As U.S. smoking rates decline, many states are scrambling to find ways to make up for lost tobacco tax revenue. Exacerbating this trend is the growing popularity of electronic cigarettes, which offer smokers a tobacco-free alternative to cigarettes.

State legislators are eager to tax electronic cigarettes to supplement their revenue, but the justification for taxing electronic cigarettes is somewhat dubious.

Cigarettes and other tobacco products are taxed because of their proven health dangers. While electronic cigarettes often look and feel similar to cigarettes, they work by delivering nicotine through inhaled water vapor and do not contain tobacco or the more than 70 carcinogens that traditional cigarettes do.

Despite the significant differences in public health impacts between traditional and electronic cigarettes, many states want to treat them the same way in their tax codes. Minnesota already taxes electronic cigarettes at 95 percent of their wholesale cost--the same rate as other tobacco products.

North Carolina, a state known for its tobacco production, is considering applying a tax on electronic cigarettes, and the proposed legislation has garnered support from both politicians and tobacco companies. Reynolds American Vice President David Powers, based in North Carolina, said, "I promise you, you've never heard me or anyone in any other industry stand up and ask for their products to be taxed, but… we are [asking to be taxed]." Higher taxes would make it harder for small, innovative companies to get off the ground, which benefits Big Tobacco but hurts consumers, so it is not surprising Reynolds American is in favor of taxing electronic cigarettes. New Jersey, Washington state, South Carolina, and a handful of other states are also debating electronic cigarette taxes.

One of the benefits of electronic cigarettes is that their relatively low price offers an affordable way for people to quit smoking. Taxing these products at rates similar to regular cigarettes will reduce these incentives and keep more people lighting up.

The health benefits electronic cigarettes offer to consumers may be outweighed by the fiscal problems they pose for states. New Hampshire earns 4.4 percent of its tax revenue from tobacco taxes and Delaware receives 3.2 percent. States collected nearly $18 billion in tobacco taxes in 2011. This amount will decrease as more people switch to electronic cigarettes, a $1.7 billion industry that is projected to double in size by 2015.

Additionally, this year, states will collect $25 billion from the Master Settlement Agreement, a 1998 court settlement that required tobacco companies to pay states about $250 billion over 25 years. But, only 2 percent of this amount will go to tobacco prevention programs—the purpose of the payments. The rest helps shore up states’ troubled finances. The tobacco companies’ payments are adjusted downwards as smoking rates fall, so states have another clear fiscal incentive to keep people hooked on cigarettes.

More research is needed to determine electronic cigarettes’ health effects and just how effective they are at helping people to kick their cigarette habits. However, the Centers for Disease Control and Prevention admit that electronic cigarette vapor contains “far fewer of the toxins found in smoke compared to traditional cigarettes.”

Anything that replaces inhaling smoke from burnt tobacco is an improvement. Instead of forcing people to use ineffective FDA-approved smoking cessation products, why not allow smokers to try products that look and feel like cigarettes?

Smoking is a serious health hazard, and because of Obamacare, the medical costs are increasingly borne by taxpayers. Lawmakers should welcome alternatives. Instead, the trend is towards overzealous regulation and taxation, which decrease innovation and consumer choice. States should encourage electronic cigarettes and find another way to balance their budgets.

Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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