Starting July 1, Indiana will implement its largest tobacco tax hike in decades, raising the cigarette tax from just under $1 to nearly $3 per pack — a 200% increase that lawmakers say will generate revenue and discourage smoking but that business owners warn could drive customers across state lines.
Lawmakers approved the tax hike in April to help close a projected $2 billion budget shortfall. The measure, signed by Gov. Mike Braun, is expected to raise approximately $800 million over two years, with much of the revenue earmarked for covering Medicaid expenses.
“Along with revenue comes a really pretty good public policy that was going to help persuade people to either not start smoking or stop smoking at the same time,” Indiana Senate President Pro Tempore Rodric Bray said during debate on the bill.
In addition to cigarettes, taxes will rise on other tobacco products such as cigars and e-cigarettes, though exact increases vary by category. The hike will make Indiana’s cigarette tax — at $2.995 per pack — the 12th highest in the nation, according to the American Lung Association.
Health advocacy groups including the American Cancer Society and the Indiana Chamber of Commerce have long supported raising the state’s tobacco tax, arguing that higher prices discourage smoking and improve public health outcomes.
But the move has alarmed many convenience store owners, especially those near state borders. They fear steep taxes will push customers to buy cigarettes in neighboring states where tobacco is cheaper, hurting Indiana businesses and potentially undermining expected revenue gains.
“Raising the cigarette tax will not reduce smoking but will drive consumers across state lines to purchase cigarettes at lower prices, which negatively impacts sales of responsible small Indiana business owners,” a coalition of store owners wrote in a letter to lawmakers obtained by IndyStar.
Scott Hackleman, chief operating officer of Herdrich Petroleum, which runs 20 QuickPix convenience stores including four in Richmond near the Ohio border, warned that the tax could have unintended consequences.
“While the intent behind this increase may be well-meaning, it places a disproportionate financial burden on a small group of adult consumers, many of whom are already facing significant cost-of-living increases across the board,” Hackleman wrote in a late-April letter to legislators.
Joe Lackey, president of the Indiana Grocery and Convenience Store Association, predicted a temporary surge in sales before the tax takes effect, followed by a sharp decline as Hoosiers seek cheaper options out of state.
“We were the cheapest state and the surrounding states were much higher,” Lackey said. “We were selling a lot of tobacco out of Indiana, and that meant we were collecting a lot of taxes for the state of Indiana that was not coming from Hoosiers.”
He added that with Indiana’s tax now exceeding those of neighboring states, that dynamic could quickly reverse. According to data compiled by the American Lung Association and Campaign for Tobacco-Free Kids, starting July 1, cigarette taxes in Indiana’s neighboring states will remain lower:
- Illinois: $2.98 per pack
- Michigan: $2.00 per pack
- Ohio: $1.60 per pack
- Kentucky: $1.10 per pack
Illinois, long known for its high cigarette taxes, previously motivated many residents to cross into Indiana for cheaper cigarettes — a situation Lackey believes will end once Indiana’s tax jump takes effect. Illinois nicotine taxes are also set to increase.
He warned that higher taxes could lead to store closures or job cuts, particularly at convenience stores near state lines. “We anticipate this is going to be a very devastating tax,” he said.
