Legislators in Oklahoma are now considering two major tax hikes in an attempt to cover a $878 million budget shortfall. The new proposal would increase the tax on a pack of cigarettes by $1.50 per pack and increase the tax on a gallon of gasoline and diesel fuel by 6 cents. The bill’s sponsors estimate the tax would generate $340 million in new tax revenue. Tobacco taxes and gasoline taxes have both proven to be very inefficient in recent years, generating less revenue than expected while leaving large holes in state budgets lawmakers need to fill.
According to Americans for Tax Reform, Oklahoma’s current cigarette tax rate of $1.03 per pack is competitive with its regional neighbors. The increase would make cigarettes sold in Oklahoma more heavily taxed than anywhere else in the region and give the state the 12th-highest tobacco tax in the country. 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.
Also, the marked difference between Oklahoma’s tax and neighboring state taxes is likely to increase black-market sales of tobacco products. The Mackinac Center for Public Policy estimates black-market sales would capture 19.2 percent of the cigarette market if the hike is passed into law.
Although reducing smoking rates may be a noble goal, raising tobacco taxes rarely works as intended and frequently has many negative effects, including incentivizing residents to buy untaxed or lower-taxed tobacco elsewhere, thus harming local retailers. Cigarette taxes are highly regressive, unduly burdening moderate- and lower-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.
While tax increases on cigarettes do sometimes result in increased revenue in the short term, they are an unreliable and shrinking tax-revenue stream, so using them to fill holes in Oklahoma’s budget would 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.
The proposed gas tax hike shares many of the same problems as the tobacco tax hike. While supporters of a gas tax hike argue Oklahoma’s low rate leaves room for an increase, gas taxes at any level have become increasingly ineffective at generating tax revenue. There is growing evidence gasoline taxes are ineffective, regressive taxes that have increasingly left transportation systems shortchanged. Increasing Oklahoma’s gas tax by 6 cents would place its ahead of nearly all its regional neighbors, only Kansas would be higher. The high cost of gas is likely to move drivers across state border to fill their tanks.
Increasing the tax on the sale of motor fuel increases the cost of transportation, which harms all consumers, including many low-income people. The fact gas taxes have not increased over time does not mean they need to be increased now. Increased taxes on gasoline create an unnecessary burden on all Oklahomans, but especially on the state’s poorest people. Gas taxes are a regressive tax hike that Wendell Cox and Ronald Utt argue have a stronger effect on lower- and middle-income families than they do on the wealthy. The tax could also cause low-income families to drive less, which could reduce employment options.
Increasing taxes on tobacco and gasoline 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 spending and ways to make government more efficient.
The following articles provide more information about gas and tobacco 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.
Cigarette Taxes and Cigarette Smuggling by State
https://taxfoundation.org/cigarette-taxes-and-cigarette-smuggling-state
In this article published by the Tax Foundation, Joseph Henchman and Scott Drenkard examine tobacco taxes and the effects higher taxes have on cigarette smuggling. They found large differentials in cigarette taxes across states create incentives for black-market sales.
Designing Alternatives to State Motor Fuel Taxes
https://heartland.org/publications-resources/publications/designing-alternatives-to-state–motor-fuel-taxes?source=policybot
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become available. They also report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation improvements.
State Motor Fuel Taxes: January 2017
http://www.api.org/oil-and-natural-gas/consumer-information/motor-fuel-taxes
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).
Reconsider the Gas Tax: Paying for What You Get
https://heartland.org/publications-resources/publications/reconsider-the-gas-tax-paying-for-what-you-get?source=policybot
Jeffrey Brown of the University of California–Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, Brown argues, is to restore the connection in the public’s mind between the tax and the roads it should provide.
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.
Cigarette Taxes and Smoking
https://heartland.org/publications-resources/publications/cigarette-taxes-and-smoking
In this study from the Cato Institute, Kevin Callison and Robert Kaestner suggest future cigarette-tax increases will offer relatively few public health benefits, and they say the justification given for future taxes should be based on the public finance aspects of cigarette taxes, such as the regressiveness, volatility, or the rate of revenue growth associated with those taxes.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/news-opinion/news/five-things-to-consider-before-raising-tobacco-taxes-a-review-of-the-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.”
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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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 John Nothdurft, Heartland’s director of government relations, 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.
