E-cigarette makers say legislators need to butt out when it comes to taxes.

New Jersey Gov. Chris Christie included in his 2015 budget proposal a tax on e-cigs that would make them just as expensive as traditional combustible cigarettes. The tax hike would raise an estimated $35 million for the state. Minnesota is the only state so far that has passed an e-cigarette tax.

According to analysis from the Smoke Free Alternatives Trade Association, federal taxation on e-cigarettes could lead to a 20% drop in sales. And e-cigarette entrepreneurs say it would be unwarranted.

“Taxes on combustible cigarettes are there to offset the expense that is generated by combustible tobacco -- from the strain on the health-care system,” says Cigirex CEO Jason Cardiff. “We’re not generating additional harm or health-care expenses.”

The FDA has not come out with a final ruling on e-cigarettes. The agency says it is unsure whether e-cigarettes could lead users to try more harmful conventional cigarettes, leaving the window open for regulation and taxation.

Could Taxes Stomp Out E-Cigarettes?

E-cigarette sales are blazing – and some say legislators are pushing to tax e-cigs due to fears over lost revenue from conventional cigarette sales.

“We’re threatening revenues, and the states are [threatening] public health to ensure that they don’t lose revenue … The states have their heart in the wrong place,” says Andries Verleur, CEO of VMR, which makes V2 e-cigarettes.

Wells Fargo Securities analyst Bonnie Herzog says as long as regulations don’t slow down the industry, e-cig usage could soon surpass that of conventional cigarettes. She says the category is worth about $1.85 billion, and could outpace combustible cigarettes within the next decade.

Cardiff says his brand, Cigirex, has seen annual growth fluctuate between 100% and 300% over the past six years. The disposable e-cigs cost between $6.95 and $8.95, and are equivalent to about a pack of cigarettes. Verleur says VMR doubled sales last year, making it the no. 3 e-cigarette company in the world, with sales in the nine-figure range.

Verleur is confident that e-cigarettes will eventually replace conventional cigarettes. That said, he believes misguided regulation could hinder the pace of innovation and consumers’ access to healthier alternatives.

"Consumers at the end of the day want these products and understand the application in their daily lives. Even with taxation, these products are not going to go away," says Verleur.

Cardiff, however, takes a more dire view on possible taxation.

“Depending on what the tax levels are, it could probably put an end to the electronic-cigarette business. It’s a complicated and advanced product … if taxation gets too out of control, we’ll be priced out of the marketplace, and only wealthy people will buy a safer product to smoke,” says Cardiff.

But Herzog is hopeful that, at least at the federal level, the final word on e-cigs will be positive.

“If e-cig innovation is stifled, in our view this could dramatically slow down conversion from combustible cigs, which would ultimately result in net negativepublic health impact; clearly, this would be in direct opposition of the agency's goal,” writes Herzog in a recent research report. She adds that it is possible the FDA will create a new category to more definitely differentiate e-cigs from conventional cigarettes, which would help the growing industry.

 

Follow Gabrielle Karol on Twitter @GabrielleKarol