Indiana's 201% cigarette tax hike will fuel smuggling, not just revenue

Indianapolis Star

11 hours ago

Indiana's 201% hike in its cigarette excise tax, which takes effect July 1, will reshape consumer behavior, and not necessarily in the way lawmakers expect.
While the intent is to boost revenue, the dramatic tax increase from 99.5 cents per pack to nearly $3 will light up at least one major unintended consequence: cigarette smuggling. Some smokers will quit, but many others will engage in tax avoidance and evasion — and possibly other illegal behavior.
We are from Indiana and Michigan, respectively, and have long shared a scholarly interest in smuggling. Since 2008, we have published estimates of cigarette smuggling by comparing legal-paid sales in each state to that state's smoking rates. We and other scholars attribute the difference between what is bought legally and what is being smoked to smuggling.
We found that, through 2023, Indiana was one of America's top export states for smuggled cigarettes, serving as a source for casual shoppers from neighboring states and large-scale, organized crime alike. We also found that for every 100 cigarettes smoked in Indiana during 2023, an additional 23 were smuggled out, and very likely to higher-taxed neighbors such as Michigan, Illinois and Ohio.
Thanks to smuggling, the Indiana treasury generated an extra $61 million in cigarette taxes on sales for out-of-state consumption.
This bounty will change when Indiana's own cigarette excise tax rate leaps to nearly $3 per pack. Research shows that yawning tax disparities are a prime driver of cross-border cigarette shopping.
On the state's southern border is Kentucky, a tobacco state with an excise tax of just $1.10 per pack. To the east, Ohio's tax is set at $1.60 per pack. The northern border touches Michigan, which charges $2 per pack. Hoosiers are likely to cross all three borders in search of cheaper cigarettes. Indeed, our statistical model indicates that nearly 15% of cigarette consumption—more than 39 million packs—will be smuggled into the state as a result of this tax hike.
Briggs: Mike Braun's tuition freeze for Indiana colleges is a marketing gimmick
Indiana last raised its cigarette tax in July 2007, from 55 cents to 99.5 cents per pack. For our 2008 study, we obtained the sales data of a large Midwestern cigarette distributor. These data, which let us track activity by ZIP code, allowed us to measure sales from wholesalers to retailers in counties that touched each other along the Indiana-Michigan border.
We found that in the three months leading up to and the three months following Indiana's last tax hike, sales to Michigan retailers in border counties rose more than 50% as buyers stocked up on cigarettes in preparation of changes that will give Michiganders less incentive to cross the state line into Indiana to save on their smokes. Now at $3 per pack, it's a near certainty that Indiana consumers will travel to Kentucky, Ohio and Michigan to buy cheaper cigarettes.
This type of smuggling is what we call 'casual,' and it typically involves people crossing borders to save money on personal consumption. A far more organized form of illicit trade, 'commercial' smuggling, also thrives on large tax differentials, often involving long-haul shipments by organized crime. Nearby Missouri charges just 17 cents per pack, so it doesn't strain credulity to suggest that smuggling from that state to Indiana may soon commence.
Many may hope that the police will be an effective deterrent against such smuggling. It is unlikely. Indiana struggles to keep tobacco and drugs out of its own correctional facilities.
In April a man was arrested for attempting to fly tobacco, marijuana and vape pens into the Westville Correctional Facility via drone.
In November 2024, a corrections officer was charged with smuggling tobacco, marijuana and methamphetamine to an inmate at the Pendleton Correctional Facility. In March 2024, a federal corrections officer at Terre Haute was busted for delivering cigarettes to an inmate and reportedly received $400 per carton.
Opinion: Indiana's 'free market' rental laws are rigged in favor of landlords
Public corruption is just one additional, corrosive effect of high cigarette taxes. There are others. Over the years we have catalogued cases of smuggling-related violence against civilians, police, a cash-and-carry retailer, retail store attendants and property.
These instances highlight the overwhelming challenge to public safety and law enforcement.
Lawmakers in Indiana and elsewhere should recognize the costly ill effects of sin taxes, as well as their purported benefits, such as the additional revenue these taxes typically generate.