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Indiana Tax Developments

1 min readBy: Curtis S. Dubay

Indiana Governor Mitch Daniels vetoed incentives for filmmakers and vowed to sign an increase of the state’s cigarette tax this week.

Incentives for the film industry are nothing but a giveaway to Hollywood filmmakers, but are popular with lawmakers because they bring big budget productions to their state. The highly-visible productions allow lawmakers to take credit for newly created, however temporary, jobs, while at the same time they get to hobnob with Hollywood stars. It is a win-win for lawmakers, but an increased taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. bill for the rest of us.

Targeted tax incentives erode the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , forcing higher rates for those not lucky enough to win political favor. Governor Daniels did the right thing by vetoing the bill and should do so for all such bills in the future-no matter the amount or the recipient of the credit-because they are bad policy.

Indiana is one of a growing number of states increasing cigarette taxes to pay for health care expenditures. Raising cigarette taxes rarely brings in the anticipated increased revenue because people shift their purchases to other states or to the internet. Increased excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es also hurt businesses when customers shift their purchases elsewhere.

Although it may be desirable to provide health care for those without it, it is unfair to pay for a broad social program that will benefit many people by taxing a narrow portion of the population. If Indiana wants to fund health care everyone should pitch in– not just smokers. Excise taxes should only be levied at a value equal to the social cost imposed on society, and studies have shown it is much less than the excise tax in most states, including Indiana’s now 99.5 cent tax.