Indiana Tax Developments

May 1, 2007

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 tax bill for the rest of us.

Targeted tax incentives erode the tax base, 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 taxes 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.

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