Tobacco Tax Revenue Projections Go Up in Smoke

August 23, 2005

As states continue to seek sources of revenue whose impacts are largely felt by small segments of society rather than broad taxes that tend to be politically unpopular, Oklahoma Governor Brad Henry and the state legislature passed a measure effective January 2005 that raised the tax per pack of cigarettes to $1.03, including a partial elimination of certain exemptions granted to tribal smoke shops that had compacted with the state.

However, what many in the state government failed to realize is a fundamental rule in economics: taxes alter the behavior of individuals and businesses. From Tax Analysts:

The additional revenues from the new taxation scheme (including the tribal compacts) were earmarked to fund several important healthcare initiatives. The shortfall in revenues is at the center of a growing controversy about the new tobacco taxes involving Henry, State Treasurer Scott Meacham, Republican legislative leaders, and Oklahoma Indian tribes.

Meacham claims that the tribes have underpaid their tobacco tax liability by nearly $13 million. At the core of the tribal tax dispute is the tax break in SQ 713 for tribal smoke shops that operate within 20 miles of the state’s boundaries. Meacham claims that most of the tribal smoke shops (including those much farther away from the state line) are taking advantage of the tax break. Some tribes have still not compacted with the state and enjoy even more significant price advantages due to the higher taxes.

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