INDIANA'S CIGARETTE TAX HIKE
40-cent jump drives Hoosiers to Kentucky
Stores, wholesalers wonder if shift will be long-term
By Ben Z. Hershberg
bhershberg@courier-journal.com
The Courier-Journal
John Schroeder, manager of Lambert's Distributors Inc., a cigarette wholesaler in New Albany, Ind., that also does business in Kentucky, said he has seen a big jump in his Kentucky business since Indiana's cigarette tax was raised.
Indiana's 40-cent cigarette tax increase, which took effect a week ago(7-1-02), already is driving many Hoosier smokers across the Ohio River for the lower prices in Louisville.
Kentucky's cigarette tax is 3 cents a pack -- the second-lowest in the nation and now 52.5 cents below Indiana's.
For a carton of cigarettes, that can mean a savings of more than $5. And Louisville merchants are reaping the benefits.
Carliss Culver, a clerk at Bank Street Liquors in the Portland neighborhood near the Sherman Minton Bridge to New Albany, Ind., said she has had 10 to 15 new customers a day buying cigarettes since the tax increase took effect July 1. Many have identified themselves as Hoosiers who are angry about the higher tax, Culver said.
Stacy Stallings, assistant manager of the Dairy Mart on 22nd Street and Portland Avenue, said her cigarette sales may have increased by 30 percent or more because of new customers from Indiana.
''They're all coming and complaining from Indiana about the tax increase,'' she said. ''They say it's crazy.''
Indiana retailers are hearing the same complaints.
Marilyn Cunningham, a clerk in the Dairy Mart at Main and West Sixth streets in New Albany, said her customers ''don't like it (the tax increase) too well.''
''They say that it's just too expensive,'' she said, and some have left the store without making a purchase.
Yesterday a carton of Kools at Stallings' Dairy Mart was selling for $23.89, compared with $26.84 at the Dairy Mart on Main Street in New Albany.
At the BP Tobacco Road store on Court Avenue in Jeffersonville, Ind., a carton of Marlboros was $30.99 -- exactly $8 higher than at the Kroger store on South Second Street in Old Louisville.
Walter Davis of New Albany, who was buying gas last week at the Tobacco Road store on Main Street in New Albany, said he will be among the Hoosiers heading to Louisville for lower prices.
''I think they're too high'' in Indiana, he said.
Merchants on both sides of the river say it's too early to know how much the tax difference will affect them.
But ''it will hurt bad,'' said Jody Pierce, who owns 13 Sav-A-Step Food Marts in Southern Indiana.
About a third of his stores' revenue is from cigarette sales, and he said he expects to lose about a quarter of that business. He also owns 13 stores in southern Louisville, but they are are too far from Indiana to benefit much, he said.
The 40-cent tax increase -- which took most prices in Indiana above $3 a pack -- was part of a bill to generate $600 million a year for Indiana's beleaguered budget and to provide property tax relief in light of a courtordered reassessment now under way.
Along Indiana's other state borders, the impact isn't likely to be as great because the tax differential isn't as big.
But there clearly is a big risk of lost sales for Southern Indiana's dealers, said state Rep. Bill Cochran, the New Albany Democrat who is chairman of the House budget subcommittee.
''It was one of the hardest things I ever did,'' he said of the cigarette tax increase, ''to put it in the budget and vote for it.''
But something had to be done to stem the tide of red ink threatening to overwhelm the budget, Cochran said.
Even with some sales lost to Kentucky, Cochran said, the tax increase should add at least $300 million annually to the state treasury.
Without the increase, Cochran said, even deeper cuts would have been made in education, health care and other basic social services.
''We had no other choice,'' Cochran said.
Tom Kaiser disagrees.
His family has run a retail tobacco store in New Albany since 1832 and a wholesale business since 1945. He thinks the legislature could have cut spending more, just as a private business would if its revenue fell short of expenses, Kaiser said.
So far, he said, he has not seen a decline in his wholesale business, but he expects to feel the impact in the next few weeks.
He hopes the business he does with Louisville retailers -- about 20 percent of his total -- will increase enough to blunt the Southern Indiana decline. And he thinks sales of some low-cost brands will rise considerably because of the tax increase, Kaiser said.
But he said state government ignored the concerns of the region's smokers and tobacco retailers because it views the area almost as though it were part of another state.
John Schroeder, manager of Lambert's Distributors Inc., another New Albany cigarette wholesaler, said he has noticed a significant increase in his Kentucky business. But he said it's too early to estimate how big the shift will be.
He also said the difference in price is big enough to encourage a black market in Hoosier sales of Kentucky cigarettes.
William Hoover, assistant special agent in charge of the Louisville office of the federal Bureau of Alcohol, Tobacco and Firearms, said at this point, cigarette bootlegging in the area ''is not a major concern for us.''
For his agency to get involved, Hoover said, an illegal sale would have to be substantial -- more than 60,000 cigarettes. The tax increase ''has just gone into effect,'' Hoover said, and ''we're not concerned at this time.''
Larry McKee, deputy commissioner of the Indiana Department of Revenue, also said his agency isn't worried at this point about a black market in cigarettes.
He said the department will monitor the amount of revenue generated by the new tax rate and will investigate if it falls well below projections.
When I was in the Army I went to dispensary one day. While the doc was checking me out she asked about tobacco use, and I admitted that I used Copenhagen. I asked her why, since tobacco is dangerous, did she not order her patients to stop using it. She said it was morally wrong to issue an order that she knew would be disobeyed.
Isn't that what this tax is doing?