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https://www.denverpost.com/2020/11/03/colorado-prop-ee-results-tobacco-nicotine-tax/

The Denver Post

Colorado Proposition EE results: Higher Tobacco, Nicotine Tax Approved.

Coloradans voted to approve a tax increase on tobacco products and a new tax on vaping

products such as e-cigarettes on Tuesday.

Proposition EE will increase the tax on a pack of cigarettes from 84 cents to $2.64 by 2027.

Taxes on other tobacco products will also increase to 22% of the manufacturer’s list price by the

same year, while nicotine products will increase by 62% of the list price by 2027.

As of 11:01 p.m., more than 1.8 million (68.4%) votes were in favor of the measure and 877,219

votes (31.6%) were opposed. About 83% of votes were counted.

“Our kids just won big,” said Jake Williams, executive director of Healthier Colorado in a

statement. “Voters chose to make life-changing investments in our children by providing every

kid with access to preschool and implementing smart policy to keep them from getting hooked

on nicotine.”
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The money from the tax increases will be directed toward public education, universal preschool,

and vaping cessation and education programs.

The measure was supported by the Colorado Education Association because it would bring

money into the general fund, with the goal of decreasing vaping, said Amie Baca-Oehlert,

president of the association.

“We see that everyday in our schools with our students and the negative impacts that vaping has

on our students,” she said.

A Bad Deal for Colorado, a group opposing the measure, said in a news release that it was

“disappointed in the outcome” of the results.

“As our economy recovers from COVID-19, now is not the time to raise taxes on any Colorado

voter,” said Mary Szarmach, co-owner of Smoker Friendly and Gasamat in the release.

The bill that placed Proposition EE on the ballot came after multiple efforts by state lawmakers

seeking to reduce the state’s high rate of teen vaping and tobacco use among the broader public.

The state has one of the highest youth vaping rates in the U.S. So far, state lawmakers have taken

small steps to curb vaping, such as banning the use of e-cigarettes in public buildings, while local

governments have taken more aggressive steps. For example, Aspen became the first city in the

state to ban the sale of all flavored nicotine products, including those with menthol, in 2019.
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The local government of Colorado is increasing the tax on cigarettes by 84 cents by 2027,

with higher price of each cigarette package to $2.64. The government is also planning to increase

the tax on other tobacco products by 22%, and that on nicotine products by 62% in the same

year. The tax is based on proposition EE, with the support of Colorado Education Association.

The increased tax revenue will be advocated towards public education, universal

preschool, and vaping cessation and education programs for students. According to the article,

Colorado has one of the highest youth vaping rates in the US, meaning that the nicotine market

in Colorado is relatively bigger than other states. The government has been taking measures such

as banning the use of e-cigarettes to prevent negative externalities caused by smoking.

The president of Colorado Education Association, Baca-Oehlert, said “We see the

negative impacts that vaping has on our students,” mentioning that the state is anticipating

positive externalities through the tax increase.

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In the article, the government of Colorado will adopt a $2.64 tax on cigarettes, 22% tax

on other tobacco products, and 62% tax on nicotine products to reduce youth vaping rate and

increase government revenue. Indirect tax is placed on the supplier, which is passed on to the

consumer in a form of a higher market price. Cigarettes and other nicotine products are demerit

goods, whose consumption generates negative externalities that occur costs, which are imposed

on third parties. Examples of external costs of cigarettes could be negative health impacts to non-

smokers, greater external healthcare costs, and air pollution.

The diagram above illustrates the economic situation where negative externalities occur

due to consumption of nicotine products in Colorado nicotine market. As consumption of

nicotine products negatively affect unrelated third parties, private benefits are greater than social

benefits. Thus, the MSB curve is below the MPB curve. Both demand curves, MSB and MPB are

steep as nicotine products are price inelastic, as nicotine products are very addictive in short

term. This means that the percentage change in price of nicotine products is smaller than that of

quantity demanded.
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Furthermore, the social optimum point, represented by (Q*,P*), is the point where MSB

intersects with MSC. The point where MPB intersects with MPC is the free market outcome.

This leads to an equilibrium quantity and price, which is Q1 and P1. In the diagram, Q1 is larger

than Q*. This suggests that the market is misallocating (Q1-Q*) units of resources. The welfare

loss is therefore represented as the shaded region, which is the difference between MSB and

MSC for the amount of output overproduced than the social optimum.

The diagram above shows the effect of tax imposed on cigarettes and nicotine products.

Nicotine taxes shift the supply curve from S to S + tax, as the production costs of nicotine

products has increased with $2.64 tax for each pack. Therefore, the new supply curve shifts the

price up from P to Pc, which results in reduction of quantity demanded from Q to Q1, as stated

by the law of supply.

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Nicotine tax may have certain advantages. The government may experience revenue

increase in long term, which can be used for merit goods, such as public education and vaping

cessation, as mentioned in the article. Greater reduction in smoking is expected in long run due

to the price inelasticity of nicotine products.

On the other hand, the cigarette taxes may bring disadvantages. As the prices of nicotine

products are much higher, the disposable income of consumers decreases, which result in a

significant decrease in living standards. Nicotine tax is regressive, where more tax burden is

placed on low-income earners, increasing income inequality. Furthermore, the reduction in

consumption of nicotine products is relatively low in short-term, as the PED for cigarettes is low.

The reduction in producer revenue may cause unemployment, as the producers may fire

employees to reduce production cost, but the employees in the cigarette producing companies are

usually low-skilled, thus if demand for cigarettes decrease, they may not find other job due to

lack of skills.

In conclusion, indirect tax on nicotine products is inefficient as drawbacks are larger than

benefits. Stakeholders in Colorado nicotine market are worse off due to the tax, with less

disposable income of consumers, decrease in producer revenue, and higher unemployment rate,

even though they have the benefit of increased government revenue and reduction in smoking.