilibrium will be at Pc and Qp. The Hoosier state will gain a huge revenue that will be aiming to create positive benefits to society “that could be reinvested in public health, things like tobacco prevention, and many other public health programs”. The reason stated before is due to the inelastic demand for e-cigarettes on account of their addictive nature, in which a change in price leads to a proportionately smaller change in the quantity demanded.

 

On the other hand, Producers partially gain and partially lose, because their production decreases to Qp, but they receive a higher price for it which is Pc. Furthermore, workers are worse off because the output of the firms decreases to Qp, so fewer workers are needed, and this leads to unemployment. Society as a whole partially gains and partially loses, because the welfare loss of the negative consumption externality is mostly corrected, and this government revenue is reinvested in positive benefits for society, but the “tax” also creates another welfare loss, as many consumers will be resistant to taxes and they might look for other illegal sources of supply, causing black markets to appear. Additionally, taxes make people pay for the external cost they create but do not stop the negative effect from taking place, as there will still be people using or consuming the good. The tax will not eliminate the welfare loss that isrepresented by the aquamarine triangle.

 

Depending on the amount of the tax, the externality could be eliminated. But in this case,
there will be still a welfare loss, but it will be less than with no government intervention.If there is no government intervention, consumers will keep ignoring the negative
externalities and maximizing their utility, however there would be government
intervention which is vital in the Hoosier state to prevent health problems in the Hoosiers
and to reduce addictiveness among young people in the long run.

App | Kognity. (2021). Kognity.com; Kognity. https://app.kognity.com/study/app/economics-hl-2021-2023/sid-186-cid- 133041/overview/

 

Johnson, S. (2022, July). Hoosier e-cigarette users can expect to pay more for vaping products. Wthr.com; WTHR. https://www.wthr.com/article/news/local/indiana- vaping-tax-july-1-ecigarettes-vapes-hoosiers-new-law/531-f0fb867b-000e-4688- b9d9-8011dc31bd31

 

Negative Externalities (2.8.2) | SL IB Economics Revision Notes 2022 Membership. (2022). Save My Exams. https://www.savemyexams.co.uk/dp/economics/sl/22/revision-notes/2- microeconomics/2-8-market-failure-externalities-and-common-pool-access-resources/2-8-2- negative-externalities/