Retailers say state will get burned on Indiana cigarette tax plan for roads

But that won't be the case anymore, there or in other Indiana border cities, if lawmakers hike the state's tobacco tax by $1 to pay for road repairs, as House Republicans propose.

Darren Collett says his 28 Smoker Friendly stores will lose big to Illinois and Michigan, which now have higher taxes than Indiana's.

Raising the cigarette tax will extinguish the incentive for out-of-state smokers to cross the border to buy cigarettes, he and other retailers say.

Indiana’s current tax of 99.5 cents per pack is 32nd highest in the country, according to the Federation of Tax Administrators. Michigan charges $2 per pack and Illinois taxes $1.98.

The tax difference adds up for smokers who buy cartons at a time including John Fenner, a Michigander who drives to the Olde Tobacco Road cigarette outlet in Middlebury, 200 yards from the state line, for Kool Milds.

Fenner said he's resigned to a tax increase.

“Taxes are taxes, they are going to do it regardless if we care or not,” he said.

Nearly doubling Indiana's tax, as some lawmakers want to do, would give the state the country's 17th highest cigarette tax.

It would be well above the $1.25 per pack tax in Ohio, for example.

Kentucky, which has one of the lowest tax rates in the country, charges just 60 cents per pack.

“I know wholesalers in Kentucky who are having a record year,” Collett said. “It’s just going to get better for them if Indiana raises the tax.”

Hiking the tax here will put the average price of a carton of cigarettes close to $70. A carton of cigarettes in Kentucky is about $56.

The difference is worth the drive, said Collett, with gas prices in southern Indiana hovering around $1.75 per gallon.

The GOP proposal, formally unveiled earlier this week by House Speaker Brian Bosma, anticipates lost sales.

It projects sales by Indiana's 5,000 licensed tobacco retailers will drop from 340 million packs per year to about 300 million.

Even so, supporters say the change will collect an additional $300 million, on top of the nearly $439 million raised last year by the state tobacco tax.

That money would offset the cost of Medicaid-funded healthcare for poor people. Supporters say it also will free up more money for road and bridge funds, which are coming up short by about $1 billion a year.

The tax hike is part of a broader plan that also increases the 18-cents-per-gallon gas tax by 4 cents, to account for inflation since it was last raised in 2002.

Anti-smoking advocates, including the American Cancer Society, praise a higher cigarette tax because it puts a damper on smoking rates, culling tobacco users who will find the habit too expensive.

Twenty-three percent of Indiana adults smoke, compared to 18 percent nationally.

When the state added 44 cents to the price of a pack of cigarettes in 2007, sales dropped nearly 18 percent.

A cigarette tax hike has the critical backing of Republican House and Ways Means Chairman Tim Brown, a family physician from Crawfordsville.

But his counterpart, Senate Appropriations Chairman Luke Kenley, R-Noblesville, is skeptical.

He doubts that it will raise the expected dollars, in part because of black market sales by smugglers who will buy cigarettes in lower-tax states and illegally sell them in Indiana.

The non-partisan Tax Foundation found smuggling increases in states - and revenue collections decrease faster than expected - after significant cigarette tax hikes.

Tobacco retailers know those trends, too.

Cigarette sales are steadily declining, they report, amid health concerns and more social pressure not to smoke.

After Indiana in 2012 banned smoking in nearly all public places, including restaurants and workplaces, sales have dropped about 2 percent per year.

“It’s already a dying industry,” said Joe Lackey, president of the Indiana Grocery and Convenience Store Association.

The hike also face hurdles from tax opponents who include Gov. Mike Pence, who has gone on record opposing any tax increases, including for roads.

Pence supports an alternate plan to raise $1 billion over the next four years by borrowing money and dipping into the state’s rarely touched $2 billion reserves.

In a State of the State address Tuesday, he signaled that he won’t be budged.

“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,” he said.