The Dirty Secret Behind the Anti-Vaping Movement

Why? That was the first question that came to mind when the war on vaping began to heat up. I decided to take the excellent advice given by Deep Throat to Bob Woodward and Carl Bernstein: “Follow the money.” The three main culprits are government, big tobacco, and big pharma.

(A pdf version of this article can be downloaded at the bottom of the page.  However, it does not include the state-by-state tobacco settlement payments graph mainly because the graph would have been unreadable.)

[Updated January 17, 2019 after suggestions from an anonymous reader.]

Is Vaping Safe?

As always, the real question is, “Safe compared to what?” There seems little doubt that vaping using products sold be legitimate companies is safer than cigarettes. Consider the chemical composition of the two products (Figure 1).[1]

Dangers of smoking and vaping The Dirty Secret Behind the Anti-Vaping Movement

Figure 1 (click for larger image)

Arsenic is poisonous. Cadmium, chromium, nickel, and lead are heavy metals that accumulate in the kidneys and will eventually cause kidney failure. Somehow that seems more serious compared to e-cigarettes and nicotine inhalers. This is amplified by the quantities of the chemicals.

Tar, formaldehyde, and diacetyl are also present in cigarette smoke. They are completely absent from e-cigarettes. There seems little doubt that vaping products are far safer than cigarettes.

In September, the New York Daily News editorialized against “anti-vaping hysteria.”[2]

A reasonable response to the vape scare would do three things: first, proceed with the current investigation; second, impose clear and enforceable regulations on all kinds of vape cartridges and liquids; and, third, do more to prevent underage vaping without overbroad bans that penalize responsible adult vapers making the switch from cigarettes.

That means rejecting the hysteria against all forms of vaping, which activists are using to mobilize sweeping bans against the whole technology.

The bottom line is that officials should not ignore how well-regulated vaping has dramatically reduced sickness and death from cigarette smoking. As alarming as today’s health scare is, a puritanical approach to vapes is very unlikely to serve the public interest.

So let’s see who’s behind the war on vaping.[3]

Culprit #1: Government

In 2018 federal, state and local governments in the U.S. collected $41 billion in revenue from tobacco-related sources. This total does not include sales tax revenue. Let’s look at the details of the sources of this revenue tsunami.

The Tobacco Tax Settlement

In 2018 the states collected a total of $7.9 billion dollars as part of the 1998 tobacco Master Settlement Agreement.[4] Total payments (including the territories) were $8.2 billion. Since the first payments in 1998, tobacco companies have paid the states $154 billion dollars.[5] Figure 2 shows the annual payments since 1998.[6]

Figure 2 Tobacco Settlement Payments The Dirty Secret Behind the Anti-Vaping Movement

Figure 2 Tobacco Settlement Payments (click for larger image)

The breakdown by state is interesting. In 2018 California collected $876 million. American Samoa, Guam, and the Virgin Islands collected $1 million each, while the Northern Mariana Islands collected $0 (probably rounded from a number less than $0.5 million). Puerto Rico received $77 million.[7]

However, settlement payments are made according to a schedule and do not depend on revenue, profit, or any other measure of business success. The California Attorney General has a good summary of the details, including this:[8]

  • “Requires industry payments to the states in perpetuity, with the payments totaling about $206 billion through the year 2025.
  • Provides that distributions to states will be made based on formulas agreed to by Attorneys General.
  • Requires annual payments by the industry to begin April 15, 2000.
  • Provides that if all states participate in the settlement, annual payments will “ramp-up” beginning with a $4.5 billion payment on April 15, 2000. Ensuing April 15 payments will be at the following rates:
    • 2001: $5 billion
    • 2002-2003: $6.5 billion
    • 2004-2007: $8 billion
    • 2008-2017: $8.139 billion (plus $861 million to the strategic fund)
    • 2018 on: $9 billion
  • Requires tobacco companies to make “up front” payments of nearly $13 billion in the following amounts: $2.4 billion in 1998, $2.472 billion on January 10, 2000, $2.546 billion in 2001, $2.622 billion in 2002, and $2.701 billion in 2003.
  • Requires the companies, on April 15, 2008 and on April 15 each year through 2017, to pay $861 million into a strategic contribution fund.”

In 2015 California spent $75 million on an anti-vaping public relations campaign. More on that shortly.

If anything, the settlement terms give state governments even more incentive to support big tobacco. After all, if one of the firms goes out of business, their “contributions” to the settlement payments will be greatly reduced. Governments are undoubtedly very afraid of this possibility. There is a powerful incentive to keep big tobacco in business and profitable.

Bankruptcy is a binary choice. Either the business is a going concern or it’s bankrupt. By contrast, loss of excise and sales tax revenue occurs at the margin. That means there is both a long-run incentive (preservation of settlement payments) and a short-run incentive (preventing excise taxes from declining) for governments to support big tobacco.

Excise and Sales Taxes

State and federal excise taxes are the second stream of revenue. In 2018 states collected $19.5 billion in tobacco excise taxes. Local agencies got an additional $521.1 million. Federal excise taxes were $13.2 billion. Additionally state and local agencies collected sales tax revenue. Let’s ignore sales taxes, implicitly assuming that sales tax revenue from vaping sales will be roughly the same as from tobacco.

Figure 3 shows how excise tax revenue has grown since 1990.

Figure 3 State Excise Tax Revenue The Dirty Secret Behind the Anti-Vaping Movement

Figure 3 State Excise Tax Revenue (click for larger image)

Look at it this way. In 2017 the average price of a pack of cigarettes was $5.38.[9] On average, U.S. smokers consumed about a pack of cigarettes a day (364 packs per year).[10] The Federal excise tax on cigarettes was $1.00 per pack. On average, state excise taxes were $1.38 per pack, for a total of $2.38 per pack in taxes. If one smoker switches from cigarettes to vaping, combined state and federal excise tax revenue decreases by about $868. If 1,000 switch, the revenue loss is $868,000. In 2018 there were 34.2 million smokers in the U.S. If five percent switch to vaping, the revenue loss is $4.1 million per year.

This is undoubtedly getting the attention of the federal and state bureaucracies. Little wonder that the state and federal governments are suddenly opposed to vaping. As is so often the case, California gives us a good case study.

In 2015 the California Department of Public Health (CADPH) issued a request for proposal for a $75 million grant to create a public relations campaign against vaping products.[11] Figure 4 shows a slide from one presentation (emphasis added).[12]

Figure 4 California is concerned about the loss of tax revenue. The Dirty Secret Behind the Anti-Vaping Movement

Figure 4 California is concerned about the loss of tax revenue.

The anti-vaping push mainly comes from progressives and Democrats. Republicans and conservatives tend to favor allowing individual choice. California Representative Duncan Hunter (R) has emerged as a leader in the anti-anti-vaping effort. In a 2015 op-ed, he wrote[13]

The reason I vape is simple: It’s so I don’t smoke cigarettes.  I vape knowing that I’m not inhaling tobacco.  Most importantly, I vape because I believe it could save my life.

Culprit #2: Big Tobacco

This is seemingly obvious, but there is a subtle catch. Big tobacco actually tried to enter the vaping market. Blu, owned by Imperial Tobacco; MarkTen, owned by Altria Group; and VUSE, owned by R.J Reynolds. But their products had a critical flaw: they tasted like cigarettes (known in the industry as cig-a-likes).

One example is the Mig Cig Basic E-Cig Starter Kit. This unit was rated number 1 by Vaping Daily. Figure 5 shows some advertising for this product. The delivery system resembles a cigarette. People who took up vaping to quit cigarettes have not been fans of a product that makes it look like they’re smoking.

Figure 5 Mig E-Cig Ad The Dirty Secret Behind the Anti-Vaping Movement

Figure 5 Mig E-Cig Ad (click for larger image)

Brian May of Altria noted that the company, “did support FDA extension of authority over e-cigarettes and other tobacco products.”[14]

Culprit #3: Big Pharma

The pharmaceutical industry is a distant third in culpability. Undoubtedly their sales of nicotine gum and other stop smoking products have declined a bit as demand has shifted to vaping. And big pharma donates vast quantities to political campaigns. But it’s difficult to find a direct connection between pharma companies and anti-vaping activities. After all, products like nicotine gum are a small fraction of their overall business.[15]

In 2019 MedConsumers.com published their list of the 10 Best Nicotine Gums 2019.[16] Five out of the top six are Nicorette products. (Nicotrol is the lone intruder. But that drug is just relabeled Nicorette.[17]) Nicorette is manufactured and distributed by GlaxoSmithKline (GSK) in the U.S.[18] From the company’s financial statements it’s impossible to extract how important Nicorette is to GSK. The company reports three lines of business: pharmaceuticals, vaccines, and consumer healthcare. Nicorette is included in the third category. In 2018 consumer healthcare was about 25 percent of total revenue (called “turnover” under the U.K. accounting system).[19] GSK is a very large company. 2018 gross revenue was £30.8 billion (about $39.8 billion). It’s unlikely that the company would spend very much defending a market that is probably a tiny part of their overall financial picture. But GSK will spend a bit defending this market just because they have significant market power and some control over pricing.

One company whose product did not make this list is Pfizer. That’s because Chantrix is actually a pill, available by prescription only.[20] Naturally, many health insurance companies will pay for this prescription with a small, perhaps zero, copay. In 2017 Chantrix sales were $997 million.[21] Pfizer certainly has a powerful incentive to oppose vaping.

Conclusion

Vaping is almost certainly safer than smoking cigarettes. But federal and state governments continue to harass the industry. The state of California has admitted that part of their incentive is to preserve their excise tax revenue stream. But an even bigger fear is possible company bankruptcies. In that case, the tobacco settlement payments would fall under the jurisdiction of a bankruptcy judge. Government has both short and long run worries.

Big tobacco is, naturally, worried. More vapers means fewer smokers. Fewer smokers mean lower revenue and profits. Their attempts to enter the vaping industry have fallen flat. One possibility is acquisition. Expect big tobacco to go on a shopping spree for established vaping companies once the campaign against vaping fails.

Big pharma is undoubtedly also concerned, but at a level several orders of magnitude lower than governments and big tobacco. To the extent that vaping replaced nicotine gum and other products used to help people quit smoking, revenues will be reduced. One potentially important factor is GlaxoSmithKline’s monopoly power in the nicotine gum market. GSK may put up a fight to defend their market power.

But this is not an anti-vaping populist uprising. The motivating forces come from government, big tobacco, and big pharma.

  1. Graphic from Not Blowing Smoke (2019). “How Does Vaping Compare to Cigarettes?” Available at http://notblowingsmoke.org/content/facts-about-vaping/, Accessed November 19, 2019.
  2. New York Daily News (September 13, 2019). Available at https://www.dailynews.com/2019/09/13/dont-succumb-to-anti-vaping-hysteria/. Accessed November 17, 2019.
  3. For convenience I’ll include both e-cigarettes and nicotine inhalers under the general terms vaping and vaping products.
  4. National Association of Attorneys General (2019). “Center for Tobacco and Public Health.” Available at https://www.naag.org/naag/about_naag/naag-center-for-tobacco-and-public-health.php. Accessed November 17, 2019.
  5. Tax Foundation (2019). “How Stable is Cigarette Tax Revenue?” Available at https://taxfoundation.org/cigarette-tax-revenue-tool/. Accessed November 12, 2019. Thanks to Katherine Loughead, Policy Analyst for giving me access to the underlying report. The figures in paragraphs 2 and 3 are from this source.
  6. There are 46 states included in the Tobacco Master Settlement. Four other states did not join the class action and were awarded separate payment streams. The figures used here include payments to all 50 states.
  7. Kaiser Family Foundation (2019). “Actual Tobacco Settlement Payments Received by the States (in millions),”s Available at https://www.kff.org/health-costs/state-indicator/tobacco-settlement-payments/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D. Accessed November 28, 2019.
  8. State of California (2019). “Tobacco Master Settlement Agreement Summary, FINANCIAL RECOVERY FOR THE STATES.” Available at https://oag.ca.gov/tobacco/resources/msasumm. Accessed November 28, 2019.
  9. Data in this paragraph is mostly from the Centers for Disease Control. (1) Centers for Disease Control (2018). “Current Cigarette Smoking Among Adults in the United States.” Available at https://www.cdc.gov/tobacco/data_statistics/fact_sheets/adult_data/cig_smoking/index.htm. Accessed November 26, 2019. (2) Centers for Disease Control (2017). “Cigarette Sales.” Available at https://www.cdc.gov/tobacco/data_statistics/fact_sheets/economics/econ_facts/index.htm. Accessed November 27, 2019. (3) https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise. Accessed November 27, 2019. (4) Author’s calculations.
  10. This figure assumes all cigarette sales are to adults. As such, it undoubtedly overstates daily consumption.
  11. Blair, Paul (March 23, 2015). “Documents: California Department of Public Health Launches $75 Million Campaign to Discourage Vaping.” Americans for Tax Reform. Available at https://www.atr.org/california-department-public-health-launches-75-million-campaign-discourage-vaping. Accessed November 19, 2019.
  12. California Tobacco Control Program (December 11, 2013). “California Tobacco Control Program Advertising Campaign RFP 14-10003” page 43. Available at https://tcfor.catcp.org/index.cfm?fuseaction=opportunities.viewArchivedOpp&oppID=41. See picture below for exact link. Accessed January 17, 2019.
  13. Rep. Duncan Hunter (R-CA, December 9, 2015). “Don’t stifle vaping.” The Hill. Available at https://thehill.com/blogs/congress-blog/healthcare/262466-dont-stifle-vaping. Accessed November 19, 2019. Mr. Hunter resigned from Congress effective January 3, 2020.
  14. Showalter, Monica (June 2, 2016). “Hot Air: Democrats Work With Big Tobacco and Big Pharma to Choke the Vaping Industry.” The Observer. Available at https://observer.com/2016/06/hot-air-democrats-work-with-big-tobacco-and-big-pharma-to-choke-the-vaping-industry/. Accessed November 19, 2019.
  15. Showalter, Monica, op. cit. suggested this idea.
  16. Med Consumers (2019). “10 Best Nicotine Gums 2019.” Available at https://www.medconsumers.com/best-nicotine-gum/. Accessed November 29, 2019.
  17. StopSmokingToday.com (2019). “Nicotrol Gum.” Available at https://www.stopsmokingtoday.com/product/38/Nicotrol_Gum.html. Accessed November 29, 2019.
  18. GlaxoSmithKline (2019). “Nicorette.” Available at https://www.gsk.com/en-gb/products/our-consumer-healthcare-products/respiratory/nicorette/. Accessed November 29, 2019.
  19. GlaxoSmithKline (2019). “Annual Report 2018.” Available at https://www.gsk.com/en-gb/investors/corporate-reporting/annual-report-2018/. Accessed November 29, 2019. And author’s calculations.
  20. Chantrix official website (2020). Available at https://www.chantix.com/. Accessed January 17, 2020.
  21. Weintraub, Arlene (June 26, 2018). “Price of Pfizer’s smoking-cessation drug Chantix doubles in just 5 years: report.” FiercePharma.com. Available at https://www.fiercepharma.com/pfizer-hikes-price-smoking-cessation-drug-chantix-106-5-years-report. Accessed January 17, 2020.
The Dirty Secret Behind the AntiVaping Movement for pdf

 

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.