Oklahoma Cigarette Fee Under Fire

June 26, 2017

Oklahoma’s “Smoking Cessation and Prevention Act of 2017” may be going up in smoke. Although Oklahoma Governor Mary Fallin (R) signed the act (SB 845) into law on May 31, the constitutionality of the law is being questioned in a pending lawsuit because of its terminology.

In recent years, Oklahoma has faced severe budget shortfalls, leading to issues in education, infrastructure, and health-care funding. Proposed cigarette tax hikes were introduced last year and again during the most recent legislative session to address these budget concerns, but failed to gain enough bipartisan support. Then, during the last week of the session, SB 845 was enacted to bridge a budget gap.

The new law is straightforward; it raises additional revenue from cigarette sales and funds health care. However, the state’s legislative gridlock and budget issues forced the passage of the cigarette charge as a fee, potentially violating Oklahoma’s Constitution. This leaves the state in a tight spot with the pending lawsuit, uncertain tax revenues, and additional budget concerns for the future.

The Law

  • The stated purpose of SB 845 is to “[increase] the price point of cigarettes…to reduce cigarette consumption by deterring children and adolescents from taking up smoking” and to discourage current smokers from continuing their habit.
  • A fee of $1.50 will be applied on wholesalers for each 20-pack of cigarettes, and prorated accordingly. The fee would be in addition to the current state cigarette tax of $1.03 per 20-pack, increasing state cigarette taxes and fees to $2.53 per pack, well above the nation’s average state tax rate of $1.68 per pack.
  • All public places and state buildings, property, and vehicles (which are already smoke-free) must clearly display signs that smoking is prohibited. Curiously, Oklahoma veterans centers are exempt from this policy.
  • A cap will be set on the quantity of cigarettes wholesalers can purchase based on previous sales. Cigarette excise stamps are necessary to sell cigarettes in Oklahoma. Each cigarette wholesaler will be limited to the monthly average of cigarette excise stamps they purchased from August 2016 to August 2017, effectively limiting future cigarette sales.
  • Since the bill didn’t list an effective date or an emergency clause, the law will go into effect 90 days after passage, or August 29.

The Revenue

  • The Oklahoma Tax Commission estimates the 2018 fiscal year tax revenues from the cigarette fee will be $257.8 million.
  • The first $1 million raised in tax revenues will go to a fund promoting law enforcement efforts “pertaining to alcoholic beverages, charity games and youth access to tobacco.”
  • Revenues collected from this tax above the first $1 million will go to the newly created Health Care Enhancement Fund and will be appropriated by the state legislature.
  • The new tax revenues will be subject to the current rebate provisions of state-tribal compacts for tobacco sales. Typically, cigarette taxes vary by tribe and region based on tobacco tax compacts and agreements.

The Controversy

Local businesses and large tobacco companies have jointly filed a lawsuit against the cigarette fee, claiming it is unconstitutional. Some legislators who voted for the bill found the lawsuit unsurprising, given the hasty passage of the legislation.

In Oklahoma, revenue-raising bills are not allowed to be passed during the last five days of the legislative session under Article V, Section 33 of the state constitution. Additionally, revenue bills require a three-fourths majority vote to pass under the state constitution. By labeling the new law a cigarette fee rather than a tax, legislators attempted to skirt both constitutional requirements. However, calling the cigarette charge a fee violates the plain meaning of the term and the structure upheld by courts.

A charge is classified as a fee if it is designed to recoup the costs of providing a service to the payer rather than discouraging a behavior or raising money for a given fund. For instance, a fee is levied when driving on a toll road. The payment of the fee (toll) is directly tied to receipt of a service. Conversely, tax revenues are often used for general governmental purposes and not specifically for the cost of providing some specified service.

In the case of Oklahoma’s cigarette fee, even though it is levied on wholesalers, it is paid by consumers. The fees paid by cigarette consumers will fund the entire state’s health care. While consumers voluntarily purchase cigarettes and incur the fee, the revenues from the fee will be disbursed broadly to Oklahoma taxpayers, rather than exclusively to cigarette consumers. Even though Oklahoma desperately needs government revenue, this policy is unconstitutional and distributes the financial burden of health care inequitably.

Data & Theory

Cigarette consumption has declined drastically, even in recent years. Some attribute this to higher cigarette taxes. However, the decline of cigarette consumption varies by socioeconomic status. Data from the Center for Disease Control and Prevention (CDC) show that high-income earners smoke significantly less than low-income earners. Oklahoma’s cigarette fee law notes that decreasing overall cigarette consumption will reduce “health-related disparities among income groups over time.” Even though low-income earners disproportionately bear the cost of cigarette taxes and fees, they have the most to gain from the health benefits.

Nonetheless, the revenue instability of sin taxes make this law short-sighted if the goal of the law is to sustainably fund health-care programs. As smokers give up tobacco products or rising generations eschew smoking, revenues from the cigarette fee to fund health care will wane. In the long run, the state still won’t have enough health-care funds. Additionally, interstate cigarette smuggling will increase due to the new cigarette fee, lowering potential revenues. 

The Takeaway

Good tax policy includes a broad base of taxpayers to pay for public goods. Conversely, Oklahoma’s new cigarette fee raises money for statewide health-care services, but only charges those most in need. Furthermore, relying on a declining revenue source makes this an unsustainable solution to funding health care in Oklahoma. Depending on the outcome of the pending Oklahoma Supreme Court decision, state legislators may be forced into a special mid-year legislative session to balance the budget.

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