Reviving Bootlegging: Indiana's New Cigarette Taxes

Indiana’s latest hike in cigarette taxes goes beyond fiscal policy; it evokes a retro feel of bootlegging from the Prohibition era. With the state increasing its cigarette prices, lawmakers have introduced stringent penalties to curb smuggling activities reminiscent of moonshiners and racketeers of the past.

Reflecting on the 1930s, historical accounts detail notorious operations that targeted illegal bootleg beer and tobacco networks. Modernly, focus shifts to interstate roads and malls where cost-savvy smokers sidestep taxes by purchasing from low-cost neighboring states or loading up on bulk deals.

Kentucky and Tennessee's low tax rates serve as a lesson in the potential for smuggling. Kentucky’s notably low cigarette tax—a mere $0.10 per pack compared to Indiana’s future $1—has fueled its role as a hot export hub, with smuggling courses running across state borders. Tennessee witnessed a spike in rogue cigarette operations near its borders after raising taxes in the past decade.

However, a Johns Hopkins Bloomberg School of Public Health report highlights the nuanced impacts of raised cigarette taxes. Following Indiana’s 2007 increase from 55¢ to 99.5¢ per pack, revenues skyrocketed by 43% in the subsequent year, with neighboring states facing smaller decreases, proving that even amidst smuggling, higher taxes can lead to net revenue increases.

The initiative is a modern twist on a classic pursuit, as Indiana now hunts cigarettes the way it once pursued moonshine stills.

New Legislation: The Enforcement Upgrade

Beginning July 1, Indiana’s cigarette tax more than doubles, accompanied by robust enforcement measures:

Criminalizing mass out-of-state buys, converting high-volume offenders into felony cases.
Strengthened task forces—including Excise and state police—monitoring deliveries at toll points and warehousing facilities.
Surprise audits of distributors and retailers to catch counterfeit tax stamps.
Predicted revenue effect: $290 million annually, allocated for health-benefiting programs.

The Cross-Border Dilemma

Enforcement remains challenging given Indiana’s closeness to low-tax states such as Kentucky, enticing for illegal trade. The Tax Foundation ranks Indiana among the top ten states likely to see a rise in cigarette smuggling after tax increases, noting notable consumer evasion via border crossing and unregulated market exchanges.

Ohio, with its moderate cigarette tax and comprehensive highway infrastructure, is also a potential hotspot. The 2024 Mackinac Center study anticipates nearly 12% of cigarettes smoked in Indiana may stem from out-of-state purchases within the initial year of the tax increase.

Lessons from Illinois and New York

Illinois:

Illinois uplied its nicotine tax to 45% of wholesale, increasing smuggling risks.
Roughly 30% of the state’s cigarette consumption is believed to be from illegally transported packs.
The government enforces heavy fines on unstamped packs—$20-$25 per pack—and concentrates on high-volume shipments post its 2019 nicotine tax increase.

New York:

With one of the highest combined tax rates in the US (state + NYC), New York battles smuggling rates exceeding 50%, peaking at 61% after its recent price hike.
The Albany ATF and state’s Tax Enforcement Agency deal with felony-level trafficking cases (Class D/E offenses for those trafficking 10,000+ cigarettes).

Hoosier State Hustles: The Tradition Continues

Bootlegging deeply influenced Indiana’s economic history. During Prohibition, the state hosted some of the Midwest’s busiest moonshine operations, particularly in southern counties such as Lawrence, Dubois, and Orange. Whisky was clandestinely moved via the infamous “Whiskey Roads.”

Today, the commodities have changed—packs for pints—but the tactics remain: identify legal loopholes, use beneficial geography, and deliver products discreetly.

Even former Indiana Excise officer John Halverson parallels the scenarios: "Back then, it was stills in barns. Now it’s cartons in car trunks."

Public Health Victory or Strategic Risk?

Opinions differ regarding the rise in smuggling. Health advocates argue that despite some tax evasion, increased overall prices facilitate impactful smoking reduction, notably in young and low-income demographics.

Mike Seilback of the American Lung Association expressed optimism to Indiana Capital Chronicle, stating: "Elevated tobacco prices effectively curtail smoking. We forecast numerous Hoosiers quitting and future generations never starting."

Research indicates states can observe significant net revenue increases post-tax hikes when enforcement is strong. Indiana’s 2007 experience—seeing a 41% decline in sales but a 43% revenue rise—supports this assertion.

The Strategic Road Ahead

Indiana stakes its hopes on this strategy. Yet, the success lies in more than revenue forecasts. Will Indiana balance deterrence and enforcement effectively? Will local shops manage the shift? And will the new breed of bootleggers in SUVs and rental vehicles stay ahead of the curve?

Time will tell. Meanwhile, the spirit of the past remains on the Midwest’s backroads. The stakes are heightened, vehicles swifter, and tax stamps tougher to counterfeit, yet the play remains as rooted in Indiana’s culture as ever.

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