ELECTRONIC 

CIGARETTES

Effect on Federal 

Excise Taxes 

Collected on 

Traditional Cigarettes 

Is Not Currently 

Evident

Report to the Committee on Finance, 

U.S. Senate

September 2015

GAO-15-771

United States Government Accountability Office
Highlights of GAO-15-771, a report to the 

Committee on Finance, U.S. Senate

September 2015

ELECTRONIC CIGARETTES

Effect on Federal Excise Taxes Collected on 

Traditional Cigarettes Is Not Currently Evident

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 Recommends

GAO is not making recommendations 

in this report.

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 ecigarettes 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 ecigarettes 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.

Cigarette Federal Excise Tax Revenue Collected and 6-Year Historical Trend Line,

April 2009-December 2014

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. 

View GAO-15-771. For more information,

contact David Gootnick at 202-512-3149 or 

gootnickd@gao.gov. 

United States Government Accountability Office
Letter 1

Background 4

Effect of E-cigarette Use on Cigarette Federal Excise Tax 

Revenue Is Not Currently Evident 11

Comprehensive Data on E-cigarette Quantities and Prices Are Not 

Available from Federal Agencies 15

Concluding Observations 20

Agency Comments 21

Appendix I Objectives, Scope, and Methodology 22

Appendix II Results of Regression Analysis Testing the Effect of Electronic 

Cigarette Use on Federal Excise Tax Revenue from Traditional 

Cigarettes 24

Appendix III GAO Contact and Staff Acknowledgments 27

Tables

Table 1: Three Possible Relationships between Use of Ecigarettes and Cigarettes and the Corresponding Potential 

Effects on Cigarette Federal Excise Tax (FET) Revenue 14

Table 2: Data on the Quantities of Cigarettes, Other Tobacco 

Products, and E-cigarettes on the U.S. Market Collected 

by the Department of the Treasury and FDA as of August 

2015 19

Table 3: Regression Results for the Multivariate Model Used to 

Estimate Effect of E-cigarette Use on Federal Excise Tax 

Revenue from Traditional Cigarettes 25

Figures

Figure 1: Types of E-cigarettes and E-cigarette Parts 5

Figure 2: Estimated Percentages of High School Students Who 

Used E-cigarettes and Tobacco Products in the 

Preceding 30 Days, by Product—National Youth Tobacco 

Survey, 2011-2014 8

Contents

Page i GAO-15-771 Electronic Cigarettes
Figure 3: Cigarette Federal Excise Tax Revenue Collected and 6-

Year Historical Trend Line, April 2009 through December 

2014 12

Abbreviations

BLS Bureau of Labor Statistics

CDC Centers for Disease Control and Prevention

DOL Department of Labor

e-cigarettes electronic cigarettes

FDA Food and Drug Administration

FET federal excise tax

HHS Department of Health and Human Services

IRC Internal Revenue Code of 1986, as amended

Tobacco Control Act Family Smoking Prevention and Tobacco Control 

Act

Treasury Department of the Treasury

USPTO U.S. Patent and Trademark Office

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.

Page ii GAO-15-771 Electronic Cigarettes
441 G St. N.W.

Washington, DC 20548

September 14, 2015

The Honorable Orrin G. Hatch

Chairman

The Honorable Ron Wyden

Ranking Member

Committee on Finance

United States Senate

While use of traditional cigarettes in the United States continues to 

decline among both adults and adolescents, electronic cigarettes—known 

as e-cigarettes—are becoming more popular and widely used.1 For 

example, according to the most recent survey data from the Centers for 

Disease Control and Prevention (CDC), from 2011 through 2014, ecigarette use among high school students increased from 1.5 percent to 

more than 13 percent.2 The Department of the Treasury (Treasury) is 

responsible for collecting federal excise tax (FET) on traditional cigarettes 

(cigarettes) and other tobacco products manufactured in the United 

States,3 pursuant to the Internal Revenue Code of 1986, as amended 

(IRC).4 The IRC does not specifically define or list a tax rate for ecigarettes. The decline in cigarette use has led to a decline in FET 

1

Scientific and policy literature also refers to e-cigarettes as a type of electronic nicotine 

delivery system. The e-cigarette industry and consumers commonly refer to e-cigarettes 

as vapor products, to e-cigarette use as vaping, and to e-cigarette liquid as e-liquid or ejuice. In addition to e-cigarettes, electronic nicotine delivery systems include vaporizers 

and other electronic products, such as e-cigars, e-pipes, and e-hookahs.

2

These percentages reflect e-cigarette use during the preceding 30 days as reported in 

the National Youth Tobacco Survey.

3

The Secretary of the Treasury delegated responsibility to U.S. Customs and Border 

Protection for collecting FET on imported tobacco products. Treasury Order 100-16, 68 

Fed. Reg. 28,322 (May 23, 2003).

4

26 U.S.C. §§ 5701-02, 6301.

Letter

Page 1 GAO-15-771 Electronic Cigarettes

 
revenue from cigarettes, from $15.3 billion in fiscal year 2010 to $13.2 

billion in fiscal year 2014.5

To reduce tobacco use and protect public health, Congress passed the 

Family Smoking Prevention and Tobacco Control Act (Tobacco Control 

Act) in June 2009, amending the Federal Food, Drug, and Cosmetic Act 

and granting the Food and Drug Administration (FDA) authority to 

regulate the manufacture, distribution, and marketing of tobacco 

products.6 The Tobacco Control Act granted FDA immediate authority to 

regulate cigarettes, cigarette tobacco, roll-your-own tobacco, and 

smokeless tobacco. The Tobacco Control Act also gave FDA the 

authority to regulate any other product that the agency deems by 

regulation to be subject to its tobacco product authorities, and in April 

2014, FDA issued a proposed rule to deem additional products, including 

e-cigarettes, to be subject to such authorities.7

You asked us to examine a number of issues related to the U.S. ecigarette market. This report examines the extent to which (1) e-cigarette 

use affects FET revenue from cigarettes and (2) data on quantities and 

prices of e-cigarettes on the U.S. market are available from federal 

agencies. Although the emergence of e-cigarettes has public health 

implications, this report focuses on e-cigarettes’ effects on revenue. We 

issued a previous report about e-cigarette imports.8

5

Legislation at both the federal and state level has aimed to discourage tobacco use and 

raise revenues by increasing excise taxes on tobacco products. The most recent increase 

in FET took place in 2009 when Congress passed the Children’s Health Insurance 

Program Reauthorization Act (Pub. L. No. 111-3, 123 Stat. 8), which amended the Internal 

Revenue Code of 1986 by raising FET rates on tobacco products. The increase became 

effective in April 2009, and the fiscal year beginning on October 1, 2010, was the first full 

fiscal year following the increase.

6

Pub. L. No. 111-31, Div. A, 123 Stat. 1776. The Tobacco Control Act amended the 

Federal Food, Drug, and Cosmetic Act by inserting a new Chapter IX. Chapter IX provides 

the primary authority for FDA’s regulation of tobacco products. For the purposes of this 

report, references to the “Tobacco Control Act” mean Chapter IX of the Federal Food, 

Drug, and Cosmetic Act, as amended. This report refers to FDA’s regulatory authority over 

tobacco products established by Chapter IX as FDA’s tobacco product authorities.

7

79 Fed. Reg. 23,142 (Apr. 25, 2014). This report refers to FDA’s proposed rule as the 

proposed deeming rule.

8

GAO, Electronic Cigarettes: Imports, Tariffs, and Data Collection, GAO-15-491R

(Washington, D.C.: May 7, 2015).

Page 2 GAO-15-771 Electronic Cigarettes

 
To determine whether e-cigarette use affects cigarette FET revenue, we 

examined cigarette FET revenue from April 2009, when the last increase 

in the FET rate on cigarettes and other tobacco products took effect, 

through December 2014. We analyzed the effect of e-cigarettes on 

cigarette FET revenue only, since cigarettes represent about 90 percent 

of the tobacco market in the United States. For this analysis, we used 

data obtained from Treasury on FET revenue from cigarettes removed 

from domestic factories or released from customs custody for distribution 

in the United States. We assessed the reliability of the cigarette removals 

data by checking the data for inconsistency errors and for completeness, 

and we determined that these data were sufficiently reliable for the 

purposes of this report. Using these data and testimonial evidence 

regarding when e-cigarettes began to have a significant presence on the 

U.S. market, we constructed a multivariate model that estimates the effect 

of e-cigarette use on cigarette FET revenue. The model controls for a 6-

year historical trend in cigarette FET revenue, the presence of ecigarettes through a time variable, other tobacco products (e.g., cigars, 

roll-your-own tobacco, and pipe tobacco), and seasonality effects. To 

describe the extent to which federal agencies collect data on quantities 

and prices of e-cigarettes, we reviewed agency documents and regulatory 

actions. In addition, we interviewed officials from Treasury’s Alcohol and 

Tobacco Tax and Trade Bureau and Treasury’s Office of Tax Analysis, 

the Department of Health and Human Services’ (HHS) FDA and CDC, the 

Department of Labor’s (DOL) Bureau of Labor Statistics (BLS), and the 

U.S. Patent and Trademark Office (USPTO) to obtain information and 

views about e-cigarette and tobacco trends and regulation. We also 

interviewed industry experts, including e-cigarette industry members, 

tobacco industry members, financial analysts, researchers, and 

representatives of public health organizations as well as representatives 

from private companies that collect e-cigarette data. Further details about 

our scope and methodology appear in appendix I.

We conducted this performance audit from September 2014 to 

September 2015 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

Page 3 GAO-15-771 Electronic Cigarettes
The term “e-cigarettes” refers to a wide range of products that share the 

same basic design and generally consist of three main parts: a power 

source (typically a battery), a heating element containing a wick (to 

deliver liquid to the heating element), and a cartridge or tank containing 

liquid solution. Cartridges and liquid are often sold separately from ecigarette devices containing the battery and heating element. Liquid 

typically contains nicotine, a solvent (e.g., propylene glycol, glycerin, or 

both), and flavorings. E-cigarettes heat liquids to deliver aerosol that 

usually contains nicotine and other chemical substances to the user by 

inhalation. E-cigarettes come in two main forms:

• Closed systems that include disposable e-cigarettes or require users 

to buy e-cigarette components, including the cartridge with liquid, from 

the same manufacturer or brand.

• Open systems that enable users to purchase the heating element, 

battery, tank, and liquid separately and from different manufacturers 

or brands.

Background

Types of E-cigarettes

Page 4 GAO-15-771 Electronic Cigarettes
Figure 1: Types of E-cigarettes and E-cigarette Parts

Industry experts we interviewed estimated that the size of the U.S. ecigarette market in 2014 was about $2.5 billion. Although there are no 

definitive data on the relative proportions of imported and domestically 

manufactured e-cigarettes, industry experts we interviewed told us that 

the majority of e-cigarettes sold in the United States are imported from 

China.

The U.S. e-cigarette market has developed rapidly in the last decade. 

U.S. Customs and Border Protection issued a customs ruling for the 

classification of e-cigarette imports to the United States as early as 2006.9

9

Customs rulings are classification decisions that importers may request from U.S. 

Customs and Border Protection to determine in advance of importation the applicable 

Harmonized Tariff Schedule code for the product. The Harmonized Tariff Schedule 

provides the legal basis for the classification of every product that enters the United States 

and the corresponding tariff rate the importer must pay for each product. For more 

information, see GAO-15-491R.

U.S. E-cigarette Market

Page 5 GAO-15-771 Electronic Cigarettes

 
USPTO issued a registration for a trademark applied to e-cigarettes as 

early as May 2008 and had recorded more than 1,600 U.S. trademark 

registrations for e-cigarette devices, parts, liquid, and services as of 

March 2015. Hundreds of e-cigarette companies participate in the U.S. ecigarette market. Large tobacco companies began entering the U.S. ecigarette market in 2012 and now manufacture some of the leading 

closed system e-cigarette brands, according to industry experts we 

interviewed. Some industry experts we spoke with predict that the U.S. ecigarette market will continue to grow, although factors such as the extent 

of federal and state regulation create uncertainty about the rate of growth.

E-cigarettes are sold in multiple types of outlets, including traditional retail 

stores, such as convenience stores and grocery stores, as well as at 

“vape stores” and over the Internet.10 According to industry experts, 

closed system e-cigarette products are mainly sold in traditional retail 

outlets, while open system e-cigarette products are often sold online and 

at vape stores.11 Private companies collect point-of-sale data on the 

quantities and prices of e-cigarettes sold at traditional retail stores, 

according to documentation from these companies; however, these data 

do not cover online sales or “vape store” sales. Financial analysts from 

one firm estimate that 40 to 60 percent of e-cigarettes are sold online or 

at vape stores.

In 2014, CDC reported a statistically significant increase in the 

percentage of U.S. adults who had used e-cigarettes in the preceding 30 

days, from 1 percent in 2010 to 2.6 percent in 2013.12 Past-month ecigarette use was especially prominent among current adult cigarette 

smokers and grew in this population, at a statistically significant level, 

10Vape stores are brick-and-mortar retail locations that specialize in selling e-cigarette 

products.

11Data on the number of vape stores are limited. According to industry experts, the 

number of vape stores has grown rapidly over the last few years. One industry expert, 

who had conducted a survey of vape store owners, estimated that as of spring 2015, 

7,000 to 10,000 vape stores existed in the United States. This expert defined vape stores 

as stores that sell only or mostly e-cigarette products and do not sell tobacco or 

marijuana.

12Brian A. King et al., “Trends in Awareness and Use of Electronic Cigarettes among U.S. 

Adults, 2010-2013,” Nicotine and Tobacco Research, vol. 17, no. 2 (2015): 219-27,

published online Sept. 19, 2014.

E-Cigarette Use among 

U.S. Adults and 

Adolescents

Page 6 GAO-15-771 Electronic Cigarettes

 
from 4.9 percent in 2010 and 2011 to 9.4 percent in 2012 and 2013. Pastmonth e-cigarette use by former adult cigarette smokers also rose, from 1 

percent to 1.3 percent during the same period, although the increase was 

not statistically significant.13

The National Youth Tobacco Survey by CDC and FDA showed a 

statistically significant increase in high school students’ past-month ecigarette use, from 1.5 percent in 2011 to 13.4 percent in 2014.14 In 

addition, the survey found that in 2014, high school students’ past-month 

e-cigarette use surpassed their use of cigarettes and other tobacco 

products at a statistically significant level (see fig. 2).15 The survey further 

found a statistically significant increase in past-month e-cigarette use 

among middle school students.16

13For current and former adult smokers, CDC aggregated data for 2010 and 2011 and for 

2012 and 2013.

14René A. Arrazola et al., “Tobacco Use among Middle and High School Students—United 

States, 2011-2014,” Morbidity and Mortality Weekly Report, vol. 64, no. 14 (2015).

15In addition to e-cigarettes and cigarettes, the National Youth Tobacco Survey asked 

questions about use of seven tobacco products: hookahs, cigars, smokeless tobacco, 

snus, tobacco pipes, bidis, and dissolvable tobacco. Hookahs are water pipes that are 

used to smoke specially made tobacco that comes in different flavors. Snus is finely 

ground moist smokeless tobacco packaged in ready-to-use pouches placed in the mouth. 

Bidis are small, thin, hand-rolled cigarettes wrapped in a leaf that are imported to the 

United States, primarily from South Asia. Dissolvable tobacco is finely ground tobacco 

pressed into shapes such as tablets, sticks, or strips that slowly dissolve in the mouth.

16The National Youth Tobacco Survey findings are consistent with findings from another 

federally funded survey released in December 2014, which found that e-cigarette use 

surpassed cigarette use among teens in 2014. According to the 2014 Monitoring the 

Future Survey, funded by the National Institute of Drug Abuse, the following percentages 

of teens reported past-month use of e-cigarettes versus cigarettes, respectively: 17.1 

percent versus 13.6 percent among 12th graders; 16.2 percent versus 7.2 percent among 

10th graders; and 8.7 percent versus 4 percent among 8th graders.

Page 7 GAO-15-771 Electronic Cigarettes

 
Figure 2: Estimated Percentages of High School Students Who Used E-cigarettes and Tobacco Products in the Preceding 30 

Days, by Product—National Youth Tobacco Survey, 2011-2014

Notes: The survey defines “Tobacco” as use of any of nine products in the National Youth Tobacco 

Survey: e-cigarettes, hookahs, cigarettes, cigars, smokeless tobacco, snus, tobacco pipes, bidis, and 

dissolvable tobacco. The survey defines “Tobacco ≥2” as use of two or more of the nine products. 

Other CDC documents define hookahs as water pipes used to smoke specially made tobacco that 

comes in different flavors; snus as finely ground moist smokeless tobacco packaged in ready-to-use 

pouches placed in the mouth; bidis as small, thin, hand-rolled cigarettes wrapped in a leaf that are 

imported to the United States, primarily from South Asia; and dissolvable tobacco as finely ground 

tobacco pressed into shapes such as tablets, sticks, or strips that slowly dissolve in the mouth.

a

According to CDC, the increases in e-cigarette use and hookah use and the decreases in cigarette, 

cigar, tobacco pipe, snus, and bidi use from 2011 through 2014 are statistically significant.

Page 8 GAO-15-771 Electronic Cigarettes
In April 2014, FDA issued a proposed rule to deem e-cigarettes and other 

products meeting the Tobacco Control Act’s definition of “tobacco 

product” to be subject to the agency’s regulation.17 FDA received more 

than 135,000 comments about the proposed deeming rule during the 

public comment period, which ended in August 2014. FDA announced its 

intent to issue the final rule in June 2015 in the spring 2015 semiannual 

regulatory agenda.18 The final rule had not been issued as of August 

2015.

The Tobacco Control Act aimed to, among other things, promote 

cessation to decrease health risks and social costs associated with 

tobacco-related diseases.19 According to the act, FDA can, by regulation, 

require restrictions on the sale, distribution, advertising, and promotion of 

a tobacco product if the agency determines that the proposed regulation 

is appropriate for the protection of public health, based on a consideration 

of the risks and benefits to the population as a whole, including users and 

nonusers of tobacco products. In the act, Congress recognized that 

virtually all new users of tobacco products are under the age of 18.

In the proposed deeming rule, FDA stated that it was researching the 

effect of e-cigarette use on public health. FDA noted that e-cigarettes 

could have a positive net impact if using them resulted in minimal 

initiation by children and adolescents and in significant numbers of 

smokers’ quitting. The FDA also noted that e-cigarette use could have a 

negative net impact if it resulted in significant initiation by young people, 

minimal quitting, or significant dual use of combustible products, such as 

cigarettes, and noncombustible products, such as e-cigarettes.

1779 Fed. Reg. 23,142. In addition to e-cigarettes, products that FDA proposed to deem 

include pipe tobacco, cigars, certain dissolvable products, and hookah tobacco. For a 

discussion of FDA’s 2010 and 2011 plans to issue the proposed rule, see GAO, Tobacco 

Taxes: Large Disparities in Rates for Smoking Products Trigger Significant Market Shifts 

to Avoid Higher Taxes, GAO-12-475 (Washington, D.C.: April 18, 2012).

18The semiannual regulatory agenda of the U.S. government, also known as the unified 

agenda, summarizes the rules and proposed rules that each federal agency expects to 

issue.

19Pub. L. No. 111-31, § 3(9).

Proposed Rule to Subject 

Additional Products, 

Including E-cigarettes, to 

FDA’s Tobacco Regulation

Page 9 GAO-15-771 Electronic Cigarettes

 
The IRC, which defines tobacco products subject to FET and sets rates of 

tax, does not specifically define or list a tax rate for e-cigarettes.20

However, two states—Minnesota and North Carolina—have imposed an 

excise tax on e-cigarettes or vapor products containing nicotine. The 

Minnesota Department of Revenue issued a notice in 2012 stating its 

position that e-cigarettes are subject to the tobacco products tax; the 

current tax rate is 95 percent of the wholesale price of the nicotinecontaining liquid or, if the liquid cannot be sold separately, of the 

complete e-cigarette. North Carolina has taxed vapor products at 5 cents 

per milliliter of nicotine-containing liquid or other material since June 

2015.21 In addition, at least 18 states and the District of Columbia have 

proposed legislation to tax e-cigarettes, vapor products, nicotine vapor 

products, or e-cigarette cartridges since 2013. For example, a bill in 

Maine proposed to include e-cigarettes in its definition of cigarettes and to 

apply the same tax rate to cigarettes and e-cigarettes, and a bill in 

Montana proposed a tax on vapor products, such as e-cigarettes, that 

would be partially based on the weight in milligrams of the nicotine 

present in the product.22

As of January 2015, three countries—Italy, Portugal, and South Korea—

imposed national-level taxes on e-cigarettes that contain nicotine, and 

each of these countries applies its tax to nicotine-containing e-cigarette 

liquid, according to an industry expert.23 In addition, according to research 

by the Law Library of Congress, Serbia recently enacted legislation to 

introduce an excise tax on e-cigarette liquid, which went into effect in 

August 2015.

2026 U.S.C. §§ 5701-02.

21N.C. Gen. Stat. § 105-113.35 (2015).

22Maine's proposed legislation introduced in 2015 specifies that for the purposes of 

taxation an amount of liquid containing 18 milligrams of nicotine equals one cigarette.

23According to this expert, Italy’s tax rate for nicotine-containing e-cigarette liquid is 50

percent of the tax on the equivalent quantity of cigarettes, whereas Portugal’s and South 

Korea’s tax rates are per milliliter of nicotine-containing e-cigarette liquid.

Taxation of E-cigarettes

Page 10 GAO-15-771 Electronic Cigarettes

 
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. Variables in the 

model control for (1) historical decreases in cigarette FET revenue over 

the last 6 years; (2) quantities of cigars, pipe tobacco, and roll-your-own 

tobacco removed from domestic factories or released from customs 

custody for distribution in the United States; and (3) monthly seasonality 

effect. Our model tests for the inclusion of e-cigarettes at different points 

in time and tests for any significant changes from the historical trend.24

We found no significant evidence that e-cigarettes have decreased the 

collection of FET revenue from cigarettes at a rate greater than the 6-year 

historical trend.

Specifically, we found that, when other variables in the model are held 

constant, the 6-year historical trend of cigarette FET revenue decreased 

at a rate between $4.4 million and $5.5 million per month (see fig. 3). 

However, we found no significant evidence of a decrease in FET revenue 

from cigarettes at a rate greater than the 6-year historical trend during the 

time frame when e-cigarettes have been on the U.S. market.25 We 

estimate that cigarette FET revenue would need to decrease by an 

24We tested for the inclusion of e-cigarettes at five different dates in 2012 through 2014. 

See appendix I and appendix II for more information about our methodology.

25Officials from agencies that monitor federal revenue—including the Congressional 

Budget Office and Treasury’s Office of Tax Analysis—also told us that they have not yet 

observed a significant effect of e-cigarette use on cigarette FET revenue.

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

Page 11 GAO-15-771 Electronic Cigarettes

 
additional $2 million to $3 million per month to signal a significant effect 

from e-cigarettes.26

Figure 3: Cigarette Federal Excise Tax Revenue Collected and 6-Year Historical Trend Line, April 2009 through December 

2014

Several factors may explain why our analysis did not detect an effect of ecigarette use on cigarette FET revenue. 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. 

As a result, without a substantial increase in the e-cigarette market, any 

26In the absence of additional regulation or other factors, like smoking cessation, this 

additional decrease from the 6-year historical trend could be attributed to increased use of 

other products such as e-cigarettes or hookahs.

Page 12 GAO-15-771 Electronic Cigarettes

 
effect on the cigarette market would be too minor to significantly affect 

cigarette FET revenue. Second, comprehensive and reliable data on ecigarette sales and prices—which would enable us to corroborate the size 

of the e-cigarette market and accurately identify when it became 

significant—are not available. Third, comprehensive and reliable data 

about the extent to which e-cigarettes are used as substitutes for 

cigarettes are also not available. Without such data and information, 

estimating the effect of e-cigarette use on cigarette FET revenue will be 

difficult, even if the e-cigarette market continues to grow.

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.27 The 

relationship between the use of e-cigarettes and cigarettes is currently 

unknown, according to public health officials. Table 1 describes these 

three possible relationships and summarizes their potential revenue 

effects.

27Each of these potential relationships also has implications for public health, as 

discussed in FDA’s preliminary economic impact analysis accompanying the April 2014 

proposed deeming rule.

Relationship between Use 

of E-cigarettes and 

Cigarettes Could 

Determine E-cigarettes’

Effect on Cigarette FET 

Revenue

Page 13 GAO-15-771 Electronic Cigarettes

 
Table 1: Three Possible Relationships between Use of E-cigarettes and Cigarettes and the Corresponding Potential Effects on 

Cigarette Federal Excise Tax (FET) Revenue

Relationship Description of relationship and market effect

Potential effect on 

cigarette FET revenue as 

e-cigarette use increases

Substitute • If e-cigarettes are substitutes for cigarettes, users consume e-cigarettes instead 

of cigarettes. If all other factors remain unchanged, fewer cigarettes will be 

consumed as more e-cigarettes are consumed.

• Market cross-price elasticity of demand is greater than zero.a

Decrease

Complement • If e-cigarettes are complementary to cigarettes, more cigarettes will be 

consumed as more e-cigarettes are consumed.

• Market cross-price elasticity of demand is less than zero.a

Increase

Not related • If e-cigarettes are not related to cigarettes, e-cigarette use will have no effect on 

use of cigarettes and vice versa. E-cigarette use and cigarette use—and possibly 

users—are independent.

• Market cross-price elasticity of demand is zero.a

No effect

Source: GAO analysis and information from the Food and Drug Administration. | GAO-15-771.

a

Market cross-price elasticity of demand refers to the percentage change in quantity demanded for 

one good that results from a 1 percent increase in the price of another good.

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. 2), suggest that cigarette FET 

revenue could decline further if these trends continue.28 If the percentage 

of high school students using cigarettes continues to decline, and if other 

factors such as current levels of regulation remain constant, the number 

of cigarette smokers could dwindle further in the coming years as the 

current cohort of high school students ages. 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.

FDA and CDC are undertaking efforts that, over time, may enable them to 

better understand e-cigarettes’ relationship to cigarettes and other 

tobacco products, according to agency officials. For example, FDA and 

CDC are refining survey instruments that they use to measure adults’ and 

youths’ use of e-cigarettes, cigarettes, and other tobacco products, such 

as the National Health Interview Survey and the National Youth Tobacco 

Survey. In addition, FDA, in collaboration with the National Institutes of 

28The National Youth Tobacco Survey data show that high school students’ use of 

hookahs also increased between 2011 and 2014.

Page 14 GAO-15-771 Electronic Cigarettes

 
Health, is funding a longitudinal cohort study, the Population Assessment 

of Tobacco and Health, which asks detailed questions about adults’ and 

youths’ use of e-cigarettes, cigarettes, and other tobacco products. FDA 

officials said that they expect to receive the data from the first year of the 

study in the summer of 2015. Further, according to FDA and CDC 

officials, other national surveys, state-level surveys, results of National 

Institutes of Health and other studies currently under way, and, if 

available, e-cigarette quantity data could help researchers analyze trends 

and observe statistical relationships.

Comprehensive Data 

on E-cigarette 

Quantities and Prices 

Are Not Available 

from Federal 

Agencies

Page 15 GAO-15-771 Electronic Cigarettes
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.29 However, Treasury collects data on quantities of domestically 

manufactured tobacco products that are subject to FET to ensure that the 

proper FET amount is paid. FDA collects data on quantities of tobacco 

products that it regulates under its tobacco product authorities to calculate 

user fees that fund FDA’s tobacco regulation activities.30

Treasury and FDA collect data on quantities for different sets of tobacco 

products because their authorities to regulate tobacco products stem from 

different statutes:

• Treasury’s authorities stem from the IRC.31 The IRC defines “tobacco 

products” as cigarettes, roll-your-own tobacco, smokeless tobacco, 

cigars, and pipe tobacco and sets FET rates for these products.32 The 

IRC defines each of these products as containing or consisting of

tobacco.33

• FDA’s tobacco product authorities stem from the Federal Food, Drug, 

and Cosmetic Act as amended by the Tobacco Control Act.34 The 

Tobacco Control Act defines “tobacco product,” in part, as any product 

29In a previous report, we found that although U.S. Customs and Border Protection 

collects data on imported goods, the agency’s officials said that e-cigarette import 

quantities are unknown because the agency cannot distinguish the data specific to ecigarettes, parts, and liquid from the data for larger categories of imported goods. See 

GAO-15-491R.

30The Tobacco Control Act authorized FDA to assess and collect user fees from each 

tobacco manufacturer and importer subject to FDA’s regulation. The act established the 

Center for Tobacco Products within FDA as the entity responsible for implementing the 

act. Pub. L. No. 111-31, § 101(b)(3), 123 Stat. 1776, 1787, 1826. The Center for Tobacco 

Products was formed in 2009 and the user fees collected are the sole source of funding 

for the center’s activities. See GAO, Tobacco Product Regulation: Most FDA Spending 

Funded Public Education, Regulatory Science, and Compliance and Enforcement 

Activities, GAO-14-561 (Washington, D.C.: June 20, 2014).

3126 U.S.C. Chapter 52.

3226 U.S.C. §§ 5701-02.

33The IRC definitions do not mention nicotine.

3421 U.S.C. §§ 387-387u.

Treasury and FDA Do Not 

Collect Data on Ecigarette Quantities 

Comparable to Data 

Collected for Cigarettes 

and Other Tobacco 

Products

Page 16 GAO-15-771 Electronic Cigarettes

 
made or derived from tobacco.35 The act granted FDA immediate 

authority over cigarettes, cigarette tobacco, roll-your-own tobacco, 

and smokeless tobacco. The act also gave FDA authority to deem by 

regulation any other product meeting the Tobacco Control Act’s 

definition of tobacco product to be subject to FDA’s tobacco product 

authorities.36 Under this authority, in April 2014 FDA proposed to 

deem additional products, including e-cigarettes, to be subject to its 

tobacco product regulation.37

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. According to Treasury officials, on 

the basis of definitions of the tobacco products enumerated in the IRC, 

Treasury’s ability to tax e-cigarettes—and collect data for them—depends 

on whether e-cigarettes contain tobacco. Treasury officials said that for ecigarettes that do not contain tobacco, Treasury could not assert federal 

taxation and any related data collection by regulation; instead, such 

authority would require an act of Congress. As of August 2015, Treasury 

had not collected any FET or data associated with e-cigarettes, according 

to Treasury officials.38

35In full, the Tobacco Control Act defines “tobacco product” as “any product made or 

derived from tobacco that is intended for human consumption, including any component, 

part, or accessory of a tobacco product (except for raw materials other than tobacco used 

in manufacturing a component, part, or accessory of a tobacco product)” that is not a drug, 

device, or combination product under the Federal Food, Drug, and Cosmetic Act. Pub. L. 

No. 111-31, § 101(a) (codified, as amended, at 21 U.S.C. § 321 (rr)).

36Pub. L. No. 111-31, § 101(b)(3) (codified, as amended, at 21 U.S.C. § 387a).

3779 Fed. Reg. 23,142.

38If Treasury were to determine that some e-cigarettes on the U.S. market contained 

tobacco, Treasury would evaluate whether they met any of the IRC definitions of the 

enumerated tobacco products by examining those e-cigarettes and their packaging and 

labeling to determine the appropriate tax classification, according to Treasury officials. The

officials further explained that e-cigarettes that met the IRC definition of an enumerated 

tobacco product would be subject to the appropriate FET rate, and the manufacturers of 

such e-cigarettes would be required to submit data for quantities removed for distribution 

in the United States from domestic factories to Treasury. However, according to Treasury 

officials, Treasury would not be able to distinguish data for quantities of such e-cigarettes 

from data for quantities of tobacco products in the same tax class, because Treasury 

collects aggregate data by tax class for tobacco products in a manufacturer’s inventory 

when the tobacco products leave the manufacturing facility.

Page 17 GAO-15-771 Electronic Cigarettes

 
FDA does not collect data on quantities of e-cigarettes sold on the U.S. 

market. FDA’s preliminary economic impact analysis accompanying the 

proposed deeming rule states that when the deemed products become 

subject to FDA’s tobacco product authorities, the agency can begin 

collecting data to determine the number of regulated entities and to 

monitor the number and type of unique products sold to the public.

At present, FDA collects data on quantities of four tobacco products 

(cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless 

tobacco) that it regulates under its tobacco product authorities to apply 

the legally mandated method for allocating user fees among the domestic 

manufacturers and importers of those products.39 In July 2014, FDA 

stated that if additional products are deemed subject to its tobacco 

regulation, the agency would conduct a new rulemaking to make 

appropriate changes to the user fee regulation. FDA also stated that it 

recognized that the issue of whether it had authority to assess user fees 

on some deemed products was controversial and that it intended to solicit 

public comment to further explore issues related to user fee assessments 

on tobacco products that may be deemed subject to FDA’s tobacco 

product authorities.40 According to FDA officials, if e-cigarettes become 

subject to user fees, FDA would likely need data on quantities of ecigarettes sold on the U.S. market, comparable to data that the agency 

collects for the four products currently subject to user fees.

39Under the Tobacco Control Act, FDA is required to use a specific method set in the Fair 

and Equitable Tobacco Reform Act of 2004 to allocate user fees. See Pub. L. No. 111-31, 

§ 101(b)(3) and Pub. L. No. 108-357, § 625(c), 118 Stat. 1418, 1529-32. This method 

mandated assessing fees, based on quantity and FET data, on six classes of tobacco 

products—cigarettes, roll-your-own tobacco, snuff, chewing tobacco, cigars, and pipe 

tobacco—to fund a federal program, known as the Tobacco Transition Payment Program, 

which ended in fiscal year 2014. However, the Tobacco Control Act specified that no user 

fees shall be assessed on a class of tobacco products unless it is listed as subject, or 

deemed to be subject to FDA’s regulatory authority over tobacco products as established 

by the act. Because cigars and pipe tobacco are currently not subject to FDA’s tobacco 

product authorities, these two products are not subject to tobacco user fees. In 

implementing the legally mandated methodology to assess user fees on the four tobacco 

products subject to those fees, FDA does not collect data from domestic manufacturers 

and importers of cigars and pipe tobacco. Instead, FDA uses publicly available FET data 

for cigars and pipe tobacco and reallocates the share that would have been paid by 

domestic manufacturers and importers of cigars and pipe tobacco among the four 

products that it currently regulates under its tobacco product authorities.

40See “Tobacco Products, User Fees, Requirements for the Submission of Data Needed 

To Calculate User Fees for Domestic Manufacturers and Importers of Tobacco Products,” 

79 Fed. Reg. 39,302 (July 10, 2014).

Page 18 GAO-15-771 Electronic Cigarettes

 
Table 2 summarizes information about Treasury’s and FDA’s collection of 

data on quantities of cigarettes, other tobacco products, and e-cigarettes.

Table 2: Data on the Quantities of Cigarettes, Other Tobacco Products, and Ecigarettes on the U.S. Market Collected by the Department of the Treasury and FDA 

as of August 2015

Product

Data collected by Treasury

(for federal excise tax 

purposes)

Data collected by FDA

(for user fee 

purposes)

Cigarettes √ √

Cigarette tobacco Not applicablea √

Roll-your-own tobacco √ √

Smokeless tobacco (snuff and 

chewing tobacco)

√ √

Cigars √ —b

Pipe tobacco (including 

hookah tobacco)

√ —b

E-cigarettes — —

Source: GAO analysis of information from the Department of the Treasury (Treasury) and the Food and Drug Administration (FDA). |

GAO-15-771.

Notes: Although the statutory definitions of the products in the table are not identical for federal excise 

tax and FDA tobacco regulation purposes, Treasury and FDA receive the same data for the tobacco 

products as defined and enumerated in the Internal Revenue Code of 1986, as amended—cigarettes, 

roll-your-own tobacco, and smokeless tobacco (snuff and chewing tobacco) from the manufacturers 

of these products. Treasury collects these data to ensure that the proper amount of federal excise tax 

(FET) is paid. FDA collects these data to calculate user fees.

a

The Family Smoking Prevention and Tobacco Control Act defines cigarette tobacco as any product 

consisting of loose tobacco that is intended for use by consumers in a cigarette (Pub. L. No. 111-31, 

§ 101(b)(3)). The Internal Revenue Code of 1986, as amended, does not define or set a rate of tax for 

cigarette tobacco. According to Treasury officials, a product that meets the Family Smoking 

Prevention and Tobacco Control Act’s definition of cigarette tobacco may meet the Internal Revenue 

Code’s definition of roll-your-own tobacco or processed tobacco.

b

Because cigars and pipe tobacco are not subject to FDA’s tobacco product authorities, these two 

products are not subject to tobacco user fees. In implementing the legally mandated methodology to 

assess user fees on the four tobacco products subject to those fees, FDA does not collect data from 

domestic manufacturers and importers of cigars and pipe tobacco. Instead, FDA uses publicly 

available FET data and reallocates the share that would have been paid by domestic manufacturers 

and importers of cigars and pipe tobacco among the four products that FDA currently regulates under 

its tobacco product authorities.

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. The 

Consumer Price Index provides monthly data on changes in the prices 

paid by urban consumers for a representative “basket” of goods and 

services. The index is divided into more than 200 categories representing 

the goods and services that an urban consumer might typically buy. BLS 

Bureau of Labor Statistics 

Has Begun to Collect 

Limited E-cigarette Price 

Data

Page 19 GAO-15-771 Electronic Cigarettes
collects e-cigarette price information, under the category “tobacco 

products other than cigarettes,” for disposable e-cigarettes, starter kits, 

liquid refills, and e-cigarette replacement cartridges. These items may or 

may not contain nicotine and may have any flavor.

According to BLS officials, the number of observations on e-cigarette 

prices is too small to calculate a reliable national average price or reliable 

state-level prices.41 According to the officials, U.S. consumers’ e-cigarette 

expenditures, while increasing, represent a small share of total 

expenditures in the representative basket of goods and services. 

Additionally, BLS officials explained that the Consumer Price Index 

sample for “tobacco products other than cigarettes” is refreshed over a 4-

year cycle; the length of time it takes to fully replace samples causes 

Consumer Price Index sample shares (the percentage of the sample 

composed of the prices of a given product) to lag real-world percentages 

for items for which consumers’ expenditures are changing rapidly. The 

Consumer Price Index sample included 10 e-cigarette price observations 

as of June 2015 and, according to the BLS officials, will increase to 14 ecigarette price observations by October 2015. BLS would require more 

resources in order to collect substantially more data on e-cigarettes, 

according to BLS officials.

Our analysis shows no current effect of the growing e-cigarette market on 

FET revenue from cigarettes. Given the limited information about the ecigarette market, it is difficult to accurately estimate this market’s size or 

analyze its potential effect on FET revenue from cigarettes and other 

tobacco products. The increased regulation of tobacco products at the 

federal and state level, among other things, has contributed to a decline 

in cigarette use and FET revenue. Recent CDC studies show that ecigarette use has significantly increased among high school students, 

while cigarette use has significantly declined. As the regulation of ecigarettes unfolds and the market develops, e-cigarette use patterns may 

change. Federal agencies’ efforts to develop a better understanding of 

the relationship between e-cigarette and cigarette use will help analysts 

41An observation is the price of a product at the same store tracked over time. For 

example, for one e-cigarette price observation, BLS collects information about the price of 

the same e-cigarette product (such as an e-cigarette replacement cartridge of a particular 

brand, flavor, and nicotine strength) at the same store every month.

Concluding 

Observations

Page 20 GAO-15-771 Electronic Cigarettes

 
and government officials develop a more complete understanding of the 

e-cigarette market and its effect on cigarette FET revenue.

We provided a draft of this report to DOL, HHS, and Treasury. We also 

provided relevant portions to U.S. Customs and Border Protection and 

USPTO. We received technical comments from DOL, HHS, and Treasury 

and incorporated the comments as appropriate.

We are sending copies of this report to the appropriate congressional 

committees; the Secretaries of Health and Human Services, Labor, and 

the Treasury; and other interested parties. In addition, the report is 

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix III.

David Gootnick

Director, International Affairs and Trade

Agency Comments

Page 21 GAO-15-771 Electronic Cigarettes
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. We determined the reliability of USPTO e-cigarette trademark 

registration data by interviewing cognizant USPTO officials. We also 

interviewed industry experts, including e-cigarette industry members, 

tobacco industry members, financial analysts, researchers, and 

representatives of public health organizations. We interviewed 

organizations and companies that represent a range of perspectives. We 

spoke with industry associations that represent small and midsized ecigarette companies; we also spoke with representatives of leading 

companies that produce e-cigarettes, as measured by dollar share from 

available data, including an independent e-cigarette company and 

tobacco companies. The views expressed by these representatives are 

not generalizable and do not represent the views of the entire e-cigarette 

industry. We also attended an e-cigarette industry conference as well as 

three FDA public workshops featuring current research on e-cigarette 

product science and implications of e-cigarette use for individual health 

and population health.

To determine whether e-cigarette use affects cigarette FET revenue, we 

examined cigarette FET revenue from April 2009 through December 

2014.1 For this analysis, we used monthly data obtained from Treasury on 

1

The last increase in the FET rate on cigarettes took effect in April 2009. The increase 

was enacted by Congress in the Children’s Health Insurance Program Reauthorization Act 

of 2009 (Pub. L. No. 111-3, 123 Stat. 8), which amended the Internal Revenue Code of 

1986 by raising FET rates on cigarettes and other tobacco products. In previous reports, 

we examined market shifts among smoking tobacco products since the act’s passage; see 

GAO, Tobacco Taxes: Large Disparities in Rates for Smoking Products Trigger Significant 

Market Shifts to Avoid Higher Taxes, GAO-12-475 (Washington, D.C.: Apr. 18, 2012), and 

Tobacco Taxes: Disparities in Rates for Similar Smoking Products Continue to Drive 

Market Shifts to Lower-Taxed Options, GAO-14-811T (Washington, D.C.: July 29, 2014).

Appendix I: Objectives, Scope, and 

Methodology

Page 22 GAO-15-771 Electronic Cigarettes

 
Appendix I: Objectives, Scope, and 

Methodology

FET revenue from cigarettes removed from domestic factories or 

released from customs custody for distribution in the United States. In 

addition, using these removals data and testimonial evidence, we 

constructed a multivariate model that estimates the effect of e-cigarette 

use on cigarette FET revenue. In particular, we regressed cigarette FET 

revenue on a number of variables, including other tobacco products, a 

trend, presence of e-cigarettes on the market, and seasonality. We 

assessed the reliability of the data by checking the data for inconsistency 

errors and for completeness. We determined that the cigarette removals 

data were sufficiently reliable for the purposes of this report. See 

appendix II for more explanation of our analysis.

To examine the extent to which data on quantities and prices for ecigarettes on the U.S. market are available from federal agencies, we 

interviewed cognizant officials from Treasury, FDA, CDC, BLS, and the 

Congressional Budget Office, as well as industry experts. To describe 

Treasury’s collection of data on quantities of federally taxed tobacco 

products, we reviewed documents and interviewed officials from 

Treasury’s Alcohol and Tobacco Tax and Trade Bureau.2 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. To 

describe BLS’s collection of data on e-cigarette prices, we reviewed 

documents and interviewed BLS officials.

We conducted this performance audit from September 2014 to 

September 2015 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

2

The Secretary of the Treasury delegated responsibility to U.S. Customs and Border 

Protection to collect FET on imported tobacco products.

Page 23 GAO-15-771 Electronic Cigarettes

 
Appendix II: Results of Regression Analysis 

Testing the Effect of Electronic Cigarette Use 

on Federal Excise Tax Revenue from 

Traditional Cigarettes

We constructed a multivariate model to estimate the effect of electronic 

cigarette (e-cigarette) use on federal excise tax (FET) revenue from 

traditional cigarettes. The model uses monthly data obtained from the 

Department of the Treasury’s (Treasury) Alcohol and Tobacco Tax and 

Trade Bureau and controls for a 6-year historical trend in cigarette FET 

revenue, from April 2009 through December 2014;1 the presence of other 

tobacco products (cigars, roll-your-own tobacco, and pipe tobacco); and 

seasonality effects. The model also includes a time variable that tests for 

the presence of e-cigarettes. We used five different dates during the 

period January 2012 to October 2013 for the time variable, and we 

estimated regressions for each date. In particular, the model uses the 

following equation:

CCCCCC_rrrrrrtt = αα + ββcc cc cctt + γγ γγγγ_pp pp tt + δδtt tttttt + θθ _ ss tt

+ λλmm h _ tt + μtt

where

CCCCCC_rrrrrrtt= the amount of FET revenue, in nominal dollars, from domestic 

and imported cigarettes collected in period t;

αα = an intercept;

cc cc cctt = the sum of small and large cigar removals2 in number of sticks 

in period t;

rr _pp pp tt = the sum of roll-your-own and pipe tobacco removals in 

pounds in period t;

tt tttttt = a monthly trend that controls for the historical changes in 

cigarette revenue at period t;

_ ss tt = a dummy variable that equals one for each month on or 

after the date that indicates the presence of e-cigarettes in the market 

(because there is no clear indicator of this presence, we selected five 

different dates to indicate the beginning of this presence);

1

The Secretary of the Treasury delegated responsibility to U.S. Customs and Border 

Protection to collect FET on imported tobacco products.

2

Removals are the quantity of tobacco products removed from domestic factories or 

released from customs custody for distribution in the United States.

Appendix II: Results of Regression Analysis 

Testing the Effect of Electronic Cigarette Use 

on Federal Excise Tax Revenue from 

Traditional Cigarettes

Page 24 GAO-15-771 Electronic Cigarettes

 
Appendix II: Results of Regression Analysis 

Testing the Effect of Electronic Cigarette Use 

on Federal Excise Tax Revenue from 

Traditional Cigarettes

mm h _ tt = a set of eleven dummy variables controlling for 

monthly seasonality, with June as the reference month; and

μtt = an error term assumed to be heteroskedastic and possibly 

autocorrelated.

Table 3: Regression Results for the Multivariate Model Used to Estimate Effect of Ecigarette Use on Federal Excise Tax Revenue from Traditional Cigarettes

Variable Jan. 12 Jan. 13 Oct. 11 Oct. 12 Oct. 13

Cigars 0.180 0.177 0.169 0.236a 0.174

(0.0974) (0.102) (0.0950) (0.101) (0.0913)

Roll-your-own and 

pipe tobacco

23.73 26.94 25.19 29.15 33.32

(21.17) (22.30) (22.19) (23.61) (23.19)

Time trend -4.672c -4.428c -4.177c -5.459c -4.767c

(1.107) (1.229) (1.007) (1.212) (1.106)

E-cigarette slope 0.176 0.0738 0.0102 0.370 0.153

(0.239) (0.241) (0.232) (0.218) (0.181)

January -107.6 -108.0 -109.4 -97.01 -109.1

(76.71) (78.32) (76.41) (78.06) (75.37)

February -216.9b -216.9b -217.6b -210.1a -217.7b

(77.61) (78.40) (77.52) (78.68) (76.30)

March -138.6a -138.4a -137.9a -141.2a -138.8a

(67.38) (65.52) (66.13) (64.97) (64.05)

April 14.51 14.75 14.18 17.95 15.40

(69.72) (69.79) (69.86) (68.49) (68.53)

May -28.98 -28.64 -28.86 -27.04 -28.52

(105.0) (105.0) (105.3) (103.4) (104.5)

July -55.44 -56.63 -56.61 -54.45 -58.18

(88.17) (88.83) (88.01) (88.33) (88.08)

August 1.184 -0.110 0.588 -3.159 -1.523

(70.71) (70.02) (69.49) (70.20) (70.11)

September -127.4 -128.2 -128.6 -126.3 -127.7

(66.02) (65.86) (65.49) (65.92) (64.32)

October 7.182 5.633 5.015 0.159 1.621

(70.83) (71.25) (72.15) (70.06) (71.04)

November -56.96 -58.15 -60.56 -54.11 -60.33

(74.11) (74.60) (75.08) (74.59) (73.26)

December -212.0a -213.7a -216.9a -204.4a -215.9b

Page 25 GAO-15-771 Electronic Cigarettes
Appendix II: Results of Regression Analysis 

Testing the Effect of Electronic Cigarette Use 

on Federal Excise Tax Revenue from 

Traditional Cigarettes

Variable Jan. 12 Jan. 13 Oct. 11 Oct. 12 Oct. 13

(81.16) (84.99) (81.76) (83.66) (80.54)

Intercept 3908.4c 3758.0c 3619.0c 4310.0c 3950.3c

(672.1) (711.4) (625.0) (699.4) (656.5)

Source: GAO analysis of Department of the Treasury data. | GAO-15-771.

Notes: R-squared in all regresssions was higher than 70 percent. Newey-West Standard errors are 

shown in parentheses.

a

Significance at 10 percent level.

b

Significance at 5 percent level.

c

Significance at 1 percent level.

Page 26 GAO-15-771 Electronic Cigarettes
Appendix III: GAO Contact and Staff 

Acknowledgments

David Gootnick, (202) 512-3149 or gootnickd@gao.gov.

In addition to the contact named above, Christine Broderick (Assistant 

Director), Christina Werth, Sada Aksartova, Pedro Almoguera, Grace Lui, 

and Srinidhi Vijaykumar made key contributions to this report. In addition, 

Tina Cheng and Reid Lowe provided technical assistance.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(321066) Page 27 GAO-15-771 Electronic Cigarettes
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