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In a recent NY Times opinion piece, Tim Wu, like Elizabeth Holmes, lionizes Steve Jobs. Like Jobs with the iPod and iPhone, and Holmes with the Theranos Edison machine, Wu tells us we must simplify the public’s experience of complex policy into a simple box with an intuitive interface. In this spirit he argues that “what the public wants from government is help with complexity,” such that “[t]his generation of progressives … must accept that simplicity and popularity are not a dumbing-down of policy.”

This argument provides remarkable insight into the complexity problems of progressive thought. Three of these are taken up below: the mismatch of comparing the work of the government to the success of Jobs; the mismatch between Wu’s telling of and Jobs’s actual success; and the latent hypocrisy in Wu’s “simplicity for me, complexity for thee” argument.

Contra Wu’s argument, we need politicians that embrace and lay bare the complexity of policy issues. Too much of our political moment is dominated by demagogues on every side of policy debates offering simple solutions to simplified accounts of complex policy issues. We need public intellectuals, and hopefully politicians as well, to make the case for complexity. Our problems are complex and solutions to them hard (and sometimes unavailing). Without leaders willing to steer into complexity, we can never have a polity able to address complexity.

I. “Good enough for government work” isn’t good enough for Jobs

As an initial matter, there is a great deal of wisdom in Wu’s recognition that the public doesn’t want complexity. As I said at the annual Silicon Flatirons conference in February, consumers don’t want a VCR with lots of dials and knobs that let them control lots of specific features—they just want the damn thing to work. And as that example is meant to highlight, once it does work, most consumers are happy to leave well enough alone (as demonstrated by millions of clocks that would continue to blink 12:00 if VCRs weren’t so 1990s).

Where Wu goes wrong, though, is that he fails to recognize that despite this desire for simplicity, for two decades VCR manufacturers designed and sold VCRs with clocks that were never set—a persistent blinking to constantly remind consumers of their own inadequacies. Had the manufacturers had any insight into the consumer desire for simplicity, all those clocks would have been used for something—anything—other than a reminder that consumers didn’t know how to set them. (Though, to their credit, these devices were designed to operate as most consumers desired without imposing any need to set the clock upon them—a model of simplicity in basic operation that allows consumers to opt-in to a more complex experience.)

If the government were populated by visionaries like Jobs, Wu’s prescription would be wise. But Jobs was a once-in-a-generation thinker. No one in a generation of VCR designers had the insight to design a VCR without a clock (or at least a clock that didn’t blink in a constant reminder of the owner’s inability to set it). And similarly few among the ranks of policy designers are likely to have his abilities, either. On the other hand, the public loves the promise of easy solutions to complex problems. Charlatans and demagogues who would cast themselves in his image, like Holmes did with Theranos, can find government posts in abundance.

Of course, in his paean to offering the public less choice, Wu, himself an oftentime designer of government policy, compares the art of policy design to the work of Jobs—not of Holmes. But where he promises a government run in the manner of Apple, he would more likely give us one more in the mold of Theranos.

There is a more pernicious side to Wu’s argument. He speaks of respect for the public, arguing that “Real respect for the public involves appreciating what the public actually wants and needs,” and that “They would prefer that the government solve problems for them.” Another aspect of respect for the public is recognizing their fundamental competence—that progressive policy experts are not the only ones who are able to understand and address complexity. Most people never set their VCRs’ clocks because they felt no need to, not because they were unable to figure out how to do so. Most people choose not to master the intricacies of public policy. But this is not because the progressive expert class is uniquely able to do so. It is—as Wu notes, that most people do not have the unlimited time or attention that would be needed to do so—time and attention that is afforded to him by his social class.

Wu’s assertion that the public “would prefer that the government solve problems for them” carries echoes of Louis Brandeis, who famously said of consumers that they were “servile, self-indulgent, indolent, ignorant.” Such a view naturally gives rise to Wu’s assumption that the public wants the government to solve problems for them. It assumes that they are unable to solve those problems on their own.

But what Brandeis and progressives cast in his mold attribute to servile indolence is more often a reflection that hoi polloi simply do not have the same concerns as Wu’s progressive expert class. If they had the time to care about the issues Wu would devote his government to, they could likely address them on their own. The fact that they don’t is less a reflection of the public’s ability than of its priorities.

II. Jobs had no monopoly on simplicity

There is another aspect to Wu’s appeal to simplicity in design that is, again, captured well in his invocation of Steve Jobs. Jobs was exceptionally successful with his minimalist, simple designs. He made a fortune for himself and more for Apple. His ideas made Apple one of the most successful companies, with one of the largest user bases, in the history of the world.

Yet many people hate Apple products. Some of these users prefer to have more complex, customizable devices—perhaps because they have particularized needs or perhaps simply because they enjoy having that additional control over how their devices operate and the feeling of ownership that that brings. Some users might dislike Apple products because the interface that is “intuitive” to millions of others is not at all intuitive to them. As trivial as it sounds, most PC users are accustomed to two-button mice—transitioning to Apple’s one-button mouse is exceptionally  discomfitting for many of these users. (In fairness, the one-button mouse design used by Apple products is not attributable to Steve Jobs.) And other users still might prefer devices that are simple in other ways, so are drawn to other products that better cater to their precise needs.

Apple has, perhaps, experienced periods of market dominance with specific products. But this has never been durable—Apple has always faced competition. And this has ensured that those parts of the public that were not well-served by Jobs’s design choices were not bound to use them—they always had alternatives.

Indeed, that is the redeeming aspect of the Theranos story: the market did what it was supposed to. While too many consumers may have been harmed by Holmes’ charlatan business practices, the reality is that once she was forced to bring the company’s product to market it was quickly outed as a failure.

This is how the market works. Companies that design good products, like Apple, are rewarded; other companies then step in to compete by offering yet better products or by addressing other segments of the market. Some of those companies succeed; most, like Theranos, fail.

This dynamic simply does not exist with government. Government is a policy monopolist. A simplified, streamlined, policy that effectively serves half the population does not effectively serve the other half. There is no alternative government that will offer competing policy designs. And to the extent that a given policy serves part of the public better than others, it creates winners and losers.

Of course, the right response to the inadequacy of Wu’s call for more, less complex policy is not that we need more, more complex policy. Rather, it’s that we need less policy—at least policy being dictated and implemented by the government. This is one of the stalwart arguments we free market and classical liberal types offer in favor of market economies: they are able to offer a wider range of goods and services that better cater to a wider range of needs of a wider range of people than the government. The reason policy grows complex is because it is trying to address complex problems; and when it fails to address those problems on a first cut, the solution is more often than not to build “patch” fixes on top of the failed policies. The result is an ever-growing book of rules bound together with voluminous “kludges” that is forever out-of-step with the changing realities of a complex, dynamic world.

The solution to so much complexity is not to sweep it under the carpet in the interest of offering simpler, but only partial, solutions catered to the needs of an anointed subset of the public. The solution is to find better ways to address those complex problems—and often times it’s simply the case that the market is better suited to such solutions.

III. A complexity: What does Wu think of consumer protection?

There is a final, and perhaps most troubling, aspect to Wu’s argument. He argues that respect for the public does not require “offering complete transparency and a multiplicity of choices.” Yet that is what he demands of business. As an academic and government official, Wu has been a loud and consistent consumer protection advocate, arguing that consumers are harmed when firms fail to provide transparency and choice—and that the government must use its coercive power to ensure that they do so.

Wu derives his insight that simpler-design-can-be-better-design from the success of Jobs—and recognizes more broadly that the consumer experience of products of the technological revolution (perhaps one could even call it the tech industry) is much better today because of this simplicity than it was in earlier times. Consumers, in other words, can be better off with firms that offer less transparency and choice. This, of course, is intuitive when one recognizes (as Wu has) that time and attention are among the scarcest of resources.

Steve Jobs and Elizabeth Holmes both understood that the avoidance of complexity and minimizing of choices are hallmarks of good design. Jobs built an empire around this; Holmes cost investors hundreds of millions of dollars in her failed pursuit. But while Holmes failed where Jobs succeeded, her failure was not tragic: Theranos was never the only medical testing laboratory in the market and, indeed, was never more than a bit player in that market. For every Apple that thrives, the marketplace erases a hundred Theranoses. But we do not have a market of governments. Wu’s call for policy to be more like Apple is a call for most government policy to fail like Theranos. Perhaps where the challenge is to do more complex policy simply, the simpler solution is to do less, but simpler, policy well.

Conclusion

We need less dumbing down of complex policy in the interest of simplicity; and we need leaders who are able to make citizens comfortable with and understanding of complexity. Wu is right that good policy need not be complex. But the lesson from that is not that complex policy should be made simple. Rather, the lesson is that policy that cannot be made simple may not be good policy after all.

Writing in the New York Times, journalist E. Tammy Kim recently called for Seattle and other pricey, high-tech hubs to impose a special tax on Microsoft and other large employers of high-paid workers. Efficiency demands such a tax, she says, because those companies are imposing a negative externality: By driving up demand for housing, they are causing rents and home prices to rise, which adversely affects city residents.

Arguing that her proposal is “akin to a pollution tax,” Ms. Kim writes:

A half-century ago, it seemed inconceivable that factories, smelters or power plants should have to account for the toxins they released into the air.  But we have since accepted the idea that businesses should have to pay the public for the negative externalities they cause.

It is true that negative externalities—costs imposed on people who are “external” to the process creating those costs (as when a factory belches rancid smoke on its neighbors)—are often taxed. One justification for such a tax is fairness: It seems inequitable that one party would impose costs on another; justice may demand that the victimizer pay. The justification cited by the economist who first proposed such taxes, though, was something different. In his 1920 opus, The Economics of Welfare, British economist A.C. Pigou proposed taxing behavior involving negative externalities in order to achieve efficiency—an increase in overall social welfare.   

With respect to the proposed tax on Microsoft and other high-tech employers, the fairness argument seems a stretch, and the efficiency argument outright fails. Let’s consider each.

To achieve fairness by forcing a victimizer to pay for imposing costs on a victim, one must determine who is the victimizer. Ms. Kim’s view is that Microsoft and its high-paid employees are victimizing (imposing costs on) incumbent renters and lower-paid homebuyers. But is that so clear?

Microsoft’s desire to employ high-skilled workers, and those employees’ desire to live near their work, conflicts with incumbent renters’ desire for low rent and lower paid homebuyers’ desire for cheaper home prices. If Microsoft got its way, incumbent renters and lower paid homebuyers would be worse off.

But incumbent renters’ and lower-paid homebuyers’ insistence on low rents and home prices conflicts with the desires of Microsoft, the high-skilled workers it would like to hire, and local homeowners. If incumbent renters and lower paid homebuyers got their way and prevented Microsoft from employing high-wage workers, Microsoft, its potential employees, and local homeowners would be worse off. Who is the victim here?

As Nobel laureate Ronald Coase famously observed, in most cases involving negative externalities, there is a reciprocal harm: Each party is a victim of the other party’s demands and a victimizer with respect to its own. When both parties are victimizing each other, it’s hard to “do justice” by taxing “the” victimizer.

A desire to achieve efficiency provides a sounder basis for many so-called Pigouvian taxes. With respect to Ms. Kim’s proposed tax, however, the efficiency justification fails. To see why that is so, first consider how it is that Pigouvian taxes may enhance social welfare.

When a business engages in some productive activity, it uses resources (labor, materials, etc.) to produce some sort of valuable output (e.g., a good or service). In determining what level of productive activity to engage in (e.g., how many hours to run the factory, etc.), it compares its cost of engaging in one more unit of activity to the added benefit (revenue) it will receive from doing so. If its so-called “marginal cost” from the additional activity is less than or equal to the “marginal benefit” it will receive, it will engage in the activity; otherwise, it won’t.  

When the business is bearing all the costs and benefits of its actions, this outcome is efficient. The cost of the inputs used in production are determined by the value they could generate in alternative uses. (For example, if a flidget producer could create $4 of value from an ounce of tin, a widget-maker would have to bid at least $4 to win that tin from the flidget-maker.) If a business finds that continued production generates additional revenue (reflective of consumers’ subjective valuation of the business’s additional product) in excess of its added cost (reflective of the value its inputs could create if deployed toward their next-best use), then making more moves productive resources to their highest and best uses, enhancing social welfare. This outcome is “allocatively efficient,” meaning that productive resources have been allocated in a manner that wrings the greatest possible value from them.

Allocative efficiency may not result, though, if the producer is able to foist some of its costs onto others.  Suppose that it costs a producer $4.50 to make an additional widget that he could sell for $5.00. He’d make the widget. But what if producing the widget created pollution that imposed $1 of cost on the producer’s neighbors? In that case, it could be inefficient to produce the widget; the total marginal cost of doing so, $5.50, might well exceed the marginal benefit produced, which could be as low as $5.00. Negative externalities, then, may result in an allocative inefficiency—i.e., a use of resources that produces less total value than some alternative use.

Pigou’s idea was to use taxes to prevent such inefficiencies. If the government were to charge the producer a tax equal to the cost his activity imposed on others ($1 in the above example), then he would capture all the marginal benefit and bear all the marginal cost of his activity. He would thus be motivated to continue his activity only to the point at which its total marginal benefit equaled its total marginal cost. The point of a Pigouvian tax, then, is to achieve allocative efficiency—i.e., to channel productive resources toward their highest and best ends.

When it comes to the negative externality Ms. Kim has identified—an increase in housing prices occasioned by high-tech companies’ hiring of skilled workers—the efficiency case for a Pigouvian tax crumbles. That is because the external cost at issue here is a “pecuniary” externality, a special sort of externality that does not generate inefficiency.

A pecuniary externality is one where the adverse third-party effect consists of an increase in market prices. If that’s the case, the allocative inefficiency that may justify Pigouvian taxes does not exist. There’s no inefficiency from the mere fact that buyers pay more.  Their loss is perfectly offset by a gain to sellers, and—here’s the crucial part—the higher prices channel productive resources toward, not away from, their highest and best ends. High rent levels, for example, signal to real estate developers that more resources should be devoted to creating living spaces within the city. That’s allocatively efficient.

Now, it may well be the case that government policies thwart developers from responding to those salutary price signals. The cities that Ms. Kim says should impose a tax on high-tech employers—Seattle, San Francisco, Austin, New York, and Boulder—have some of the nation’s most restrictive real estate development rules. But that’s a government failure, not a market failure.

In the end, Ms. Kim’s pollution tax analogy fails. The efficiency case for a Pigouvian tax to remedy negative externalities does not apply when, as here, the externality at issue is pecuniary.

For more on pecuniary versus “technological” (non-pecuniary) externalities and appropriate responses thereto, check out Chapter 4 of my recent book, How to Regulate: A Guide for Policymakers.

This post was co-authored with Chelsea Boyd

The Food and Drug Administration has spoken, and its words have, once again, ruffled many feathers. Coinciding with the deadline for companies to lay out their plans to prevent youth access to e-cigarettes, the agency has announced new regulatory strategies that are sure to not only make it more difficult for young people to access e-cigarettes, but for adults who benefit from vaping to access them as well.

More surprising than the FDA’s paradoxical strategy of preventing teen smoking by banning not combustible cigarettes, but their distant cousins, e-cigarettes, is that the biggest support for establishing barriers to accessing e-cigarettes seems to come from the tobacco industry itself.

Going above and beyond the FDA’s proposals, both Altria and JUUL are self-restricting flavor sales, creating more — not fewer — barriers to purchasing their products. And both companies now publicly support a 21-to-purchase mandate. Unfortunately, these barriers extend beyond restricting underage access and will no doubt affect adult smokers seeking access to reduced-risk products.

To say there are no benefits to self-regulation by e-cigarette companies would be misguided. Perhaps the biggest benefit is to increase the credibility of these companies in an industry where it has historically been lacking. Proposals to decrease underage use of their product show that these companies are committed to improving the lives of smokers. Going above and beyond the FDA’s regulations also allows them to demonstrate that they take underage use seriously.

Yet regulation, whether imposed by the government or as part of a business plan, comes at a price. This is particularly true in the field of public health. In other health areas, the FDA is beginning to recognize that it needs to balance regulatory prudence with the risks of delaying innovation. For example, by decreasing red tape in medical product development, the FDA aims to help people access novel treatments for conditions that are notoriously difficult to treat. Unfortunately, this mindset has not expanded to smoking.

Good policy, whether imposed by government or voluntarily adopted by private actors, should not help one group while harming another. Perhaps the question that should be asked, then, is not whether these new FDA regulations and self-imposed restrictions will decrease underage use of e-cigarettes, but whether they decrease underage use enough to offset the harm caused by creating barriers to access for adult smokers.

The FDA’s new point-of-sale policy restricts sales of flavored products (not including tobacco flavors or menthol/mint flavors) to either specialty, age-restricted, in-person locations or to online retailers with heightened age-verification systems. JUUL, Reynolds and Altria have also included parts of this strategy in their proposed self-regulations, sometimes going even further by limiting sales of flavored products to their company websites.

To many people, these measures may not seem like a significant barrier to purchasing e-cigarettes, but in fact, online retail is a luxury that many cannot access. Heightened online age-verification processes are likely to require most of the following: a credit or debit card, a Social Security number, a government-issued ID, a cellphone to complete two-factor authorization, and a physical address that matches the user’s billing address. According to a 2017 Federal Deposit Insurance Corp. survey, one in four U.S. households are unbanked or underbanked, which is an indicator of not having a debit or credit card. That factor alone excludes a quarter of the population, including many adults, from purchasing online. It’s also important to note that the demographic characteristics of people who lack the items required to make online purchases are also the characteristics most associated with smoking.

Additionally, it’s likely that these new point-of-sale restrictions won’t have much of an effect at all on the target demographic — those who are underage. According to a 2017 Centers for Disease Control and Prevention study, of the 9 percent of high school students who currently use electronic nicotine delivery systems (ENDS), only 13 percent reported purchasing the device for themselves from a store. This suggests that 87 percent of underage users won’t be deterred by prohibitive measures to move sales to specialty stores or online. Moreover, Reynolds estimates that only 20 percent of its VUSE sales happen online, indicating that more than three-quarters of users — consisting mainly of adults — purchase products in brick-and-mortar retail locations.

Existing enforcement techniques, if properly applied at the point of sale, could have a bigger impact on youth access. Interestingly, a recent analysis by Baker White of FDA inspection reports suggests that the agency’s existing approaches to prevent youth access may be lacking — meaning that there is much room for improvement. Overall, selling to minors is extremely low-risk for stores. The likelihood of a store receiving a fine for violation of the minimum age of sale is once for every 36.7 years of operation, the financial risk is about 2 cents per day, and the risk of receiving a no sales order (the most severe consequence) is 1 for every 2,825 years of operation. Furthermore, for every $279 the FDA receives in fines, it spends over $11,800. With odds like those, it’s no wonder some stores are willing to sell to minors: Their risk is minimal.

Eliminating access to flavored products is the other arm of the FDA’s restrictions. Many people have suggested that flavors are designed to appeal to youth, yet fewer talk about the proportion of adults who use flavored e-cigarettes. In reality, flavors are an important factor for adults who switch from combustible cigarettes to e-cigarettes. A 2018 survey of 20,676 US adults who frequently use e-cigarettes showed that “since 2013, fruit-flavored e-liquids have replaced tobacco-flavored e-liquids as the most popular flavors with which participants had initiated e-cigarette use.” By relegating flavored products to specialty retailers and online sales, the FDA has forced adult smokers, who may switch from combustible cigarettes to e-cigarettes, to go out of their way to initiate use.

It remains to be seen if new regulations, either self- or FDA-imposed, will decrease underage use. However, we already know who is most at risk for negative outcomes from these new regulations: people who are geographically disadvantaged (for instance, people who live far away from adult-only retailers), people who might not have credit to go through an online retailer, and people who rely on new flavors as an incentive to stay away from combustible cigarettes. It’s not surprising or ironic that these are also the people who are most at risk for using combustible cigarettes in the first place.

Given the likelihood that the new way of doing business will have minimal positive effects on youth use but negative effects on adult access, we must question what the benefits of these policies are. Fortunately, we know the answer already: The FDA gets political capital and regulatory clout; industry gets credibility; governments get more excise tax revenue from cigarette sales. And smokers get left behind.

Over the past few weeks, Truth on the Market has had several posts related to harm reduction policies, with a focus on tobacco, e-cigarettes, and other vapor products:

Harm reduction policies are used to manage a wide range of behaviors including recreational drug use and sexual activity. Needle-exchange programs reduce the spread of infectious diseases among users of heroin and other injected drugs. Opioid replacement therapy substitutes illegal opioids, such as heroin, with a longer acting but less euphoric opioid. Safer sex education and condom distribution in schools are designed to reduce teenage pregnancy and reduce the spread of sexually transmitted infections. None of these harm reduction policies stop the risky behavior, nor do the policies eliminate the potential for harm. Nevertheless, the policies intend to reduce the expected harm.

Carrie Wade, Director of Harm Reduction Policy and Senior Fellow at the R Street Institute, draws a parallel between opiate harm reduction strategies and potential policies related to tobacco harm reduction. She notes that with successful one-year quit rates hovering around 10 percent, harm reduction strategies offer ways to transition more smokers off the most dangerous nicotine delivery device: the combustible cigarette.

Most of the harm from smoking is caused by the inhalation of toxicants released through the combustion of tobacco. Use of non-combustible nicotine delivery systems, such as e-cigarettes and smokeless tobacco generally are considered to be significantly less harmful than smoking cigarettes. UK government agency Public Health England has concluded that e-cigarettes are around 95 percent less harmful than combustible cigarettes.

In the New England Journal of Medicine, Fairchild, et al. (2018) identify a continuum of potential policies regarding the regulation of vapor products, such as e-cigarettes, show in the figure below.  They note that the most restrictive policies would effectively eliminate e-cigarettes as a viable alternative to smoking, while the most permissive may promote e-cigarette usage and potentially encourage young people—who would not do so otherwise—to take-up e-cigarettes. In between these extremes are policies that may discourage young people from initiating use of e-cigarettes, while encouraging current smokers to switch to less harmful vapor products.

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International Center for Law & Economics chief economist, Eric Fruits, notes in his blog post that more than 20 countries have introduced taxation on e-cigarettes and other vapor products. In the United States, several states and local jurisdictions have enacted e-cigarette taxes. His post is based on a recently released ICLE white paper entitled Vapor products, harm reduction, and taxation: Principles, evidence and a research agenda.

Under a harm reduction principle, Fruits argues that e-cigarettes and other vapor products should face no taxes or low taxes relative to conventional cigarettes, to guide consumers toward a safer alternative to smoking.

In contrast to harm reduction principles,  the precautionary principle as well as principles of tax equity point toward the taxation of vapor products at rates similar to conventional cigarettes.

On the one hand, some policymakers claim that the objective of taxing nicotine products is to reduce nicotine consumption. On the other hand, Dan Mitchell, co-founder of the Center for Freedom and Prosperity, points out that some politicians are concerned that they will lose tax revenue if a substantial number of smokers switch to options such as vaping.

Often missed in the policy discussion is the effect of fiscal policies on innovation and the development and commercialization of harm-reducing products. Also, often missed are the consequences for current consumers of nicotine products, including smokers seeking to quit using harmful conventional cigarettes.

Policy decisions regarding taxation of vapor products should take into account both long-term fiscal effects and broader economic and welfare effects. These effects might (or might not) suggest very different tax policies to those that have been enacted or are under consideration. These considerations, however, are frustrated by unreliable and wildly divergent empirical estimates of consumer demand in the face of changing prices and/or rising taxes.

Along the lines of uncertain—if not surprising—impacts Fritz Laux, professor of economics at Northeastern State University, provides an explanation of why smoke-free air laws have not been found to adversely affect revenues or employment in the restaurant and hospitality industries.

He argues that social norms regarding smoking in restaurants have changed to the point that many smokers themselves support bans on smoking in restaurants. In this way, he hypothesizes, smoke-free air laws do not impose a significant constraint on consumer behavior or business activity. We might likewise infer, by extension, that policies which do not prohibit vaping in public spaces (leaving such decisions to the discretion of business owners and managers) could encourage switching by people who otherwise would have to exit buildings in order to vape or smoke—without adversely affecting businesses.

Principles of harm reduction recognize that every policy proposal has uncertain outcomes as well as potential spillovers and unforeseen consequences. With such high risks and costs associated with cigarette and other combustible use, taxes and regulations must be developed in an environment of uncertainty and with an eye toward a net reduction in harm, rather than an unattainable goal of zero harm or in an overt pursuit of tax revenues.

 

Dan Mitchell is the co-founder of the Center for Freedom and Prosperity.

In an ideal world, the discussion and debate about how (or if) to tax e-cigarettes, heat-not-burn, and other tobacco harm-reduction products would be guided by science. Policy makers would confer with experts, analyze evidence, and craft prudent and sensible laws and regulations.

In the real world, however, politicians are guided by other factors.

There are two things to understand, both of which are based on my conversations with policy staff in Washington and elsewhere.

First, this is a battle over tax revenue. Politicians are concerned that they will lose tax revenue if a substantial number of smokers switch to options such as vaping.

This is very much akin to the concern that electric cars and fuel-efficient cars will lead to a loss of money from excise taxes on gasoline.

In the case of fuel taxes, politicians are anxiously looking at other sources of revenue, such as miles-driven levies. Their main goal is to maintain – or preferably increase – the amount of money that is diverted to the redistributive state so that politicians can reward various interest groups.

In the case of tobacco, a reduction in the number of smokers (or the tax-driven propensity of smokers to seek out black-market cigarettes) is leading politicians to concoct new schemes for taxing e-cigarettes and related non-combustible products.

Second, this is a quasi-ideological fight. Not about capitalism versus socialism, or big government versus small government. It’s basically a fight over paternalism, or a battle over goals.

For all intents and purposes, the question is whether lawmakers should seek to simultaneously discourage both tobacco use and vaping because both carry some risk (and perhaps because both are considered vices for the lower classes)? Or should they welcome vaping since it leads to harm reduction as smokers shift to a dramatically safer way of consuming nicotine?

In statistics, researchers presumably always recognize the dangers of certain types of mistakes, known as Type I errors (also known as a “false positive”) and Type II errors (also known as a “false negative”).

How does this relate to smoking, vaping, and taxes?

Simply stated, both sides of the fight are focused on a key goal and secondary issues are pushed aside. In other words, tradeoffs are being ignored.

The advocates of high taxes on e-cigarettes and other non-combustible products are fixated on the possibility that vaping will entice some people into the market. Maybe vaping wil even act as a gateway to smoking. So, they want high taxes on vaping, akin to high taxes on tobacco, even though the net result is that this leads many smokers to stick with cigarettes instead of making a switch to less harmful products.

On the other side of the debate are those focused on overall public health. They see emerging non-combustible products as very effective ways of promoting harm reduction. Is it possible that e-cigarettes may be tempting to some people who otherwise would never try tobacco? Yes, that’s possible, but it’s easily offset by the very large benefits that accrue as smokers become vapers.

For all intents and purposes, the fight over the taxation of vaping is similar to other ideological fights.

The old joke in Washington is that a conservative is someone who will jail 99 innocent people in order to put one crook in prison and a liberal is someone who will free 99 guilty people to prevent one innocent person from being convicted (or, if you prefer, a conservative will deny 99 poor people to catch one welfare fraudster and a liberal will line the pockets of 99 fraudsters to make sure one genuinely poor person gets money).

The vaping fight hasn’t quite reached this stage, but the battle lines are very familiar. At some point in the future, observers may joke that one side is willing to accept more smoking if one teenager forgoes vaping while the other side is willing to have lots of vapers if it means one less smoker.

Having explained the real drivers of this debate, I’ll close by injecting my two cents and explaining why the paternalists are wrong. But rather than focus on libertarian-type arguments about personal liberty, I’ll rely on three points, all of which are based on conventional cost-benefit analysis and the sensible approach to excise taxation.

  • First, tax policy should focus on incentivizing a switch and not punishing those who chose a less harmful products. The goal should be harm reduction rather than revenue maximization.
  • Second, low tax burdens also translate into lower long-run spending burdens because a shift to vaping means a reduction in overall healthcare costs related to smoking cigarettes.
  • Third, it makes no sense to impose punitive “sin taxes” on behaviors that are much less, well, sinful. There’s a big difference in the health and fiscal impact of cigarettes compared to the alternatives.

One final point is that this issue has a reverse-class-warfare component. Anti-smoking activists generally have succeeded in stigmatizing cigarette consumption and most smokers are now disproportionately from the lower-income community. For better (harm reduction) or worse (elitism), low-income smokers are generally treated with disdain for their lifestyle choices.  

It is not an explicit policy, but that disdain now seems to extend to any form of nicotine consumption, even though the health effects of vaping are vastly lower.

It is a truth universally acknowledged that unwanted telephone calls are among the most reviled annoyances known to man. But this does not mean that laws intended to prohibit these calls are themselves necessarily good. Indeed, in one sense we know intuitively that they are not good. These laws have proven wholly ineffective at curtailing the robocall menace — it is hard to call any law as ineffective as these “good”. And these laws can be bad in another sense: because they fail to curtail undesirable speech but may burden desirable speech, they raise potentially serious First Amendment concerns.

I presented my exploration of these concerns, coming out soon in the Brooklyn Law Review, last month at TPRC. The discussion, which I get into below, focuses on the Telephone Consumer Protection Act (TCPA), the main law that we have to fight against robocalls. It considers both narrow First Amendment concerns raised by the TCPA as well as broader concerns about the Act in the modern technological setting.

Telemarketing Sucks

It is hard to imagine that there is a need to explain how much of a pain telemarketing is. Indeed, it is rare that I give a talk on the subject without receiving a call during the talk. At the last FCC Open Meeting, after the Commission voted on a pair of enforcement actions taken against telemarketers, Commissioner Rosenworcel picked up her cell phone to share that she had received a robocall during the vote. Robocalls are the most complained of issue at both the FCC and FTC. Today, there are well over 4 billion robocalls made every month. It’s estimated that half of all phone calls made in 2019 will be scams (most of which start with a robocall). .

It’s worth noting that things were not always this way. Unsolicited and unwanted phone calls have been around for decades — but they have become something altogether different and more problematic in the past 10 years. The origin of telemarketing was the simple extension of traditional marketing to the medium of the telephone. This form of telemarketing was a huge annoyance — but fundamentally it was, or at least was intended to be, a mere extension of legitimate business practices. There was almost always a real business on the other end of the line, trying to advertise real business opportunities.

This changed in the 2000s with the creation of the Do Not Call (DNC) registry. The DNC registry effectively killed the “legitimate” telemarketing business. Companies faced significant penalties if they called individuals on the DNC registry, and most telemarketing firms tied the registry into their calling systems so that numbers on it could not be called. And, unsurprisingly, an overwhelming majority of Americans put their phone numbers on the registry. As a result the business proposition behind telemarketing quickly dried up. There simply weren’t enough individuals not on the DNC list to justify the risk of accidentally calling individuals who were on the list.

Of course, anyone with a telephone today knows that the creation of the DNC registry did not eliminate robocalls. But it did change the nature of the calls. The calls we receive today are, overwhelmingly, not coming from real businesses trying to market real services or products. Rather, they’re coming from hucksters, fraudsters, and scammers — from Rachels from Cardholder Services and others who are looking for opportunities to defraud. Sometimes they may use these calls to find unsophisticated consumers who can be conned out of credit card information. Other times they are engaged in any number of increasingly sophisticated scams designed to trick consumers into giving up valuable information.

There is, however, a more important, more basic difference between pre-DNC calls and the ones we receive today. Back in the age of legitimate businesses trying to use the telephone for marketing, the relationship mattered. Those businesses couldn’t engage in business anonymously. But today’s robocallers are scam artists. They need no identity to pull off their scams. Indeed, a lack of identity can be advantageous to them. And this means that legal tools such as the DNC list or the TCPA (which I turn to below), which are premised on the ability to take legal action against bad actors who can be identified and who have assets than can be attached through legal proceedings, are wholly ineffective against these newfangled robocallers.

The TCPA Sucks

The TCPA is the first law that was adopted to fight unwanted phone calls. Adopted in 1992, it made it illegal to call people using autodialers or prerecorded messages without prior express consent. (The details have more nuance than this, but that’s the gist.) It also created a private right of action with significant statutory damages of up to $1,500 per call.

Importantly, the justification for the TCPA wasn’t merely “telemarketing sucks.” Had it been, the TCPA would have had a serious problem: telemarketing, although exceptionally disliked, is speech, which means that it is protected by the First Amendment. Rather, the TCPA was enacted primarily upon two grounds. First, telemarketers were invading the privacy of individuals’ homes. The First Amendment is license to speak; it is not license to break into someone’s home and force them to listen. And second, telemarketing calls could impose significant real costs on the recipients of calls. At the time, receiving a telemarketing call could, for instance, cost cellular customers several dollars; and due to the primitive technologies used for autodialing, these calls would regularly tie up residential and commercial phone lines for extended periods of time, interfere with emergency calls, and fill up answering machine tapes.

It is no secret that the TCPA was not particularly successful. As the technologies for making robocalls improved throughout the 1990s and their costs went down, firms only increased their use of them. And we were still in a world of analog telephones, and Caller ID was still a new and not universally-available technology, which made it exceptionally difficult to bring suits under the TCPA. Perhaps more important, while robocalls were annoying, they were not the omnipresent fact of life that they are today: cell phones were still rare; most of these calls came to landline phones during dinner where they were simply ignored.

As discussed above, the first generation of robocallers and telemarketers quickly died off following adoption of the DNC registry.

And the TCPA is proving no more effective during this second generation of robocallers. This is unsurprising. Callers who are willing to blithely ignore the DNC registry are just as willing to blithely ignore the TCPA. Every couple of months the FCC or FTC announces a large fine — millions or tens of millions of dollars — against a telemarketing firm that was responsible for making millions or tens of millions or even hundreds of millions of calls over a multi-month period. At a time when there are over 4 billion of these calls made every month, such enforcement actions are a drop in the ocean.

Which brings us to the FIrst Amendment and the TCPA, presented in very cursory form here (see the paper for more detailed analysis). First, it must be acknowledged that the TCPA was challenged several times following its adoption and was consistently upheld by courts applying intermediate scrutiny to it, on the basis that it was regulation of commercial speech (which traditionally has been reviewed under that more permissive standard). However, recent Supreme Court opinions, most notably that in Reed v. Town of Gilbert, suggest that even the commercial speech at issue in the TCPA may need to be subject to the more probing review of strict scrutiny — a conclusion that several lower courts have reached.

But even putting the question of whether the TCPA should be reviewed subject to strict or intermediate scrutiny, a contemporary facial challenge to the TCPA on First Amendment grounds would likely succeed (no matter what standard of review was applied). Generally, courts are very reluctant to allow regulation of speech that is either under- or over-inclusive — and the TCPA is substantially both. We know that it is under-inclusive because robocalls have been a problem for a long time and the problem is only getting worse. And, at the same time, there are myriad stories of well-meaning companies getting caught up on the TCPA’s web of strict liability for trying to do things that clearly should not be deemed illegal: sports venues sending confirmation texts when spectators participate in text-based games on the jumbotron; community banks getting sued by their own members for trying to send out important customer information; pharmacies reminding patients to get flu shots. There is discussion to be had about how and whether calls like these should be permitted — but they are unquestionably different in kind from the sort of telemarketing robocalls animating the TCPA (and general public outrage).

In other words the TCPA prohibits some amount of desirable, Constitutionally-protected, speech in a vainglorious and wholly ineffective effort to curtail robocalls. That is a recipe for any law to be deemed an unconstitutional restriction on speech under the First Amendment.

Good News: Things Don’t Need to Suck!

But there is another, more interesting, reason that the TCPA would likely not survive a First Amendment challenge today: there are lots of alternative approaches to addressing the problem of robocalls. Interestingly, the FCC itself has the ability to direct implementation of some of these approaches. And, more important, the FCC itself is the greatest impediment to some of them being implemented. In the language of the First Amendment, restrictions on speech need to be narrowly tailored. It is hard to say that a law is narrowly tailored when the government itself controls the ability to implement more tailored approaches to addressing a speech-related problem. And it is untenable to say that the government can restrict speech to address a problem that is, in fact, the result of the government’s own design.

In particular, the FCC regulates a great deal of how the telephone network operates, including over the protocols that carriers use for interconnection and call completion. Large parts of the telephone network are built upon protocols first developed in the era of analog phones and telephone monopolies. And the FCC itself has long prohibited carriers from blocking known-scam calls (on the ground that, as common carriers, it is their principal duty to carry telephone traffic without regard to the content of the calls).

Fortunately, some of these rules are starting to change. The Commission is working to implement rules that will give carriers and their customers greater ability to block calls. And we are tantalizingly close to transitioning the telephone network away from its traditional unauthenticated architecture to one that uses a strong cyrptographic infrastructure to provide fully authenticated calls (in other words, Caller ID that actually works).

The irony of these efforts is that they demonstrate the unconstitutionality of the TCPA: today there are better, less burdensome, more effective ways to deal with the problems of uncouth telemarketers and robocalls. At the time the TCPA was adopted, these approaches were technologically infeasible, so the its burdens upon speech were more reasonable. But that cannot be said today. The goal of the FCC and legislators (both of whom are looking to update the TCPA and its implementation) should be less about improving the TCPA and more about improving our telecommunications architecture so that we have less need for cludgel-like laws in the mold of the TCPA.

 

Fritz L. Laux is a Professor of Economics at Northeastern State University in Tahlequah, Oklahoma.

The puzzling lack of economic impacts

One focus in the analysis of smoke-free air (SFA) laws has been on measuring the impact smoking bans have on the restaurant and hospitality industries. The overwhelming or “consensus” result of this research is that bans impose no adverse impact on industry revenues and employment levels (Scollo et al., 2003; Scollo and Lal, 2008; Hahn, 2010; CDC Fact Sheet, 2014).

What’s puzzling about this literature is that the “no-statistical-significance” result is presented as a neutral or, “this takes the issue off the table” result. I would suggest that the robustness of this finding should be presented as “shocking” and highly significant (if not “statistically significant”).

The economic model for the behavior of profit-maximizing firms would indicate that any restaurant or hospitality venue that could benefit from a smoking ban would already have implemented such a ban. Thus, the imposition of smoking bans should never help and should always hurt such industries. While our model predicts that bans can never help restaurants and can only hurt them, our finding shows that bans tend to have no impact, and may slightly help the average restaurant. This should be viewed, if not highlighted, as surprising.  

Clearly, we understand why the result might be presented with the “no adverse economic impact” headline. Restaurant and hospitality industry groups are important constituencies that can influence policy, and estimates of the business impacts of SFA laws can motivate or placate policy activists. If the laws have, on average, no adverse impact on the members of a local restaurant association, then that restaurant association should have no incentive to oppose SFA ordinances.

My suggestion, however, is that we should give more attention to the strangeness of this result and to the investigation of how this result can be occurring. Where is the market failure that prevented more restaurateurs from implementing SFA policies of their own accord, without need for SFA ordinances? Can efforts to bring more publicity to these market failures help restaurateurs and the public better to understand why SFA policies can make good policy?

Sources of market failure

The obvious (if not tautological) explanation for this weird result is that restaurateurs have somehow been consistently misestimating the business impact of SFA. There are several possible reasons for why this would happen and the most likely of these, it seems, is that social norms play a role in defining how restaurant employees and customers respond to a ban (Leibenstein, 1950). Before imposition of a ban, if the norm is to allow for smoking, then politeness dictates that we will expect restaurants to allow smoking. After a ban (and the resulting change in norms), just as nobody expects to smoke at a fitness club, smoking customers experience reduced desire or expectation of smoking in restaurants. Thus, if the ban changes the norm in ways that restaurateurs do not anticipate, we see empirical results such that industry impact is positive or zero instead of negative.

Borland (2006) with coauthors from the International Tobacco Control project provide evidence of just this kind of an effect. In a survey of current smokers, they found that for those U.S. smokers reporting that they lived in jurisdictions where restaurant smoking was not banned, only 17.5% supported bans on restaurant smoking. For smokers who reported total bans on restaurant smoking in their jurisdictions, 65.5% supported bans on restaurant smoking. Not surprisingly, it seems that expectations and preferences are affected by changes in norms.

With over three-fourths of the U.S. population now living in jurisdictions covered by 100% smoke-free restaurant laws, such shifts in norms within the U.S. are well underway. However, in communities where restaurant smoking is still commonly accepted, complaining to a restaurant manager about another customer’s smoking might seem a bit strange and confrontational. In these situations, patrons and employees may also not be as aware of the health consequences of secondhand smoke. After the publicity of a smoke-free air ordinance heightens awareness and after having experienced eating in a smoke-free restaurants, the value patrons place on smoke-free air may go up. Similarly, restaurant employee may acquire increased preferences for work in smoke-free establishments (Tang et al., 2004).

Although this argument seems less convincing (given the large percentages of restaurants that did go smoke-free well in advance of SFA law implementation), another possible explanation for how restaurateurs could have so consistently misestimated the business impact of smoke-free air policies is that they may have been influenced by incorrect or biased information. From the 1980s through the early 2000s, restaurant managers would have received lots of communication from various state and national industry associations arguing either that smoking restrictions would hurt business or that improved ventilation, rather than going smoke free, would be the correct industry response. As can be seen in online archives of tobacco industry documents, the Tobacco Institute was actively working with hospitality industry associations to promote such an “accommodation strategy” (via improved ventilation and smoking sections) for restaurants during these years when most smoke-free air legislation was passed (Dearlove et al., 2002). This industry-funded analysis, as intended, did likely have some influence the decisions made by restaurateurs.

Implications

From those who oppose SFA laws, the primary argument has been that, if bans do not hurt the restaurant and hospitality industries, why do they need to be imposed on these industries? Would not any restaurants and bars that could benefit from smoking bans have already implemented such bans of their own accords? My suggestion is that, in any advocacy for SFA, it may be appropriate to try to answer these objections more directly. Using research like the Borland et al. (2006) article, we can suggest why it is that restaurateurs, who would benefit from SFA implementation, don’t implement SFA policies of their own accords. Then, after having offered theoretical explanations, we can present our empirical analyses of the economic impact on the restaurant and hospitality industries with more credibility. The idea is that, just as good empirical work gives credence to theory, intuitive theoretical explanations give credence to empirical results.

Carrie Wade, Ph.D., MPH is the Director of Harm Reduction Policy and Senior Fellow at the R Street Institute.

Abstinence approaches work exceedingly well on an individual level but continue to fail when applied to populations. We can see this in several areas: teen pregnancy; continued drug use regardless of severe criminal penalties; and high smoking rates in vulnerable populations, despite targeted efforts to prevent youth and adult uptake.

The good news is that abstinence-oriented prevention strategies do seem to have a positive effect on smoking. Overall, teen use has steadily declined since 1996. This may be attributed to an increase in educational efforts to prevent uptake, stiff penalties for retailers who fail to verify legal age of purchase, the increased cost of cigarettes, and a myriad of other interventions.

Unfortunately many are left behind. Populations with lower levels of educational attainment, African Americans and, ironically, those with less disposable income have smoking rates two to three times that of the general population. In light of this, how can we help people for whom the abstinence-only message has failed? Harm reduction strategies can have a positive effect on the quality of life of smokers who cannot or do not wish to quit.

Why harm reduction?

Harm reduction approaches recognize that reduction in risky behavior is one possible means to address public health goals. They take a pragmatic approach to the consequences of risk behaviors – focusing on short-term attainable goals rather than long-term ideals—and provide options beyond abstinence to decrease harm relative to the riskier behavior.

In economic terms, traditional public health approaches to drug use target supply and demand, which is to say they attempt to decrease the supply of a drug while also reducing the demand for it. But this often leads to more risky behaviors and adverse outcomes. For example, when prescription opioids were restricted, those who were not deterred from such an inconvenience switched to heroin; when heroin became tricky to smuggle, traffickers switched to fentanyl. We might predict the same effects when it comes to cigarettes.

Given this, since we know that the riskiest of behaviors, such as tobacco, alcohol and other drug use will continue—and possibly flourish in many populations—we should instead focus on ways to decrease the supply of the most dangerous methods of use and increase the supply of and demand for safer, innovative tools. This is the crux of harm reduction.

Opioid Harm Reduction

Like most innovation, harm reduction strategies for opioid and/or injection drug users were born out of a need. In the 1980s, sterile syringes were certainly not an innovative technology. However, the idea that clean needle distribution could put a quick end to the transmission of the Hepatitis B virus in Amsterdam was, and the success of this intervention was noticed worldwide.

Although clean needle distribution was illegal at the time, activists who saw a need for this humanitarian intervention risked jail time and high fines to reduce the risk of infectious disease transmission among injection drug users in New Haven and Boston. Making such programs accessible was not an easy thing to do. Amid fears that dangerous drug use may increase and the idea that harm reduction programs would tacitly endorse illegal activity, there was resistance in governments and institutions adopting harm reduction strategies as a public health intervention.

However, following a noticeable decrease in the incidence of HIV in this population, syringe exchange access expanded across the United States and Europe. At first, clean syringe access programs (SAPs) operated with the consent of the communities they served but as the idea spread, these programs received financial and logistical support from several health departments. As of 2014, there are over 200 SAPs operating in 33 states and the District of Columbia.

Successes

Time has shown that these approaches are wildly successful in their primary objective and enormously cost effective. In 2008, Washington D.C. allocated $650,000 to increase harm reduction services including syringe access. As of 2011, it was estimated that this investment had averted 120 cases of HIV, saving $44 million.

Seven studies conducted by leading scientific and governmental agencies from 1991 through 2001 have also concluded that syringe access programs result in a decrease in HIV transmission without residual effects of increased injection drug use. In addition, SAPs are correlated with increased entry into treatment and detox programs and do not result in increases in crime in neighborhoods that support these programs.

Tobacco harm reduction

We know that some populations have a higher risk of smoking and of developing and dying from smoking-related diseases. With successful one-year quit rates hovering around 10 percent, harm reduction strategies can offer ways to transition smokers off of the most dangerous nicotine delivery device: the combustible cigarette.

In 2008, the World Health Organization developed the MPOWER policy package aimed to reduce the burden of cigarette smoking worldwide. In their vision statement, the authors explicitly state a goal where “no child or adult is exposed to tobacco smoke.”

Using an abstinence-only framework, MPOWER strategies are:

  1. To monitor tobacco use and obtain data on use in youth and adults;
  2. To protect society from second-hand smoke and decrease the availability of places that people are allowed to smoke by enacting and enforcing indoor smoking bans;
  3. To offer assistance in smoking cessation through strengthening health systems and legalization of nicotine replacement therapies (NRTs) and other pharmaceutical interventions where necessary;
  4. To warn the public of the dangers of smoking through public health campaigns, package warnings and counter advertising;
  5. To enact and enforce advertising bans; and
  6. To raise tobacco excise taxes.

These strategies have been shown to reduce the prevalence of tobacco use. People who quit smoking have a greater chance of remaining abstinent if they use NRTs. People exposed to pictorial health warnings are more likely to say they want to quit as a result. Countries with comprehensive advertising bans have a larger decrease in smoking rates compared to those without. Raising taxes has proven consistently to reduce consumption of tobacco products.

But, the effects of MPOWER programs are limited. Tobacco and smoking are often deeply ingrained in the culture and identity of communities. Studies repeatedly show that smoking is strongly tied to occupation and education, smokers’ self-identity and also the role that tobacco has in the economy and identity of the community.

As a practical matter, the abstinence approach is also limited by individual governmental laws. Article 13 of the Framework Convention on Tobacco Control recognizes that constitutional principles or laws may limit the capabilities of governments to implement these policy measures. In the United States, cigarettes are all but protected by the complexity of both the 1998 Master Settlement Agreement and the Family Smoking Protection and Tobacco Control Act of 2009. This guarantees availability to consumers – ironically increasing the need of more reduced-risk nicotine products, such as e-cigarettes, heat-not-burn devices or oral Snus, all of which offer an alternative to combustible use for people who either cannot or do not wish to quit smoking.

Several regulatory agencies, including the FDA in the United States and Public Health England in the United Kingdom, recognize that tobacco products exist on a continuum of risk, with combustible products (the most widely used) being the most dangerous and non-combustible products existing on the opposite end of the spectrum. In fact, Public Health England estimates that e-cigarettes are at least 95% safer than combustible products and many toxicological and epidemiological studies support this assertion.

Of course for tobacco harm reduction to work, people must have an incentive to move away from combustible cigarettes.There are two equally important strategies to convince people to do so. First, public health officials need to acknowledge that e-cigarettes are less risky. Continued mixed messages from government officials and tobacco use prevention organizations confuse people regarding the actual risks from e-cigarettes. Over half of adults in the United States believe that nicotine is the culprit of smoking-related illnesses – and who can blame them when our current tobacco control strategies are focused on lowering nicotine concentrations and ridding our world of e-cigarettes?

The second is price. People who cannot or do not wish to quit smoking will never switch to safer alternatives if they are more, or as, expensive as cigarettes. Keeping the total cost of reduced risk products low will encourage people who might not otherwise consider switching to do so. The best available estimates show that e-cigarette demand is much more vulnerable to price increases than combustible cigarettes – meaning that smokers are unlikely to respond to price increases meant to dissuade them from smoking, and are less likely to vape as a means to quit or as a safer alternative.

Of course strategies to prevent smoking or encourage cessation should be a priority for all populations that smoke, but harm-reduction approaches—in particular with respect to smoking—play a vital role in decreasing death and disease in people who engage in such risky behavior. For this reason, they should always be promoted alongside abstinence approaches.

ICLE has released a white paper entitled Vapor products, harm reduction, and taxation: Principles, evidence and a research agenda, authored by ICLE Chief Economist, Eric Fruits.

More than 20 countries have introduced taxation on e-cigarettes and other vapor products. In the United States, several states and local jurisdictions have enacted e-cigarette taxes.

The concept of tobacco harm reduction began in 1976 when Michael Russell, a psychiatrist and lecturer at the Addiction Research Unit of Maudsley Hospital in London, wrote: “People smoke for nicotine but they die from the tar.”  Russell hypothesized that reducing the ratio of tar to nicotine could be the key to safer smoking.

Since then, much of the harm from smoking has been well-established as caused almost exclusively by toxicants released through the combustion of tobacco. Public Health England and the American Cancer Society have concluded non-combustible tobacco products as well as pure nicotine products are considerably less harmful than combustible products. Earlier this year, the American Cancer Society shifted its position on e-cigarettes, recommending that individuals who do not quit smoking, “… should be encouraged to switch to the least harmful form of tobacco product possible; switching to the exclusive use of e-cigarettes is preferable to continuing to smoke combustible products.”

In contrast, some public health advocates urge a precautionary approach in which the introduction and sale of e-cigarettes be limited or halted until the products are demonstrably safe.

Policymakers face a wide range of strategies regarding the taxation of vapor products. On the one hand, principles of harm reduction suggest vapor products should face no taxes or low taxes relative to conventional cigarettes, to guide consumers toward a safer alternative to smoking. the U.K. House of Commons Science and Technology Committee concludes:

The level of taxation on smoking-related products should directly correspond to the health risks that they present, to encourage less harmful consumption. Applying that logic, e-cigarettes should remain the least-taxed and conventional cigarettes the most, with heat-not-burn products falling between the two.

In contrast, the precautionary principle as well as principles of tax equity point toward the taxation of vapor products at rates similar to conventional cigarettes.

Analysis of tax policy issues is complicated by divergent—and sometimes obscured—intentions of such policies. Some policymakers claim that the objective of taxing nicotine products is to reduce nicotine consumption. Other policymakers indicate the objective is to raise revenues to support government spending. Often missed in the policy discussion is the effect of fiscal policies on innovation and the development and commercialization of harm-reducing products. Also, often missed are the consequences for current consumers of nicotine products, including smokers seeking to quit using harmful conventional cigarettes.

Policy decisions regarding taxation of vapor products should take into account both long-term fiscal effects, as well as broader economic and welfare effects. These effects might (or might not) suggest very different tax policies to those that have been enacted or are under consideration.

Apart from being a significant source of revenue, the cigarette taxes have been promoted as “sin” taxes to discourage consumption either because of externalities caused by smoking (increased costs for third-party health payers and health consequences) or paternalism. According to Centers for Disease Control and Prevention in U.S., smoking-related illness in the U.S. costs more than $300 billion each year, including; (1) nearly $170 billion for direct medical care for adults and (2) more than $156 billion in lost productivity, including $5.6 billion in lost productivity due to secondhand smoke exposure.

The CDC’s cost estimates raise important questions regarding who bears the burden of smoking related illness. Much of the cost is borne by private insurance, which charges steeper premiums for customers who smoke. In addition, the CDC estimates reflect costs imposed by people who have smoked for decades—many of whom have now quit. A proper accounting of the costs vis-à-vis tax policy would measure the incremental discounted costs imposed by today’s smokers.

According to Levy et al. (2017), a strategy of replacing cigarette smoking with e-cigarettes would yield substantial life year gains, even under pessimistic assumptions regarding cessation, initiation, and relative harm. Increased longevity does not simply extend the individual’s years of retirement and reliance on government transfers but has impact on greater work effort and productivity together with higher tax payments on consumption.

Vapor products that cause less direct harm or have lower externalities (e.g., the absence of “second hand smoke”) should be subject to a lower “sin” tax. A cost-benefit analysis of the desired excise tax rate on vapor products would include reduced health spending as an offset against excise tax revenue that was foregone by putting a lesser rate on those products.

State and local governments in the U.S. collect more than $18 billion a year in tobacco taxes. While some jurisdictions earmark a portion of tobacco taxes for prevention and cessation efforts, in practice most tobacco taxes are treated by policymakers as general revenues to be spent in whatever way the legislative body determines.

In the long-run, the goals of reducing or eliminating consumption of the taxed good and generating revenues are in conflict. If the tax is successful in reducing consumption, it falls short in generating revenue. Similarly, if the tax succeeds in generating revenues, it falls short in reducing or eliminating consumption.

Substitutability is another consideration. An increase in the tax on spirits will result in an increase in beer and wine purchases. A high toll on a road will divert traffic to untolled streets that may not be designed for increased traffic volumes. Evidence from the U.S. and Europe indicate high or rising tobacco taxes in one jurisdiction will result in increased sales in bordering jurisdictions as well as increase illegal cross-jurisdiction sales or smuggling.

As of March 2018, nine U.S. states have enacted taxes on e-cigarettes:

California 65.08% on wholesale price
Delaware 0.05 USD/ml
DC 70% on wholesale price
Kansas 0.05 USD/ml
Louisiana 0.05 USD/ml
Minnesota 95% of wholesale price
North Carolina 0.05 USD/ml
Pennsylvania 40% of wholesaler price
West Virginia 0.075 USD/ml

In addition, 22 countries outside of the U.S. have introduced taxation on e-cigarettes.

The effects of different types of taxation on usage and thus economic outcomes varies. Research to date finds a wide range of own price and cross price elasticities for e-cigarettes. While most researchers conclude that the demand for e-cigarettes is more elastic than the demand for combustible cigarettes, some studies find inelastic demand and some studies find highly elastic demand. Economic theory would point to e-cigarettes as a substitute for combustible cigarettes. Some empirical research supports this hypothesis, while others conclude the two products are complements.

In addition to e-cigarettes, little cigars and smokeless tobacco are also potential substitutes for cigarettes. The results from Zheng, et al. (2016) suggest increases in sales of little cigars and smokeless tobacco products would account for about 14 percent of the decline in cigarette sales associated with a hypothetical 10 percent increase in the price of cigarettes. On the other hand, another study using a seemingly identical data set (Zheng, et al., 2017), suggests that sales of little cigars and smokeless tobacco would decrease in the face of an increase in cigarette prices.

The wide range of estimated elasticities calls into question the reliability of published estimates. As a nascent area of research, the policy debate would benefit from additional research that involves larger samples with better statistical power, reflects the dynamic nature of this relatively new product category, and accounts for the wide variety of vapor products.

More importantly, demand and supply conditions for e-cigarettes, heated tobacco products and other electronic nicotine delivery products have been changing rapidly over the past few years—and are expected for rapidly change into the foreseeable future. Thus, estimates of demand parameters, such as elasticity and cross-price elasticity estimates, are almost certain to vary over time as users gain knowledge and experience and as products and suppliers enter the market.

Because the market for e-cigarettes and other vapor products is small and developing, the tax bearing capacity of these new product segments are untested and unknown. Moreover, current tax levels and prices could be also misleading based on the relatively sparse empirical data, in which case more data points and evaluation is needed. One can argue, given the slow growth rates of these segments in many markets, that current prices of e-cigarettes and heat-not-burn products are relatively high when compared to cigarettes and a tax or an increase on existing tax would slow down the segment growth or even lead to a decline.

Separately, the challenges in assessing a tax on electronic nicotine delivery products indicate the costs of collecting the tax, especially an excise tax, may be much higher than similar taxes levied on combustible cigarettes. In addition, as discussed above, heavy taxation of this relatively new industry would likely stifle innovation in a way that is contrary to the goal harm reduction.

Principles of harm reduction recognize that every proposal has uncertain outcomes as well as potential spillovers and unforeseen consequences. Nevertheless, the basic principle of harm reduction is a focus on safer rather than safe. Policymakers must make their decisions weighing the expected benefits and expected costs. With such high risks and costs associated with cigarette and other combustible use, taxes and regulations must be developed in an environment of uncertainty and with an eye toward a net reduction in harm, rather than an unattainable goal of zero harm.

Read the full report.

The Economist takes on “sin taxes” in a recent article, “‘Sin’ taxes—eg, on tobacco—are less efficient than they look.” The article has several lessons for policy makers eyeing taxes on e-cigarettes and other vapor products.

Historically, taxes had the key purpose of raising revenues. The “best” taxes would be on goods with few substitutes (i.e., inelastic demand) and on goods deemed to be luxuries. In Wealth of Nations Adam Smith notes:

Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.

The Economist notes in 1764, a fiscal crisis driven by wars in North America led Britain’s parliament began enforcing tariffs on sugar and molasses imported from outside the empire. In the U.S., from 1868 until 1913, 90 percent of all federal revenue came from taxes on liquor, beer, wine and tobacco.

Over time, the rationale for these taxes has shifted toward “sin taxes” designed to nudge consumers away from harmful or distasteful consumption. The Temperance movement in the U.S. argued for higher taxes to discourage alcohol consumption. Since the Surgeon General’s warning on the dangers of smoking, tobacco tax increases have been justified as a way to get smokers to quit. More recently, a perceived obesity epidemic has led several American cities as well as Thailand, Britain, Ireland, South Africa to impose taxes on sugar-sweetened beverages to reduce sugar consumption.

Because demand curves slope down, “sin taxes” do change behavior by reducing the quantity demanded. However, for many products subject to such taxes, demand is not especially responsive. For example, as shown in the figure below, a one percent increase in the price of tobacco is associated with a one-half of one percent decrease in sales.

Economist-Sin-Taxes

 

Substitutability is another consideration for tax policy. An increase in the tax on spirits will result in an increase in beer and wine purchases. A high toll on a road will divert traffic to untolled streets that may not be designed for increased traffic volumes. A spike in tobacco taxes in one state will result in a spike in sales in bordering states as well as increase illegal interstate sales or smuggling. The Economist reports:

After Berkeley introduced its tax, sales of sugary drinks rose by 6.9% in neighbouring cities. Denmark, which instituted a tax on fat-laden foods in 2011, ran into similar problems. The government got rid of the tax a year later when it discovered that many shoppers were buying butter in neighbouring Germany and Sweden.

Advocates of “sin” taxes on tobacco, alcohol, and sugar argue their use impose negative externalities on the public, since governments have to spend more to take care of sick people. With approximately one-third of the U.S. population covered by some form of government funded health insurance, such as Medicare or Medicaid, what were once private costs of healthcare have been transformed into a public cost.

According to Centers for Disease Control and Prevention in U.S., smoking-related illness in the U.S. costs more than $300 billion each year, including; (1) nearly $170 billion for direct medical care for adults and (2) more than $156 billion in lost productivity, including $5.6 billion in lost productivity due to secondhand smoke exposure.

On the other hand, The Economist points out:

Smoking, in contrast, probably saves taxpayers money. Lifelong smoking will bring forward a person’s death by about ten years, which means that smokers tend to die just as they would start drawing from state pensions. In a study published in 2002 Kip Viscusi, an economist at Vanderbilt University who has served as an expert witness on behalf of tobacco companies, estimated that even if tobacco were untaxed, Americans could still expect to save the government an average of 32 cents for every pack of cigarettes they smoke.

The CDC’s cost estimates raise important questions regarding who bears the burden of smoking related illness. For example, much of the direct cost is borne by private insurance, which charge steeper premiums for customers who smoke. In addition, the CDC estimates reflect costs imposed by people who have smoked for decades—many of whom have now quit. A proper accounting of the costs vis-à-vis tax policy should evaluate the discounted costs imposed by today’s smokers.

State and local governments in the U.S. collect more than $18 billion a year in tobacco taxes. While some jurisdictions earmark a portion of tobacco taxes for prevention and cessation efforts, in practice most tobacco taxes are treated by policymakers as general revenues to be spent in whatever way the legislative body determines. Thus, in practice, there is no clear nexus between taxes levied on tobacco and government’s use of the tax revenues on smoking related costs.

Most of the harm from smoking is caused by the inhalation of toxicants released through the combustion of tobacco. Public Health England and the American Cancer Society have concluded non-combustible tobacco products, such as e-cigarettes, “heat-not-burn” products, smokeless tobacco, are considerably less harmful than combustible products.

Many experts believe that the best option for smokers who are unable or unwilling to quit smoking is to switch to a less harmful alternative activity that has similar attributes, such as using non-combustible nicotine delivery products. Policies that encourage smokers to switch from more harmful combustible tobacco products to less harmful non-combustible products would be considered a form of “harm reduction.”

Nine U.S. states now have taxes on vapor products. In addition, several local jurisdictions have enacted taxes. Their methods and levels of taxation vary widely. Policy makers considering a tax on vapor products should account for the following factors.

  • The current market for e-cigarettes as well as heat-not-burn products in the range of 0-10 percent of the cigarette market. Given the relatively small size of the e-cigarette and heated tobacco product market, it is unlikely any level of taxation of e-cigarettes and heated tobacco products would generate significant tax revenues to the taxing jurisdiction. Moreover much of the current research likely represents early adopters and higher income consumer groups. As such, the current empirical data based on total market size and price/tax levels are likely to be far from indicative of the “actual” market for these products.
  • The demand for e-cigarettes is much more responsive to a change in price than the demand for combustible cigarettes. My review of the published research to date finds the median estimated own-price elasticity is -1.096, meaning something close to a 1-to-1 relationship: a tax resulting in a one percent increase in e-cigarette prices would be associated with one percent decline in e-cigarette sales. Many of those lost sales would be shifted to purchases of combustible cigarettes.
  • Research on the price responsiveness of vapor products is relatively new and sparse. There are fewer than a dozen published articles, and the first article was published in 2014. As a result, the literature reports a wide range of estimated elasticities that calls into question the reliability of published estimates, as shown in the figure below. As a relatively unformed area of research, the policy debate would benefit from additional research that involves larger samples with better statistical power, reflects the dynamic nature of this new product category, and accounts for the wide variety of vapor products.

 

With respect to taxation and pricing, policymakers would benefit from reliable information regarding the size of the vapor product market and the degree to which vapor products are substitutes for combustible tobacco products. It may turn out that a tax on vapor products may be, as The Economist notes, less efficient than they look.