Research & Commentary: Unreliable Tax Hikes Will Not Save Oklahoma’s Budget

Published November 3, 2017

In an attempt to cover an $878 million budget shortfall, legislators in Oklahoma are now considering three major tax hike proposals. The first tax change would be an increase in the state’s basic gross production tax rate, also known as a “severance tax.” The legislature is also considering a plan that would increase the tax on a pack of cigarettes by $1.50 per pack and the taxes on gasoline and diesel fuel by 6 cents.

Severance taxes are levied when landowners sell nonrenewable resources – such as oil, natural gas, iron, and copper – for extraction. These taxes are typically assessed on the gross value of the resource and are paid by the party extracting the resource. Oklahoma’s severance tax has been set at 7 percent since the 1970s, but in the early 1990s, the state established a discounted special tax rate for certain types of extraction methods, including horizontal drilling, for the first 36 months of production. The present proposal would increase the discounted rate on new horizontal oil and gas wells from 2 percent to 4 percent.

One of the most significant issues with severance taxes is they are unreliable; changes in the energy market mean the revenue generated by the tax is highly unpredictable, making budgeting difficult. According to The Oklahoman, Oklahoma’s gross production tax collections hit their lowest level in two decades in fiscal year 2016, when the state brought in just $356 million in gross production tax revenue, down from $843.7 million in 2014.

In addition to the severance tax increase, Oklahoma is also proposing a $340 million increase to the state’s tobacco and gas taxes. 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 the most heavily taxed 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.

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. 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.

Increasing the tax on the sale of motor fuel increases the cost of transportation, which harms all consumers, including many low-income people. 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. 

In an editorial in the Journal Record, Jonathan Small, president of the Oklahoma Council of Public Affairs, argues the cause of Oklahoma’s budget problems is not a lack of tax revenue, but excessive spending. “Even before the special session, we were on track to spend $17.9 billion this year. State spending has risen by $3.83 billion in the past decade,” Small said.

Small concludes the state could start cutting costs by consolidating the glut of duplicative programs and agencies that drain Oklahoma’s budget. “A state that continues to try to fund more than 500 school districts, nearly 50 college campuses, at least four separate law enforcement agencies, two distinct road agencies, and dozens and dozens of various licensing and regulatory boards and commissions simply has no business asking the hardworking, hard-pressed taxpayers to pony up more dollars to be wasted and frittered away,” Small wrote.

The state should not rely on inefficient, unreliable, and regressive taxes. Instead, it should focus on keeping taxes low and cutting spending.

The following documents examine tobacco, gasoline, and severance taxes in greater detail.

10 Reasons Why a 145 Percent ($1.50 per Pack) Increase in the Cigarette Tax Is Bad Policy
Jonathan Small, president of the Oklahoma Council of Public Affairs, outlines 10 reasons why Oklahoma policymakers should oppose a proposed $1.50-per-pack cigarette tax increase.

Oklahoma State Government Spending Is Higher Than Ever
Dave Bond and Curtis Shelton of the Oklahoma Council of Public Affairs argue the claim by tax hike advocates that available funding has been slashed to the bone for important public services is not true. Bond and Shelton also say Oklahoma government spending is higher than ever.

State Motor Fuel Taxes: October 2017
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

The Political Attraction of Severance Taxes
In response to increasing interest in severance taxes in Pennsylvania and Ohio, Heartland Institute Research Fellow Isaac Orr explains what severance taxes are and why governments implement them. “More often, the taxes are an estimate of how much money government officials can take from one group, typically job-creators that harvest natural resources, without completely removing their incentives to do business in the state,” Orr wrote.

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.

Paying at the Pump: Gasoline Taxes in 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. 

Reconsider the Gas Tax: Paying for What You Get
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.

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.


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.

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