YTA (a little), but not for not wanting to receive childcare from your MIL. This sounds like it goes beyond just using your MIL as an option for childcare. As you said, "I would still be very uncomfortable with the idea of her touching and being close to the baby." You're not comfortable with your baby's grandmother ever touching her grandchild? I would imagine that your wife would feel shocked, at the very least, at hearing something like this.

It's totally valid to want to keep your baby away from cigarette smoke, but it sounds like your concerns expressed to your wife insinuated that her mother shouldn't have any role in the baby's life. I would gently suggest offering an apology for the intensity with which you approached the situation, and trying to open a calmer, more open dialogue about the roles you each, respectively and together, hope to see for your baby's grandparents (from both sides!) and what your respective priorities are with regards to childcare.