2). Effect of E-cigarette Use on Cigarette Federal Excise Tax Revenue Is Not Currently Evident

		No Current Evidence That E-cigarette Use Has Affected Cigarette FET Revenue

Our analysis of Treasury data on cigarette FET revenue found no current  evidence that e-cigarette use has affected the historical decreasing trend  in FET collections over the past 6 years. We used a time series  regression to determine the change in cigarette FET revenue from April  2009, when the last increase in FET on cigarettes and other tobacco  products became effective, through December 2014. 3). First, the e-cigarette market— estimated at $2.5 billion in sales in 2014—is relatively small compared  with the cigarette market, which had $80 billion in sales in the same year. Third, comprehensive and reliable data  about the extent to which e-cigarettes are used as substitutes for  cigarettes are also not available. Relationship between Use of E-cigarettes and Cigarettes Could Determine E-cigarettes’ Effect on Cigarette FET Revenue

How consumers’ use of e-cigarettes relates to their use of cigarettes— whether e-cigarettes are substitutes, complements, or unrelated—may  determine any effect of e-cigarette use on cigarette FET revenue. The most recent data from the National Youth Tobacco Survey by CDC  and FDA showing high school students’ increasing use of e-cigarettes  and decreasing use of cigarettes (see fig. A continued decline in  cigarette smoking among high school students—which could be due, in  part, to increased use of e-cigarettes—would reduce cigarette FET  revenue at a greater rate than the average historical trend. Comprehensive Data on E-cigarette Quantities and Prices Are Not Available from Federal Agencies

		Treasury and FDA Do Not Collect Data on E- cigarette Quantities Comparable to Data Collected for Cigarettes and Other Tobacco Products

Treasury and FDA do not collect data on quantities of e-cigarettes on the  U.S. market, and we did not identify any other federal agencies that do  so. Under this authority, in April 2014 FDA proposed to  deem additional products, including e-cigarettes, to be subject to its  tobacco product regulation. Treasury collects data on quantities of cigarettes and other federally  taxed tobacco products from domestic manufacturers of these products,  but does not collect such data for e-cigarettes, because the IRC does not  define or list a tax rate for e-cigarettes. Bureau of Labor Statistics Has Begun to Collect Limited E-cigarette Price Data

The Department of Labor’s Bureau of Labor Statistics (BLS) began  collecting limited e-cigarette price information in September 2014 as part  of its ongoing data collection for the Consumer Price Index. Appendix I: Objectives, Scope, and Methodology

This report examines the extent to which (1) use of electronic cigarettes  (also known as e-cigarettes) affects federal excise tax (FET) revenue  from cigarettes and (2) data on quantities and prices of e-cigarettes on  the U.S. market are available from federal agencies. To address these objectives, we reviewed documents and interviewed  officials from the Department of the Treasury’s (Treasury) Alcohol and  Tobacco Tax and Trade Bureau and Treasury’s Office of Tax Analysis,  the Food and Drug Administration (FDA), the Centers for Disease Control  and Prevention (CDC), the U.S. Bureau of Labor Statistics (BLS), and the  U.S. Patent and Trademark Office (USPTO) to obtain information and  views about e-cigarette and tobacco sales and revenue trends and  regulation. To describe  FDA’s collection of data on quantities of tobacco products regulated by  the agency, we examined FDA’s regulatory actions, including its April  2014 proposed rule to deem additional products, including e-cigarettes, to  be subject to the agency’s tobacco product authorities, and the July 2014  final user fee rule, and we interviewed cognizant FDA officials.
Why GAO Did This Study

While use of traditional cigarettes in the United States continues to decline, use of e-cigarettes is increasing. Treasury collects FET on cigarettes and other tobacco products manufactured in the United States. The Internal Revenue Code of 1986, as amended, does not specifically define or list a tax rate for e-cigarettes. The decline in cigarette use has led to a decline in cigarette FET revenue, from $15.3 billion in fiscal year 2010 to $13.2 billion in fiscal year 2014. FDA currently regulates four tobacco products. In April 2014, FDA proposed to deem additional tobacco products, including e-cigarettes, subject to its tobacco product authorities.
GAO was asked to examine issues related to the U.S. e-cigarette market. This report examines the extent to which (1) e-cigarette use affects cigarette FET revenue, and (2) data on quantities and prices of e-cigarettes on the U.S. market are available from federal agencies.
GAO conducted a regression analysis to assess the effect of e-cigarette use on cigarette FET revenue from April 2009 through December 2014, using Treasury data on FET revenue from cigarettes. GAO also reviewed agency documents and interviewed agency officials and industry experts.

What GAO Found

GAO's analysis found no evidence that use of electronic cigarettes (e-cigarettes) has affected federal excise tax (FET) revenue from traditional cigarettes, which has been declining over time (see figure). Possible reasons for the lack of a detectable effect include the small size of the e-cigarette market (estimated at $2.5 billion in 2014) relative to the cigarette market ($80 billion in the same year); lack of comprehensive and reliable data on e-cigarette quantities and prices; and lack of comprehensive and reliable information about the extent to which e-cigarettes substitute for cigarettes. If users consume e-cigarettes instead of cigarettes, cigarette FET revenue would decline as fewer cigarettes are consumed. Data from a recent survey by the Centers for Disease Control and Prevention showing high school students' increasing use of e-cigarettes and decreasing use of cigarettes suggest that these students may substitute e-cigarettes for cigarettes to some extent. If the percentage of high school students using cigarettes continues to decline, cigarette FET revenue could also decrease at a greater rate than the average historic trend observed since April 2009, when FET on cigarettes and other tobacco products was last increased.
Comprehensive data on e-cigarette quantities and prices are not available from federal agencies. The Department of the Treasury (Treasury) and Food and Drug Administration (FDA) do not collect data on e-cigarette quantities comparable to data that they collect for cigarettes and some other tobacco products. According to FDA officials, if e-cigarettes are deemed subject to FDA's tobacco product authorities as a result of a rule proposed in April 2014, the agency could start collecting some data on the types of e-cigarettes on the U.S. market but will not collect data on the quantities of e-cigarettes sold. The Bureau of Labor Statistics began collecting data on e-cigarette prices in September 2014 as part of its data collection for the Consumer Price Index, but these data are limited.

What GAO Recommends

GAO is not making recommendations in this report.