To the Members of the Oklahoma State Legislature,
On behalf of National Taxpayers Union’s (NTU) Oklahoma members, I strongly encourage you to close the projected Fiscal Year 2017 budget deficit without raising taxes. In her State of the State address and in her Executive Budget, Governor Fallin proposed substantial tax hikes to cover the projected deficit that has grown due primarily to a decline in oil prices. This would be a mistake.
A centerpiece of the Governor’s budget proposal is a $1.50 per pack increase in the state’s cigarette tax. In her Executive Budget, the Governor said, “Raising the $1.03 per pack rate collected by the state when someone chooses to buy cigarettes to $2.53 per pack will save lives, reduce health care costs and generate recurring revenue for core services.”
If this approach seems paradoxical – a tax hike sufficient to pay for new spending but not too high that it would endanger those programs by depressing smoking too much – that’s because it is. In the name of improving health outcomes, the Governor and some legislators who support the idea would have Oklahoma increase its stake in ensuring sufficient numbers of Sooners continue to smoke in order to pay for more government spending and programs. Simply put, increased cigarette taxes are an ill-conceived way to fund government.
For starters, cigarette taxes are highly regressive, affecting low-income earners far more than high-income earners. It is estimated that over half of adult smokers make less than 200 percent of the Federal Poverty Level. In other words, the tax hikes under consideration would hit particularly hard those Sooners who can least afford to pay for them.
Next, the National Association of Convenience Stores estimates that tobacco sales account for approximately one-third of all sales at convenience stores. These are small businesses usually owned and operated locally. Increasing costs on small retailers in Oklahoma is not a wise idea in a fragile economy.
In addition, if Oklahoma increases its cigarette taxes by $1.50 per pack to $2.53, its major neighboring states – Texas, Arkansas, and Kansas – would each have lower cigarette taxes. This creates an incentive for black market purchases or for cross-border sales of tobacco products from neighboring states.
Finally, and perhaps most importantly, cigarette taxes usually yield far less revenue than initially projected; as the non-partisan National Conference of State Legislatures succinctly noted, “cigarette taxes are not a stable source of revenue.” A 2013 study by the National Taxpayers Union Foundation found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were raised between 2001 and 2011. That same study concluded that over the same period, tobacco tax hikes were followed by other tax hikes nearly 70 percent of the time, usually after revenues failed to meet initial rosy projections.
Another major component of the Governor’s plan to address the projected deficit is a proposal to broaden the sales tax base and lower the overall tax rate. This is a positive framework for virtually all tax reform proposals, but the details matter. As the Governor’s budget states, “If structured properly, [this framework] could present the opportunity to reduce the state sales tax rate, which is the nation’s sixth highest, while still increasing overall sales tax collections.” This implies that the sales tax rate might not be cut even after applying the levy to items not currently taxed. Expanding the sales tax base must be accompanied by a reduction in tax rates. Additional revenue generated by this type of reform should come in a more efficient tax code leading to less deadweight loss, not from tax hikes.
The Oklahoma State Legislature is facing a major choice this legislative session. One path leads to higher taxes and more government and the other leads to fiscal responsibility and lower taxes. The conservative approach is the sensible path favored by most Sooners. For these reasons, the House and Senate should reject tax hikes on Oklahoma’s citizens.
Policy and Government Affairs Manager