Northwest Indiana smoke shop owners fear a $1 per pack tax hike that passed the Indiana House of Representatives will snuff out a lot of the business they get from Illinois, and potentially put some of them out of business.

Smoke shops are clustered along the state line in Hammond, Whiting, Munster and Dyer to take advantage of Indiana's lower cigarette taxes, which lure many Illinois smokers across the border for cigarette runs. A carton of Marlboro Reds is about $60 in Northwest Indiana as compared to $120 or $130 in Chicago, where more than $6 in taxes are slapped on every pack.

Mo Ghazneh, who works at Cheap Tobacco On Ridge 2, in Munster, is concerned that half the store's business could disappear. Indiana's cigarette tax rate will end up being a few cents higher than Illinois's cigarette tax, and Will County just south of Chicago doesn't have the extra state and local taxes smokers pay in Chicago.

Ghazneh estimates cartons potentially could end up being $5 to $10 cheaper in Will County, both because of the Indiana tax increase and because Indiana has a state-set minimum price on cigarettes whereas Illinois does not.

"We're literally directly on the border," he said. "People come to Indiana for gas and cigarettes. If you raise cigarette taxes and gas taxes, it's going to be a ghost town. It's going to be a ghost state."

High cost of smoking

The increased cigarette tax still would have to pass the Indiana Senate and be signed by Gov. Eric Holcomb to become law. But it has political momentum because it is part of a road-funding bill that is a priority for Republicans in the legislature they dominate.

As part of that bill, the Indiana House also approved a 10 cent per gallon gasoline hike, in addition to an extra $15 in registration fees and a $150 fee per year for electric vehicles. The plan is to raise $1.2 billion a year to improve the state's roads and bridges. Indiana's gas taxes would end up being about 10 cents per gallon higher than Illinois' state gas taxes, but would still be at least 40 cents cheaper per gallon than in Cook County after all the local taxes are factored in.

House Bill 1001, co-sponsored by State Rep. Ed Soliday, R-Valparaiso, also adds $1 to the state's existing $0.99 cigarette tax to cover health care costs related to tobacco use. That move would free up funds for road construction that currently are spent on maladies related to smoking.

And those costs are steep, estimated by the American Lung Association to be $15.90 in health care expenditures for every pack of cigarettes sold in Indiana.

Indiana estimates smoking costs the state $3 billion a year in medical expenses, including $589.8 million covered by Medicaid. The habit kills 11,100 Hoosiers each year, according to the Indiana Tobacco Quitline, but about 22.9 percent of adults in Indiana and 15.1 percent nationally still smoke.

Cheap cigarettes, cheap gas

Customers at Sam's Smoke Shop, in Whiting, have been complaining a lot about the threatened $1 per pack tax hike, according to Karen Garza, who works behind the counter there.

"It's a big jump," she said. "This is Indiana, not Illinois. Everything keeps going up except the wages."

Garza still thinks customers will come even if they have to pay nearly $8 a pack for Newports or about $7 a pack for name brands like Camel. Many come from Illinois to get cigarettes, gasoline and groceries, since Indiana does not tax most grocery items.

"People say they'll quit when it goes up, but they always come back," she said.

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Indiana smoke shops along the Indiana/Illinois state line make up a significant chunk of the retail space on commercial corridors like Calumet Avenue. Muayad Hamad, who works at Oasis Smoke Shop in Hammond, estimates there are at least a dozen smoke shops within a mile.

"It's going to affect us big time." he said. "We're right on the state line. From what they're saying, Will County will be cheaper, so a lot of business will stay there. This is our business. This is our life. People live off of this.'

Illinois customers who live within walking distance will continue to come, but those with cars will likely head to Will County to stock up on cartons, Hamad said.

"People come here for the cheap cigarettes and the cheap gas," he said. "Once the gas and cigarette taxes go up, we're not going to see those guys."

Luke Oil CEO Tom Collins Jr. said his Hobart-based gas station chain supported efforts to increase road funding, but expected that gas stations along the border could see a 60 percent decline in their business after losing "many Illinois customers that will find other, cheaper options for their fuel purchases."

Regressive tax?

Demand for cigarettes — which are highly addictive — is steady even when the price goes up, Micah Pollak, Indiana University assistant professor of economics said. Academic research suggests an increase from $6 a pack to $7 a pack would cause overall cigarette sales to fall by about 6 percent to 7 percent.

However, other Northwest Indiana businesses could suffer if fewer Illinois residents cross into Northwest Indiana to purchase cigarettes, Pollak said. They won't stop to fill up their gas tanks, eat or spend money at other local stores.

But taxes on goods like cigarettes, gasoline and gambling tend to be politically popular, even though they're "extremely regressive," adversely affecting the poor more than the wealthy, Pollak said.

"If the typical smoker smokes a pack a day, then this tax increase will cost the typical smoker around $350 more per year," he said. "This amount represents a significantly larger portion of the budget for a low income household than a high income household, and as a result places a larger financial burden on poor households. There is also some evidence that smoking is more prevalent among lower income households, which would amplify this effect."

More smokers vaping

Cigarette prices have gone up so much over the years that generics, which now cost $4.68 a pack, are the second top-selling brand after Newport at Smoke City in Hobart, manager Becky Griesse said. Customers object every time there's a price hike, and the store is barely eking out any profit from cigarettes, making most of its money from higher-margin items like hookah and smoking accessories.

"Everybody hates it," she said of the tax hike.

Nearly 30 percent to 40 percent of smokers who shop there have switched over to vaping because it's so much cheaper, Griesse said. The vaping e-liquid equivalent of 120 packs of cigarettes sells at Smoke City for $50. The same amount of name-brand cigarettes would cost about $360.

She believes as many as 70 percent to 80 percent of Smoke City's customers eventually could switch over to vaping to save money.

"But it's only a matter of time before they tax that (as much), too," she said.


Business Reporter

Joseph S. Pete is a Lisagor Award-winning business reporter who covers steel, industry, unions, the ports, retail, banking and more. The Indiana University grad has been with The Times since 2013 and blogs about craft beer, culture and the military.