How High Are Vapor Excise Taxes in Your State?
Vapor products, also known as electronic cigarettes, have become commonly displayed at gas stations, convenience stores, and stand-alone vapor stores since entering in the market in 2007. While there is currently no federal excise tax on vapor products, some states and localities have proposed and enacted taxes on vapor products. Localities in Alaska, Illinois, and Maryland levy their own excise taxes while the state does not.
This week’s map shows where state and local vapor taxes stand today.
Taxation methods vary across states and localities. Some tax a percentage of the wholesale value while others tax per unit or milliliter of e-liquid. The variety of taxing methods and wide range of rates indicates that there is little consensus on the best way to tax vapor products.
Of the states that tax the wholesale value, Minnesota is the highest by far (95 percent) followed by the District of Columbia (65 percent). The lowest wholesale rate is found in California (27.3 percent). Chicago levies the highest per unit tax ($0.80) plus a per milliliter rate ($0.20). Louisiana and North Carolina have the lowest per milliliter rate ($0.05).
There is a broader debate about the relative risk of vapor products compared to traditional cigarettes. Recent research shows that vaping is 95 percent less harmful compared to smoking cigarettes. However, states and localities are not necessarily considering the difference in health risk when taxing vapor. Opponents of aggressive vapor taxation argue that a high price could deter current cigarette smokers from using vapor as a tool for quitting. Proponents assert that the health risks of vapor usage are unknown and therefore taxes should be levied to offset any potential negative externalities.
Beyond these arguments, states and localities should be cautious of the negative externalities of a vapor tax itself. Cigarette smuggling and budget dependence on cigarette tax revenue are problems that could sabotage any potential benefits of a vapor tax.
Source: Tax Policy – How High Are Vapor Excise Taxes in Your State?
A Bevy of Tax Bills To Raise Long-Term Revenue in Delaware
Recently, two tax bills were approved by the Delaware legislature and three bills were introduced. Facing a $386 million shortfall in 2018, the state is desperate for new sources of revenue. Along with a proposal to eliminate the estate tax, the state is considering four other revenue-raising proposals in a broad attempt to cover the deficit.
Estate taxes are levied against the value of an estate or trust. Currently, Delaware has a top estate tax rate of 16 percent, second only to Washington state, which has a top rate of 20 percent. Delaware excludes income below $5.49 million from the tax, which matches the federal estate tax exemption.
HB 16 would “sunset” the Delaware estate tax on December 31. The bill passed in the House 26 to 14 and in the Senate 13 to 7, and awaits the governor’s signature. A Fiscal Note prepared by the Delaware Office of the Controller General estimates that repealing the estate tax will cost the state $3.75 million in lost revenue in 2019, and $5 million in 2020. The 2020 figure is based on the average amount of estate tax revenue collected in the state, although revenue collections vary considerably from year to year.
In 2011, $13.7 million was raised from the estate tax, when adjusted for inflation. In 2014, just $1 million in revenue was raised. The estate tax raised $9.3 million in revenue in 2016, with revenue predicted to fall to $2.5 million in 2017, illustrating the instability of the estate tax as a revenue source.
Studies find that estate taxes have high compliance costs, and are often detrimental to economic growth. If the governor approves the measure, Delaware would join a growing cohort of states eliminating their estate tax. Repealing the estate tax not only reduces revenue instability, but it also eliminates a source of high costs for a state looking to cover a major shortfall. Eliminating the estate tax in Delaware is a sound policy for long-term economic and revenue growth at the cost of a potential short-term windfall.
Corporate Franchise Tax
HB 175 alters numerous aspects of state policy for collecting franchise taxes. A franchise tax is levied against businesses incorporated in Delaware, even if those businesses don’t conduct their operations in the state. Unlike a corporate income tax, a franchise tax is based off the number of authorized shares or a measure of the company’s capital. Generally, tax payments are capped under this system.
The bill makes a few inflation adjustments and one major policy change. The bill raises the maximum tax payment for corporations from $180,000 to $200,000. This change adjusts the cap for inflation since 2009, the last time the payment cap was raised. The bill also increases several administrative fees related to the collection of the tax, including the fee for late payment.
The creation of a second bracket for large corporations is the main policy change outlined in the bill. A maximum tax payment of $250,000 would apply to corporations with either more than $750 million in revenue and at least $250 million in assets or with more than $750 million in assets and at least $250 million in revenue.
Under this framework, a company with $4 billion in revenue but only $150 million in assets would not be in the new bracket. However, a corporation with $800 million in assets and $300 million in revenue would be placed in the new bracket. This policy would affect about 0.2 percent of Delaware corporations.
The bill passed the Senate 16 to 4 and the House 39 to 1, and is awaiting the governor’s signature.
Personal Income Tax
HB 240 would overhaul Delaware’s personal income tax system by raising rates and broadening the tax base. The bill would:
- Raise income tax rates: The tax rate for all existing brackets would increase between 0.15 and 0.4 percent, depending on the bracket. A new top bracket with a rate of 6.95 percent would be created for income above $150,000. The current top rate of 6.6 percent applies to income above $60,000.
- Restrict retirement income deductions: Delaware currently allows retired residents to deduct a portion of pension income from their taxable income. Presently, those under age 60 can claim a $2,000 deduction, while those over age 60 can claim a $12,500 deduction.
The bill does not change the amount of the deductions, but does increase the age limit for claiming them. The qualifying age for the $12,500 deduction will be raised from 60 to 65 over a five-year period.
- Eliminate itemized deductions: Delawareans can claim deductions for the same expenses the federal government considers deductible. Most citizens claim a standard deduction instead, which is available to everyone regardless of their expenses. In general, high-income residents claim itemized deductions instead of the standard deduction since their itemized deductions are likely to exceed the standard deduction.
The proposed legislation would eliminate itemized deductions while increasing the standard deduction from $3,250 to $5,000. These actions would increase the deduction for low-income residents, while decreasing the deduction for high-income residents who utilized itemized deductions.
- Reduce personal tax credits: Delaware offers a personal tax credit to each resident on an unconditional basis. The proposal decreases the personal credit from $110 to $85. An additional $85 credit is available for residents over the age of 60, with the eligibility age increasing to 65 over a five-year period.
Alcoholic Beverage Taxes
HB 241 aims to increase the taxes imposed on alcoholic beverages in Delaware. The bill would increase the tax on beer from $4.58 to $11.46 per barrel, a 150 percent tax increase. Similarly, the bill would increase the tax on wine from $0.97 to $1.72 per gallon, a 77 percent increase.
While Delaware would reap more revenue per unit of alcohol sold under the new bill, alcohol sales would likely decline in the state. Delawareans could easily buy beverages in neighboring Pennsylvania and New Jersey, which have significantly lower tax rates for both beer and wine. Since substituting beverages bought in Delaware for beverages bought in other states is fairly simple, it is unlikely that the state will see a dollar-for-dollar revenue increase by raising tax rates on alcohol.
HB 242 would increase existing taxes on tobacco products, in addition to introducing a tax on vapor products of $0.05 per fluid milliliter. Specifically, the cigarette taxes would be increased from $1.60 to $2.10 per pack, and the tax on snuff would be increased from $0.54 to $0.93 per ounce.
While tobacco taxes can increase revenue in the short run, collections will decline sharply in the future. The proposed increase would vault the tax in Delaware above the per pack tax in Maryland, making it easy for Delawareans to skirt the tax by purchasing cigarettes across state lines. Increasing cigarette taxes would not be a sound policy.
The Delaware legislature is casting a wide net on tax reform in an attempt to raise state revenue. Last Wednesday, the income, alcohol, and tobacco tax bills successfully passed out of committee for consideration by the full House. While these bills could raise short-term revenue, they may not be advisable long-term policies. Repealing the estate tax and adjusting the franchise tax for inflation are more reasonable measures.
Source: Tax Policy – A Bevy of Tax Bills To Raise Long-Term Revenue in Delaware
State Tax Changes Taking Effect July 1, 2017
- Seven states have tax rate changes going into effect on July 1, 2017.
- Indiana has the lone corporate income tax change, with the rate decreasing to 6 percent.
- Kansas is enacting two changes to its income tax code: the repeal of the pass-through carveout coupled with increases in individual income tax rates.
- Tennessee is decreasing its already reduced sales tax rate on groceries from 5 percent to 4 percent.
- Five states – Indiana, Montana, New Jersey, South Carolina, and Tennessee – have increases to their gas tax rates. New Jersey will be implementing the second part of a diesel tax increase passed in 2016.
- Colorado will increase its excise tax on recreational marijuana from 10 percent to 15 percent and will exempt recreational marijuana from the general sales tax.
While most states enact tax changes at the beginning of the calendar year, a number of them implement changes at the beginning of the fiscal year. Seven states have tax changes that will take effect on July 1, 2017, the beginning of the 2018 fiscal year.
Corporate Income Tax
Indiana has been reducing its corporate income tax rate from 8.5 percent since 2011, when the state adopted tax reform. In 2014, additional reductions were passed to reduce the rate to 4.9 percent by 2022.
Unlike many states, Indiana’s corporate tax year tracks the fiscal year, rather than the calendar year. Corresponding with the rate reduction schedule, the corporate tax rate this year will be reduced from 6.25 percent to 6.0 percent on July 1.
Individual Income Tax
In 2012, Kansas adopted a tax package that, among other provisions, included a pass-through carveout unlike any state in the country. The carveout allowed pass-through entities to completely forgo income taxes. However, after a legislative override of Governor Brownback’s veto in June, Kansas will roll back some elements of the state’s 2012 tax package, including the carveout. The repeal is retroactive to January 1, 2017. Though this is a change to the individual income tax code, it exclusively affects the taxation of certain business formations.
The rollback of 2012 legislation also slightly increases individual income tax rates, but rates remain lower than they were before 2012. The new bill also creates a third tax bracket for income above $30,000 (single) and $60,000 (married filing jointly), with the rate set at 5.2 percent retroactive to January 1, 2017, and 5.7 percent in 2018. The bottom two income tax brackets of 2.7 percent and 4.6 percent go to 2.9 percent and 4.9 percent respectively as of January 1, 2017, and 3.1 percent and 5.25 percent respectively in 2018 and thereafter.
In combination with gas tax changes, Tennessee is also reducing the sales tax rate on groceries to 4 percent effective July 1, 2017. The state already levied a reduced sales tax rate of 5 percent on groceries, lower than the state’s general sales tax rate of 7 percent.
Indiana will see an increase in the state’s gas tax after the state adopted a highway improvement bill this year. Under the new legislation, drivers will see the excise tax on fuel increase 10 cents, from 18 cents to 28 cents per gallon. Under the new law, all gas taxes collected at the pump will be dedicated to roads by 2025. The state also has a gasoline use tax that varies based on the statewide average retail price per gallon of gasoline (excluding taxes). The July 2017 use tax rate is 12.8 cents per gallon, bringing the total gas tax in Indiana to 40.8 cents per gallon as of July 1, 2017.
Revenues from the excise tax will be directed to the state, but a quarter will be remitted to local governments. The legislation also includes a 10-cent increase to the diesel tax and a variety of vehicle registration fees to further fund highway improvement.
Montana House Bill 473, adopted in May 2017, will raise the state’s gas tax rate for the first time in twenty-four years. The rate will increase by 4.5 cents per gallon this year, raising the gas tax from its current 27 cents to 31.5 cents. The tax will be phased in over five years, eventually rising to 33 cents by fiscal year 2023. The diesel tax rate will increase 1.5 cents this year to 29.25 cents, eventually reaching 29.75 cents by fiscal year 2023.
As part of a $2 billion transportation funding bill passed last year, both gas and diesel taxes were increased in New Jersey, in November 2016 and January 2017 respectively. The change raised the rate from 14.5 to 37.5 cents per gallon, effective November 1, 2016. The rate on diesel fuel also increased by 15.9 cents per gallon on January 1, 2017, and the second part of the diesel tax increase will go into effect July 1, 2017, increasing the rate to 12.5 percent of the per gallon diesel fuel price (currently approximately $2.79/gallon, including taxes). The diesel rate is currently 70 percent of 12.5 percent, or 27 cents per gallon.
An important caveat is that New Jersey’s gas tax is tied to consumption, not to the price of gasoline, meaning the rate has the potential to fluctuate. The law caps how much revenue the state can raise from the gas tax at the amount that 23 cents (or 12.85 percent) per gallon would have produced during the 2016 fiscal year. If consumption rises, the rate will decline slightly. If consumption falls, the rate will rise. This design ensures that the tax will bring in a consistent $1.23 billion in revenue each year.
The transportation bill was passed in conjunction with a tax bill that phases in the repeal of the New Jersey estate tax. The estate tax will be completely eliminated by January 1, 2018.
An infrastructure bill passed this year will go into effect July 1, 2017, raising the gas tax in the state for the first time in thirty years. The gas tax will increase 12 cents over the next five years, eventually rising to 28.75 cents per gallon in 2022. The first increase of 2 cents will go into effect July 1, 2017, raising the tax to 18.75 cents for the next fiscal year. To help quell concerns about regressivity, lawmakers also expanded several tax credits, including the Earned Income Tax Credit, Two-Wage Earner Credit, Tuition Credit, and the Manufacturing Property Tax Exemption.
As part of a road funding bill passed earlier this year, Tennessee gas taxes will increase beginning July 1, 2017. Overall the plan increases the state’s fuel taxes by 6 cents, from 21.4 cents per gallon to 27.4 cents per gallon by 2019. The bulk of the increases will go into effect this year with a 4-cent increase, followed by 1-cent increases in the subsequent years. The funding bill also affects diesel taxes, increasing them 10 cents to 28.4 cents per gallon, with a 4-cent increase this year, and 3-cent increases in the following two years, eventually reaching 35.4 cents by 2019.
After Amendment 64 was passed in 2012 legalizing the possession and sale of recreational marijuana, the issue of taxation quickly arose. The question was posed to voters the following year in Proposition AA, which asked residents to approve a 15 percent excise tax and 10 percent sales tax for all recreational marijuana sales. The rate was originally scheduled to drop from 10 percent to 8 percent on July 1, 2017. However, earlier this year, during negotiations regarding a new spending bill, a last-minute marijuana tax hike was included to fill a budget gap. This provision, which was passed along with the spending bill, raises the sales tax from 10 percent to 15 percent, effective July 1, 2017. The bill also exempts recreational marijuana from the state’s general sales tax of 2.9 percent, effective July 1, 2017.
As of July 1, 2017, recreational marijuana will be subject to several taxes: the increased 15 percent excise tax on final retail sales, a 15 percent tax on the average market price of retail marijuana that’s imposed on the first sale or transfer from a cultivation facility to a retail store, and any local marijuana excise taxes.
 Scott Drenkard, “Several States Will Start 2017 with Corporate Tax Reductions,” Tax Foundation, February 1, 2017, https://taxfoundation.org/several-states-will-start-2017-corporate-tax-reductions/.
 Joseph Henchman, “Kansas Pass-Through Carveout Repealed After Legislature Overrides Gov. Brownback’s Veto,” Tax Foundation, June 07, 2017, https://taxfoundation.org/brownback-pledges-veto-kansas-tax-bill/.
 2017 TN Acts Ch. 181.
 Indiana Department of Revenue, “Increase in Gasoline License Tax, Special Fuel License Tax, and Motor Carrier Surcharge Tax,” May 2017, http://www.in.gov/dor/.
 2017 Mont. Acts Ch. 267.
 GasBuddy, “GasBuddy NewJersey,” GasBuddy, June 2017, http://www.newjerseygasprices.com/index.aspx?fuel=D.
 Larry Higgs, “The next part of N.J.’s gas tax hike hits pumps Sunday,” NJ.com, January 03, 2017, http://www.nj.com/traffic/index.ssf/2017/01/second_part_of_state_gas_tax_increase_hits_drivers.html.
 Jared Walczak, “New Jersey’s Gas Tax Increase is Just One Part of the Story,” Tax Foundation, October 24, 2016, https://taxfoundation.org/new-jerseys-gas-tax-increase-just-one-part-story/.
 Morgan Scarboro, “Does Your State Have an Estate or Inheritance Tax?” Tax Foundation, May 25, 2017, https://taxfoundation.org/state-estate-inheritance-tax/.
 2017 S.C. Act No. 40.
 2017 TN Acts Ch. 181.
 Joseph Henchman and Morgan Scarboro, “Marijuana Legalization and Taxes: Lessons for Other States from Colorado and Washington,” Tax Foundation, May 12, 2016, https://taxfoundation.org/marijuana-taxes-lessons-colorado-washington/.
 2017 Colo. Sess. Laws, ch. 267.
Source: Tax Policy – State Tax Changes Taking Effect July 1, 2017
How a Longer Budget Window Helps and Doesn’t
Tax reform is notoriously difficult. It requires making difficult trade-offs that inevitably will upset certain groups of taxpayers and help others. The House Republicans have found this out the hard way. In June of 2016, they introduced a “Blueprint” for tax reform. There is a lot to like about this plan. It would greatly simplify individual income taxes for millions of filers and would eliminate most distortions in business taxation. In addition, the plan’s base broadeners offset most, if not all, of the cost of the rate cuts.
However, different industries and interest groups have been lining up against specific aspects of the GOP’s plan. For instance, while the border adjustment in the Blueprint would go a long way to protect the U.S. corporate tax base, the retail industry does not like it. The plan would also eliminate the deduction for net interest expense, which would eliminate the bias toward debt-financed corporate investment and prevent base erosion – but heavily leveraged industries, such as real estate, don’t want to lose this deduction.
Faced with opposition to many of the proposed base broadeners, some lawmakers are thinking about abandoning them altogether. Instead, they are interested in passing straight tax cuts without any offsets and changing budget rules to prevent the tax cuts from expiring after ten years.
Under current Senate rules, lawmakers could pass a tax bill with only 51 votes through a process called “reconciliation” and avoid a possible filibuster. However, this shortcut comes with a catch that is important for would-be tax reformers. Reconciliation bills cannot increase the budget deficit outside of the budget window – currently a ten-year period. As such, any tax cuts would need to be offset with base broadeners or spending cuts of equal size. This is referred to as the “Byrd Rule.”
Alternatively, lawmakers could do what they did in the early 2000s with the Bush tax cuts. Those tax cuts were passed through reconciliation, but did not have sufficient offsets. Congress got around the Byrd Rule by making the tax cuts expire in the ninth year, so that the tax changes would not increase the long-run deficit.
The downside to temporary tax cuts is that they are unlikely to produce significant economic growth, an important goal for lawmakers. Businesses would not be able to make many long-term investment plans knowing that the tax cut they received may only be temporary. In fact, we found that a temporary corporate tax cut would only create a small economic benefit that would flow mostly to shareholders. This is compared to a permanent corporate rate cut, which could permanently lift wages for workers.
Many lawmakers understand the shortcomings of temporary tax policy. But some are interested in passing a temporary tax cut, and are interested in doing so for a period longer than ten years. To accomplish this, some have proposed extending the budget window beyond the current ten-year standard. There is nothing in federal budget rules that states the budget window cannot be longer than ten years — in fact, the length of the window used to be five years. Some lawmakers hope that a longer budget window would solve a lot of their issues.
A longer budget window could help with some aspects of tax reform. But not all.
A longer budget window could help lawmakers better account for long-term costs and benefits of their tax plans. Many tax plans come with large up-front costs. For example, the House GOP’s Blueprint converts the corporate tax into a cash-flow tax. This conversion costs a lot in the first few years, due to the move to full expensing of capital investment. However, over time a conversion to a cash-flow tax starts raising revenue, as companies fully lose the ability to deduct their net interest expense.
Under a shorter, ten-year budget window, this conversion looks very expensive. In fact, in the first decade we show that enacting full expensing and eliminating the net interest deduction would lose about $1 trillion. However, in the second decade, these two provisions end up raising nearly $1 trillion. A longer budget window would better account for these transitional budgetary effects.
However, a longer budget window may not allow for a significantly longer temporary tax cut. This is because a tax cut – especially for a rate cut for businesses – may influence revenues long after the initial cut has expired. For example, if lawmakers cut the corporate tax rate for five years, the federal government may lose revenue for many years after the tax cut expires. This is because companies would shift profits and tax payments into years in which the tax rate was lower, reducing the amount of taxable profits in later years when the tax rate is higher.
There is an important distinction between the length of the budget window and the length of a tax cut. It is true that a much longer budget window would allow lawmakers to increase the length of a temporary tax cut. However, the Byrd rule would still require corporate tax cuts to expire well before the end of the budget window. This would put lawmakers back where they started: a temporary corporate tax cut that lasts — at most — ten years and wouldn’t have a permanent positive impact on the economy.
Lawmakers should be realistic about what help they can gain from a longer budget window. It can help them be more fiscally responsible over the long run, by illuminating budget impacts into the future. However, a longer budget window would not enable lawmakers to make a temporary tax cut into a permanent one. Instead, to ensure a pro-growth tax bill, lawmakers should concentrate on working towards permanent tax reform.
Source: Tax Policy – How a Longer Budget Window Helps and Doesn’t
Senate GOP Healthcare Bill Would Repeal 0 Billion in ACA Tax Increases
Last week, Senate Republicans introduced the Better Care Reconciliation Act of 2017, which would make a number of changes to the U.S. healthcare system and the federal tax code. Like the House healthcare bill, the Senate bill would repeal several provisions from the Affordable Care Act, including nearly all of the tax increases passed in that bill.
This afternoon, the Congressional Budget Office released a score for the Senate bill, which included revenue estimates. Overall, the Senate bill would reduce federal revenue by $701.0 billion between 2017 and 2026. Of that total, $550.1 billion of the revenue loss comes from the repeal (or delay) of 13 taxes in the Affordable Care Act, which are listed below:
|Provision repealed (or delayed)
||Effective date of repeal (or delay)
||Change in federal revenue, billions of dollars, 2017-2026
|Source: Congressional Budget Office, https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/52849-hr1628senate.pdf
|Net Investment Income Tax
|Health Insurance Providers Tax
|Cadillac Tax (delayed)
|Additional Medicare Tax
|10% floor on deductibility of medical expenses
|Branded Prescription Drug Fee
|Medical Device Tax
|Limitations on FSAs in cafeteria plans
|Limitation on purchase of over-the-counter drugs with HSAs, Archer MSAs, and FSAs
|Limitation on the deductibility of business expenses related to Medicare Part D
|Limitation on deductible compensation to health insurance executives
|Increase in penalty on improper HSA and Archer MSA distributions
Besides the repeal of these taxes, the Senate bill would also make a number of other changes that would affect federal revenue, including modifying the premium tax credit, expanding Health Savings Accounts, and repealing the individual mandate and the employer mandate.
The Senate bill would repeal the same set of taxes as the House healthcare bill, but with slightly different effective dates. To read more about each of these taxes, click here.
Source: Tax Policy – Senate GOP Healthcare Bill Would Repeal 0 Billion in ACA Tax Increases