To the Members of the Indiana Senate,
On behalf of National Taxpayers Union’s (NTU) Indiana members, I strongly encourage you to reject House Bill 1001 (HB 1001), the road funding proposal sent to you from the House of Representatives. As you return to work in the General Assembly, a number of high profile issues confront you this session, perhaps none more consequential than fixing the state’s crumbling roadways. Regrettably, in its current form HB 1001 is ill-conceived and would not adequately address the problem.
Though most states dedicate all of the revenue generated by the gasoline tax to road repair, maintenance and construction, Indiana does not. Current law establishes that only about 15 percent of every dollar collected by the gasoline tax goes toward maintaining and upgrading the roads. Dedicating every dime of the gasoline tax revenue to transportation makes sense, but the plan before the Committee is fatally flawed.
If enacted, HB 1001 would index the gas tax to inflation and shift that revenue to the State Highway Fund. It is estimated that the gas tax would increase by 5 cents per gallon immediately and then increase with the Consumer Price Index. To offset the revenue loss to the General Fund, the proposal would hike Indiana’s cigarette tax by $1 per pack to $1.99. In addition, the bill would expand upon the income tax reductions that are scheduled under current law. The state’s flat income tax rate is slated to drop from 3.3 percent in 2016 to 3.23 percent in 2017. If enacted, H.R. 1001 would further phase down the tax rate to 3.06 percent between 2019 and 2025.
While NTU strongly supports the income tax reductions, there are multiple problems with this overall approach as it is currently structured. The principal problem is that cigarette taxes almost always yield far less revenue than initially projected, leaving the non-partisan National Conference of State Legislatures to conclude, “cigarette taxes are not a stable source of revenue.” A 2013 study by NTU’s research arm, National Taxpayers Union Foundation, found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were increased between 2001 and 2013. The same study concluded that over the same period, tobacco tax hikes were followed by other tax hikes nearly 70 percent of the time, usually after revenues failed to meet projections.
Next, cigarette taxes are highly regressive, affecting low-income earners far more than high-income earners. It is estimated that over 50 percent of adult smokers make less than 200 percent of the Federal Poverty Level. In other words, the tax hikes under consideration would hit particularly hard those Hoosiers who can least afford to pay for them.
Next, according to a 2010 study by the National Association of Convenience Stores, tobacco sales account for over one-third of all sales at convenience stores, which are often owned and operated locally. It is unlikely that the Indiana General Assembly’s goal is to raise taxes on small businesses, yet that would be the result if HB 1001 becomes law.
In addition, by increasing cigarette taxes to $1.99 per pack, Indiana’s neighbors to the east and south – Ohio and Kentucky – would each have lower cigarette taxes, even accounting for Ohio’s 2015 cigarette tax hike. This creates an incentive for black market purchases or cross-border sales of tobacco products.
Finally, assuming the tax cut included in HB 1001 is fully phased in and legislative assumptions are correct about the revenues generated by the tax hike, the proposal would amount to a net tax increase on hardworking Hoosiers. According to the Fiscal Impact Statement prepared by the Indiana Legislative Services Agency, HB 1001 would raise about $180 million per year from the gasoline tax hike, the special fuels tax hike, and an increase in the motor carrier surcharge. At the same time, it is estimated that the cigarette tax hike would generate $254 million in Fiscal Year 2017. This amounts to approximately $435 million in new taxes, while the Fiscal Impact Statement notes the tax cut would result in a $367 million reduction once fully implemented in 2026. In the intermediate years, HB 1001 represents a major tax hike that is only partially softened in the out years.
NTU fully appreciates the budgetary difficulties facing the General Assembly. Indiana truly needs a long term solution to road repair and construction, but HB 1001 is rife with ill-advised funding mechanisms, fiscal gimmickry, and, most problematically, would result in a net tax hike. Accordingly, NTU strongly encourages you to defeat HB 1001.
Policy and Government Affairs Manager