A new proposal in Montana would utilize what is referred to as a “harm reduction” principle to tier the tobacco tax rate depending on how harmful the product is. Currently, Montana imposes a $1.70 tax per 20-cigarette package. Under Senate Bill 98, a new, lower tax rate of 85 cents for packages of 20 heat sticks that are intended to be heated and not burned would be created. The goal of this proposal is to incentivize smokers to move towards less harmful products. This type of tax policy is known as “harm reduction.”
According to the Tax Foundation:
“To better understand the trade-offs involved in nicotine tax policy design, it is crucial to introduce the concept of harm reduction. Harm reduction emphasizes the practicality of reducing the harm associated with certain goods rather than attempting to eliminate it entirely through bans or excessively high taxes. This approach represents a departure from the traditional thinking that has dominated public health efforts to promote cessation.
The FDA recognizes harm reduction through its classifications of premarket tobacco product application (PMTA) and modified risk tobacco products. Under these classifications, certain tobacco and nicotine products can be designated as less harmful compared to others. For instance, the first-ever MRTP order was granted to Swedish-style snus products, allowing the manufacturer to claim that the use of these products lowers consumers’ risks in comparison to cigarettes.”
The Tax Foundation ultimately recommends:
“To incentivize switching, safer nicotine products should receive a preferential tax rate compared to combustible cigarettes.”
While this type of tax policy makes sense from a public health perspective, "sin taxes" in general conflict with sound principles of taxation. Ideally, a tax system should focus on simplicity, transparency, neutrality, and stability.
Here is how the Tax Foundation describes these terms:
“Simplicity: Tax codes should be easy for taxpayers to comply with and for governments to administer and enforce.
Transparency: Tax policies should clearly and plainly define what taxpayers must pay and when they must pay it. Hiding tax burdens in complex structures should be avoided. Additionally, any changes to the tax code should be made with careful consideration, input, and open hearings.
Neutrality: Taxes should neither encourage nor discourage personal or business decisions. The purpose of taxes is to raise needed revenue, not to favor or punish specific industries, activities, and products. Minimizing tax preferences broadens the tax base, so that the government can raise sufficient revenue with lower rates.
Stability: Taxpayers deserve consistency and predictability in the tax code. Governments should avoid enacting temporary tax laws, including tax holidays, amnesties, and retroactive changes, and strive to establish stable revenue sources.”
Sin taxes conflict with the neutrality principle. While using the tax code to change behavior should be avoided, an ideal tax code must be weighed against the public health goals of using harm reduction policies.
Ideally, there should be no sin taxes and we’d encourage lawmakers to work towards repealing them. The purpose of the tax code should not be punishing behavior. In the meantime, scaling sin taxes on a harm reduction principle to improve public health is a debate worth having.