States increase tobacco, nicotine taxes to fill budget shortfalls

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With half the year over, most states have wrapped up their regular legislative sessions. Prior to adjourning, several states have turned to increased tobacco and nicotine taxes for varying reasons, including to fill budget deficits, fund programs and capture new revenue sources from nicotine pouches.

In total, 10 states have hiked tobacco or nicotine excise taxes. Here is a closer look at a few of the increases and why these states acted:

• Indiana: In April, with only a few weeks remaining in their legislative session, legislators realized they were facing a $2.4 billion deficit. To help address this, lawmakers turned to tobacco and nicotine and applied a significant “across the board” approach, increasing the cigarette tax from $1 to $3 per pack; other tobacco products (OTP) from 24% to 30% of the wholesale price; moist snuff from 40 cents to 50 cents per ounce; nicotine pouches from 40 cents to 50 cents per ounce; closed-system vapor cartridges from 15% to 30% of the wholesale price; and vapor consumable material (open systems) from 15% to 30% at retail. 
• Oregon: Looking to provide funding for a wildlife prevention program, legislators enacted a new tax on oral nicotine products—for packages with 20 consumable units or less, an excise tax of 65 cents per can, and for packages with more than 20 consumable units, a tax of 3.25 cents per consumable unit.
• Rhode Island: Realizing that nicotine pouches were not in the taxation definition of OTP, lawmakers expanded this taxation category. As a result, nicotine pouches will be taxed at the OTP rate of 80%.
• Tennessee: Coming into this year, Tennessee was one of 18 states that did not have an excise tax on vapor products. As of July 1, the state taxes these products at 10% of the wholesale price.

As for what is next with state excise taxes, some states are likely to hold special sessions prior to the end of the year to address budget shortfalls. The recent economic uncertainty and changes to federal funding to states has caused pressure to find additional revenue to fund state programs. Despite being a declining revenue source as smoking decreases, cigarette taxes continue to be looked upon to plug budget deficits. 

Also, in future sessions, states will be grappling with how to capture revenue from the newer forms of nicotine such as vapor products and nicotine pouches. Generally, state bill proposals either include lower rates that recognize the potential tobacco harm reduction qualities of these products or measures that try to equalize the tax on these products to that on cigarettes. 

In 2026, state tobacco and nicotine excise taxes will be considered, like every year. However, several states have shorter sessions and focus their attention on non-fiscal matters that can alleviate some of the threats. It is also an election year for state legislators, which will impact the length of state sessions.

David Spross is the executive director of the National Association of Tobacco Outlets in Washington, D.C. Reach him at david.spross@natocentral.org.

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