Cigarette Tax Hike Goes Up In Smoke – For Now

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As Indiana legislators passed a two-year, $34.6 billion budget last week, supporters of raising the state’s cigarette tax watched their work snuffed out for another session.

Lawmakers had to adjust their final calculations to account for lower predicted sales and income taxes and higher-than-anticipated Medicaid costs. They looked to broaden the sales tax base by targeting online transactions through ‘market facilitators’ and hotel booking sites, and passed a massive gaming bill in the waning hours before adjournment to bring a jackpot of casino licensing fees and wagering taxes.

But the General Assembly passed up a fairly significant opportunity to boost the state’s bottom line by hiking cigarette taxes, a move championed by a coalition of business groups, hospitals and public health advocates for several years now.

Indiana's current (per pack) cigarette tax, at just under a dollar, is the lowest in the Midwest and provides a roughly $240 million annually (a modest contributor to the overall budget, less than riverboat wagering and vehicle excise taxes for context). 

Raising the tax by $2 a pack (as pushed by the ‘Raise It for Health’ alliance) would catapult our rate above our neighbors.  This may be an affront to a culture that blanches at being described as “high tax” in any category, but there are compelling reasons to rethink our typical attitudes.

Tripling cigarette taxes would add $360 million a year in new revenues.  As lawmakers scrambled this year to address teacher pay and other priorities (and keep a healthy rainy day fund amid warnings of a softening economy), it’s hard to argue this boon to the state’s finances wouldn’t have been welcomed.

The 2017 infrastructure investment plan showed tax increases don’t have to be politically toxic if the revenue source is tied to a clearly-defined and compelling purpose (i.e. gasoline taxes funding highways).  Connecting cigarette taxes to public health programs has similarly common-sense appeal…and because general fund revenues are largely fungible, would still offer breathing room on the rest of the budget.

Skeptics argue that a few windfall years would be replaced by a steady decline as higher prices discourage smokers.  But here, the old Ronald Reagan adage (“If you want less of something, tax it.”) becomes a positive talking point: If more Hoosiers give up cigarettes, the silver lining outshines the cloudy outlook for this specific revenue stream.

After all, two of the biggest fiscal issues facing Indiana are lagging personal income (leading to sluggish individual income tax collections) and the inexorable growth of Medicaid as a share of the state budget.

There are a multitude of factors that drive income growth (like educational attainment).  But Indiana’s high smoking rate reduces productivity, increases workplace absenteeism and rates of chronic illness, and adds health costs for employers and individuals alike – all taking a toll on wages.  A healthier workforce simply has healthier earning potential and capacity to sustain the state’s coffers.

One of every four Hoosier adults smoke, a worrisome enough number given Indiana’s poor health rankings and their collective impacts.  But so do nearly half our adult Medicaid population (46%).  With Indiana in the top tier of state Medicaid spending-per-enrollee, discouraging smoking is also a necessity to control the underlying pressures on a program that’s already our second-largest state budget category.

Looked at this way, cheap cigarettes are a costly choice; Indiana’s low cigarette tax isn’t a taxpayer-friendly policy, but a subsidy to smokers that threatens our overall tax burden and anchors the productive potential of our economy.  So why are we looking at a 2020-21 budget with no adjustment on cigarette taxes?

The politics of tax hikes may have something to do with it, and there’s also legislative sentiment that a major increase in cigarette taxes should be “saved” in case federal Medicaid policy changes leaves states like Indiana with shortfalls in the future. 

But just as any doctor would counsel “today is the best day to quit smoking,” a decision to raise the tax this year could have started the process of building a budgetary bulwark on Medicaid and bringing down the state’s smoking rate – accelerating the benefits of a healthier Indiana. 

It’s easy to offer post-mortems after the budget has passed and the gavel has dropped, but the status quo on the cigarette tax deserved more serious debate.  Given the upside, it’s an issue that should be revisited in 2020, despite the reluctance to make significant fiscal policy in a short session.

Chris Watts is president of the Indiana Fiscal Policy Institute.

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