Research & Commentary: Indiana Tobacco Taxes and Infrastructure Funding

Published January 19, 2016

Lawmakers in Indiana are considering increasing the state’s tobacco tax to help fill a dwindling infrastructure fund. House Speaker Rep. Brian Bosma (R-Indianapolis) and House Roads and Transportation Committee Chairman Rep. Ed Soliday (R-Indianapolis) are looking at increasing the state tax on cigarettes, which they say will go to Indiana’s Medicaid program, freeing up money in the general fund currently used for that purpose and allowing more money to be directed towards the infrastructure fund.

Not everyone is on board with this proposed tax increase. Gov. Mike Pence (R) has said he opposes any tax increases. Pence says the state should instead borrow $240 million and spend various one-time funds to support $1.4 billion in infrastructure improvements through 2020.

Proponents of the proposed tax increases argue they are a sustainable, long-term solution to funding roads in the state, but research shows tobacco taxes are an unreliable revenue source that’s often used to prop up bloated government budgets while relying on a narrow and shrinking tax base. This creates greater revenue gaps taxpayers must later fill by paying additional or increased taxes.

Recent data from the U.S. Census Bureau show state revenue from tobacco product sales taxes decreased in 2013 by 0.9 percent, to $17.0 billion. That decrease followed a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation has found initial revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased between 2001 and 2011.

Although reducing smoking rates is a noble goal, raising tobacco taxes rarely works as intended and frequently creates many harms, including incentivizing residents to buy untaxed or lower-taxed tobacco products elsewhere, which reduces sales for retailers in the state.

Tobacco taxes prop up government spending with an unsustainable revenue source. They are also highly regressive, unduly burdening moderate- and low-income individuals. The Bureau of Labor Statistics reports consumer households earning less than $150,000 a year make 95.8 percent of tobacco expenditures. Increasing Indiana’s tobacco tax would only further contract the market over time and create budget deficits taxpayers will eventually have to fill with additional tax increases.

In addition to a cigarette tax increase, Indiana state lawmakers are also considering increasing the gas tax for road funding. Even with increases to the gas tax, future fuel-economy requirements for vehicles make that proposed revenue source a temporary solution.

Currently, only 1 percent of the 7 percent sales tax on gasoline is allocated to improving and sustaining Indiana’s roads. The rest goes into the state’s general fund, where it is used for other services. All of the revenues from the 7 percent sales tax on gasoline should be allocated to the roads fund, instead of increasing the gas tax and the cigarette tax, a move that would save the residents of Indiana from having to pay for two unnecessary tax increases.

The following articles provide more information about tobacco taxes.

Ten Principles of State Fiscal Policy 
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed and easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low” to “Protect state employees from politics.”  

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes 
John Nothdurft, director of government relations at The Heartland Institute, argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services and avoid supporting harmful tax policies. 

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”  

Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social-welfare argument. For example, tobacco tax revenues aren’t being used to help smokers. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive lobbying efforts. 

E-Cigarettes Are Making Tobacco Obsolete. So Why Ban Them?
Matt Ridley reports vaping works better than any other method of smoking cessation, citing several important studies. With the success of vaping products at reducing smoking, Ridley seeks to identify what the real reasons are behind the bans. 

E-Cigarettes Poised to Save Medicaid Billions
In a new report from State Budget Solutions, J. Scott Moody finds e-cigarette use could create significant savings for state governments, especially in their Medicaid programs: “As shown in this study, the potential savings to Medicaid significantly exceeds [sic] the state revenue raised from the cigarette excise tax and tobacco settlement payments by 87%. As such, the rational policy decision is to adopt a non-interventionist stance toward the evolution and adoption of the e-cig until hard evidence proves otherwise.”  

Peering Through the Mist: Systematic Review of What the Chemistry of Contaminants in Electronic Cigarettes Tells Us about Health Risks 
Electronic cigarettes are generally recognized as a safer alternative to combustible tobacco products, but there are conflicting claims about the potential health concerns these products warrant. This paper reviews the available data on the chemistry of aerosols and liquids of electronic cigarettes and compares modeled exposure of vapers with occupational safety standards. 

Cigarette Tax Hikes Burn Hole in State Coffers 
Gregg M. Edwards, president of the Center for Policy Research of New Jersey, reports the state brought in less revenue after its cigarette tax hike was implemented than before the tax increase.  

Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity 
Dr. Dahlia Remler, an expert with the Department of Health Policy and Management at Columbia University, demonstrates cigarette taxes are regressive, burdening impoverished individuals more than other groups. 

Debunking the ‘Tax Thee, But Not Me’ Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes 
The nonpartisan National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”  

Cigarette Taxes and Smoking: Will Higher Taxes Yield a Public Benefit? 
Kevin Callison and Robert Kaestner of the Cato Institute summarize their study focusing on the effect of recent, large cigarette tax increases on the smoking behavior of adults ages 18–74. The data suggest the association between cigarette taxes and either smoking participation or number of cigarettes smoked is small, negative, and not usually statistically significant. 

Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle
Patrick Fleenor examines New York’s half-century battle with cigarette black markets and related crime, documenting consumer responses to tax increases and discussing law enforcement and policy efforts to curb the negative side effects of high cigarette levies. Finally, Fleenor discusses national and international experiences with cigarette taxes and finds New York’s experience is typical of jurisdictions levying high cigarette taxes.  

Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review
The authors of this study consider cigarette smuggling from two perspectives. First, they employ a statistical model to estimate the amount of cigarette smuggling in 47 of the 48 contiguous U.S. states. Second, they review the historical experiences of three states—California, Michigan, and New Jersey—known to have problems with cigarette smuggling. The authors’ findings suggest state policymakers should reassess the value of cigarette taxes as a tool used to increase revenue and improve public health.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database, at 

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.