Excise taxes have long been used by governments around the world to discourage the consumption of products such as alcohol and tobacco, with the goal of protecting public health. In line with this, the South African government recently imposed a tax on vaping products, citing similar justifications for doing so.
The motivation for this tax stems from mounting evidence that vaping products are not as harmless as they were initially thought to be. The imposition of the new vaping tax, on the other hand, has sparked controversy, with vaping advocacy groups and manufacturers strongly opposing it.
The vaping industry’s stance is based on the claim that e-cigarettes pose fewer health risks than traditional cigarettes. They argue that the tax may inadvertently encourage the growth of an underground vaping market, lead former smokers back to traditional tobacco, and fail to discourage young people from adopting vaping habits.
The vaping industry’s main argument is that the excise tax could increase the retail price of e-cigarettes by more than 100%. Using insights from the Research Unit on the Economics of Excisable Products, this article goes beyond mere claims and examines the potential price escalation effects while evaluating the effectiveness of the vaping excise tax regime.
It is important to note that, while the article does not address all of the industry’s concerns, the government has addressed some of them.
The crux of the issue is that the recently implemented vaping tax may be ineffective in reducing youth consumption. The design of the tax does not appear to be sufficiently tailored to discourage or prevent young people from using vaping products, particularly disposable vapes that are subject to lower taxation. This is a serious flaw in the current tax system.
What is concerning is that disposable vapes, which are discarded once the liquid runs out, are gaining popularity among young users. This group of users is not primarily made up of teenagers who are switching from smoking to vaping; rather, it is made up of adolescents who are developing potential lifelong nicotine addictions through vaping. The industry’s claim that it only sells to people over the age of 18 is challenged by evidence to the contrary.
According to a study conducted in 2022 across nine schools in three South African provinces, 15% of 5,583 surveyed high school students in grades 8-12 reported using vaping devices. Vaping was even more prevalent among students in grades 11 (17%) and 12 (27%).
These statistics highlight the widespread appeal of vaping products among young people, owing primarily to their diverse flavours, appealing designs, and ease of use. Notably, some vaping devices are designed to look like ice lollies, adding to their allure. Brands such as AirsPops, particularly their disposable vapes, have gained popularity among South African youth.
Surprisingly, the retail price of these products has remained relatively stable, implying that the industry is absorbing the tax or that older stock is still available. Furthermore, e-liquid prices have been driven down by competition in both the disposable and open-system vaping markets.
To put this in context, South Africa’s National Treasury has been aiming for a 40% excise tax burden on cigarettes since 2004. This means that the excise tax should be 40% of the average cigarette’s retail price. In recent years, excise tax increases have outpaced retail price increases, resulting in an average tax burden of around 45% for popular-priced cigarettes. With VAT included, the total tax burden on these cigarettes is approximately 58%.
While comparisons to cigarette taxation are contentious, current e-cigarette taxation consistently falls below that of tobacco products, with the exception of 100ml e-liquids.
The upcoming tax changes are expected to have the least impact on disposable vapes and the greatest impact on larger e-liquid containers. Those who use 100ml e-liquid containers are more likely to be experienced vapers looking for a smoking alternative. This disparity, however, poses a problem because the current excise tax structure does not adequately target the reduction of vaping among youth.
A proposed solution is to levy a minimum excise tax on all vaping products, resulting in a more consistent tax impact across different container sizes. Furthermore, the National Treasury could raise the excise tax on e-cigarettes on an annual basis, taking into account inflation and an announced supplementary percentage. This strategy, similar to that used in Australia, would gradually make e-cigarettes less affordable over time.
In the midst of the industry’s backlash against the vaping tax, it is critical to remember that the most popular vaping products among youth are those with the lowest tax burden. South Africa must strive to prevent a new wave of addiction, and the vaping tax is a step in the right direction. Nonetheless, improving the tax system to better target youth consumption is critical. Hopefully, the National Treasury will take these concerns into account in future budgetary discussions.
