Cigarette tax hike not long-term fix

(Fort Wayne) News-Sentinel

It is axiomatic in economics that whatever you tax, you get less of, no matter how harmless and carefully targeted the tax seems. And the greater you increase a tax, the greater the loss.

Some Indiana lawmakers are proposing to add $1 to the tax on a pack of cigarettes to help create a permanent funding mechanism for road repairs. Since the current tax is only 99.5 cents a pack, the increase would not be a small one, and retailers in the state are warning legislators of the consequences.

Cheaper cigarettes are a lure that brings people into Indiana from neighboring states. Michigan currently adds $2 a pack in taxes, Illinois $1.98. If our tax ends up at $1.99, it would be well above Kentucky’s 60 cents and Ohio’s $1.25, so we might end up driving smokers to those states. We lose all around the border.

And that’s not the end of the bad news. The higher the cost of a carton of cigarettes, the more incentive there is for bootleggers to haul in truckloads of smokes, which deprives the state of any tax income.

Furthermore, the more something costs, the less people use it. Supporters of the increase say the change will collect an additional $300 million in taxes on top of the $439 million collected last year. That is, to put it kindly, somewhat unrealistic.

When the state added just 44 cents to the per-pack tax back in 2007, sales dropped by nearly 18 percent. And since Indiana banned smoking in most public spaces, including restaurants and workplaces, sales have dropped about 2 percent a year.

Now all this depression of sales activity and smoking habits can be seen as a plus for public health. Despite the decline in smoking in recent years, 23 percent of Hoosier adults still smoke, compared to 18 percent nationwide.

But it means that the cigarette tax will be of diminishing value as a road-repair funding mechanism.

In his State of the State speech, Gov. Mike Pence made this observation: “I think when you have money in the bank and the best credit rating in America, the last place you should look to pay for roads and bridges is the wallets and pocketbooks of hardworking Hoosiers.”

That’s a hard argument to answer. Tax-hike supporters need to put some serious thought into how they are going to do it.

This was distributed by Hoosier State Press Association.

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