Oklahoma Gov. Mary Fallin (R) recently proposed two major tax increases, along with several changes to state spending, in her 2016 State of the State address. Fallin’s tax plan would increase the state’s cigarette excise tax by $1.50 per pack and expand the state sales tax by applying it to multiple new services and goods that are currently exempted. In addition to these hikes, Fallin has proposed a 6 percent spending cut for many state agencies and an increase in education spending, including a $3,000-per-year pay hike for public school teachers.
Oklahoma already relies heavily on sales tax revenue to fund government programs, so expanding Oklahoma’s sales tax could be problematic for the state’s economy. Oklahoma currently imposes the 6th highest sales tax in the nation, with a combined state and average local rate of 8.77 percent. The proposal would amount to a $200 million annual tax increase.
The proposed $1.50-per-pack cigarette tax increase would have many negative consequences. Tobacco taxes are an unreliable and shrinking tax revenue stream, so using them to fill holes in Oklahoma’s budget will likely create budget problems in the future. According to recent data from the U.S. Census Bureau, state revenue from tobacco product sales taxes decreased in 2013 by 0.9 percent, to $17.0 billion. In 2012, revenue dropped by 0.5 percent. The National Taxpayers Union Foundation found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.
Tobacco taxes, like all sin taxes, are highly regressive, unduly burdening moderate- and low-income individuals. According to the Bureau of Labor Statistics, consumer households earning less than $150,000 a year make 95.8 percent of tobacco expenditures.
According to Americans for Tax Reform, Oklahoma’s current cigarette tax rate of $1.03-per-pack is competitive with its regional neighbors; increasing the rate to $1.50-per-pack would mean cigarettes sold in Oklahoma would be more heavily taxed than anywhere else in the region, making it the 10th highest rate in the United States. Research shows sin taxes, more than most other kinds of taxes, cause consumers to shop across a home state’s border to find a better rate, so the biggest beneficiaries of an increase in Oklahoma’s tobacco tax would likely be neighboring Kansas, Missouri, and Texas.
Increasing taxes on sales and tobacco would reduce Oklahoma’s economic competitiveness and encourage unsustainable increases in government spending, all while placing an excessive burden on lower-income taxpayers. Instead of creating and increasing taxes, Oklahoma should focus on tax reforms that would lower rates, put dollars back into the pockets of citizens, and encourage government efficiency.
The following articles provide more information about sales and excise taxes.
Cigarette and Tobacco Tax Hikes a Bad and Dangerous Idea
http://www.ocpathink.org/post/cigarette-and-tobacco-tax-hikes-a-bad-and-dangerous-idea
Over the years, a number of states have increased taxes on cigarettes and tobacco products to increase funding for numerous government programs, including education. Jonathan Small of the Oklahoma Council of Public Affair outlines in this article several examples of why any tax hike on tobacco products is unwise.
ATR Opposes Oklahoma Governor Mary Fallin’s Tax Increases
https://www.atr.org/atr-opposes-oklahoma-governor-mary-fallins-tax-increases
In response to Fallin’s proposal to raise taxes by hundreds of millions of dollars annually, Americans for Tax Reform outlines its opposition to any tax increases in Oklahoma and explains why Fallin’s tax proposals are not the best policy for the state.
Mercatus on Policy: Sales Taxes and Exemptions
https://heartland.org/policy-documents/mercatus-policy-sales-taxes-and-exemptions
Thomas Stratmann of the Mercatus Center argues, contrary to common assumptions held by many legislators, sales tax exemptions may actually lead to higher overall taxes and less revenue. “Legislators and policymakers need to be aware of the real-world implications of carving out exemptions for favored business sectors when drafting tax policies.”
The Effect of Sales Taxes on Employment: New Evidence From Cross-Border Panel Data Analysis
https://heartland.org/policy-documents/effect-sales-taxes-employment-new-evidence-cross-border-panel-data-analysis
This study, authored by Federal Reserve Board researcher Jeffery Thompson and Kent State University economics professor Shawn Rohlin, examines how sales taxes affect employment rates in areas near state borders, where cross-border economic effects often take place.
Roy Cordato: Extending Sales Taxes to Services
https://heartland.org/podcasts/2010/08/18/roy-codato-extending-sales-taxes-services
Most states apply sales taxes exclusively to goods, but in some states, there is serious talk of extending sales taxes to services, such as haircuts, hair styling, accounting, legal services, and medical services. In this podcast, Roy Cordato of the John Locke Foundation discusses the effects of applying sales taxes to services.
Sin Taxes: Size, Growth, and Creation of the Sindustry
https://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social-welfare argument – tobacco tax revenues aren’t being used to help smokers, for example. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive and preventive lobbying.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Debunking the ‘Tax Thee, But Not Me’ Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
The nonpartisan National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”
Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle
http://heartland.org/policy-documents/cigarette-taxes-black-markets-and-crime-lessons-new-yorks-50-year-losing-battle
Patrick Fleenor examines New York’s half-century battle with cigarette black markets and related crime, documenting consumer responses to tax increases and discussing law enforcement and policy efforts to curb the negative side effects of high cigarette levies. Fleenor also examines various cigarette taxes imposed in the United States and in other nations, which leads him to conclude New York’s experience is typical of jurisdictions levying high cigarette taxes around the world.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact MaryAnn McCabe, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
