Back to work for lawmakers? It depends on the Supreme Court’s definition of a revenue bill

NOTE: This post was written prior to the Supreme Court’s decision striking down the smoking cessation fee included in SB 845. Click here for the Court’s decision. Here is the statement from the Save Our State coalition, of which OK Policy is a member.

The fate of this year’s state budget is in the hands of Oklahoma’s nine Supreme Court justices. This week, the Court heard oral arguments in challenges to four bills enacted by the Legislature earlier this year. The bills, which were intended to generate a combined $329 million needed to balance the FY 2018 budget, were passed by simple majorities in the final days of the legislative session after efforts to garner bipartisan, supermajority support for tax increases broke down. If the Court strikes down one or both of the two largest revenue measures, it would create a huge hole in a state budget that is already massively underfunded and almost certainly force Governor Fallin to call legislators back into special session.

What’s Under Challenge

The challenges come in three separate lawsuits that claim that the Legislature passed bills in violation of Article V, Section 33 of the Oklahoma Constitution. This is the provision that requires that all revenue bills must: 1) originate in the House of Representatives; 2) be approved prior to the final five days of session, and 3) receive approval by three-quarters of the members of both legislative chambers or be referred to a vote of the people. The first two requirements are part of the original state Constitution, while the third was added by State Question 640 in 1992.

The four bills in question are:

  • HB 2433 partially removes the sales tax exemption for motor vehicles, so that a 1.25 percent sales tax is applied to motor vehicle purchases. HB 2433, which took effect July 1st, is expected to generate $110.9 million for the FY 2018 budget. HB 2433 was challenged in separate lawsuits filed by the Oklahoma Automobile Association and by Tulsa Attorney and gubernatorial candidate Gary Richardson;
  • SB 845, the “Smoking Cessation and Prevention Act of 2017”, assesses a $1.50 per-cigarette-package smoking cessation fee. The fee, which is scheduled to take effect on August 24th, is expected to generate $257.8 million in FY 2019, of which $214.0 million was appropriated for the FY 2018 budget. HB 2433 was challenged by tobacco manufacturers, wholesalers, and distributors;
  • HB 2348  decouples Oklahoma’s standard deduction from the federal standard deduction. Since the federal standard deduction is adjusted every year for inflation, this measure was projected to boost state revenues by $4.4 million in FY 2018 and $14 million in FY 2019;
  • HB 1449 assesses a $100 fee on electric vehicles and a $30 fee on hybrid vehicles. It is expected to generate $422,000 in FY 2018 and $1.0 million in FY 2019. HB 1449 and HB 2348 are part of the challenges filed by Gary Richardson; the Sierra Club of Oklahoma has also announced its intention to challenge HB 1449.

None of the parties dispute that these bills all failed to meet the requirements for a revenue bill under Article V, Section 33. Rather, the question the Court must decide in all three cases is whether the bills are actually revenue bills under the state Constitution.

The Two-Part Revenue Bill Test

The Supreme Court’s most direct definition of the term “revenue bill” was laid out in a 1956 case, Leveridge v. Oklahoma Tax Commission:

‘Revenue Bills’ are those laws whose principal object is the raising of revenue and which levy taxes in the strict sense of the word, and said phrase does not cover laws under which revenues may incidentally arise.

Leveridge’s two-part test — that a bill must levy a tax in the strict sense and that its primary purpose must be to raise revenue — has formed the basis of dozens of Court decisions. As Mark Ramsey showed in a 1992 Oklahoma Bar Journal article, Oklahoma Courts have generally adopted a narrow interpretation of what constitutes a revenue bill, upholding a whole range of legislation in which revenue increases were determined to be incidental to the bill’s primary purpose or which did not levy a tax in the strict sense. The Court has continued to rely on the Leveridge definition of revenue bills since passage of State Question 640.

From the Supreme Court’s oral arguments, it appears that its decision in the challenge to HB 2433 and HB 2348 will hinge on whether it deems eliminating or reducing a tax exemption to be levying a tax in the strict sense. Several justices referred repeatedly to the Leveridge case, when the Court struck down a challenge to a bill that removed an exemption from the motor vehicle excise tax for certain new cars, as as a precedent for excluding tax exemptions from the definition of a revenue bill.  Justice Raiff described tax exemptions as existing by “legislative grace’, which the Legislature had the power to bestow and take away.

The challenge to SB 845 is likely to rest on the second prong of the Leveridge test: whether the primary purpose of the bill is to raise revenue. The State argued that the bill has the primary purpose of regulating tobacco and promoting public health.   Referencing the public health research, Oklahoma’s Solicitor General Mithun Mansinghani contended that raising the price of cigarettes is “the single best way to decrease the single biggest cause of preventable illness,” and that SB 845 would save 18,000 lives. He argued that the bill was rooted in the state’s regulatory and policing powers, not its taxing powers. The plaintiffs countered that since the budget depends on the $214 million to be generated from the cigarette fee increase, revenue is clearly its primary purpose. They also note that until the final days of session, the Legislature had tried and failed repeatedly to gain 3/4th approval for an outright tax increase before repackaging the proposal as a fee.

In their questions of the Solicitor General, the justices seemed concerned that upholding SB 845 would allow any tax increase that could be tied to a public purpose to escape the definition of a revenue bill — not just any sin tax increase that caused a decline in unwanted behaviors but also a fuel tax increase dedicated for road repair or even an income tax hike that could arguably address income inequality. The Solicitor General tried to differentiate SB 845 from those other examples, but also reminded the Court that in cases where there are two possible interpretations of a law, “the construction must be applied which renders them constitutional” — or, in other words, a tie goes to the Legislature.

What Happens Next

We should always be wary of making predictions about how a Court may rule based on questions asked in oral arguments; however, to me and to others I spoke with after Tuesday’s hearing, it appeared that the justices were leaning towards striking down the tobacco bill while upholding the motor vehicle and standard deduction bills. In the challenge to the registration fee for electric and hybrid vehicles, justices questioned whether plaintiff Gary Richardson even had standing to file the suit. Either way, the amount of revenue is small enough that if HB 1449 is struck down, it would have a negligible impact on the budget. 

Should SB 845 be invalidated, it would nullify the $214 million that the Legislature appropriated based on passage of the smoking cessation fee, all of which was allocated to just three health-related agencies:  the Department of Human Services ($69 million), Oklahoma Health Care Authority ($70 million), and Department of Mental Health and Substance Abuse Services ($75 million). None of these agencies could implement cuts of this magnitude without inflicting terrible damage to frail seniors, vulnerable children, very sick patients, and health care providers. The only way to avoid that damage would be for lawmakers to go into special session and find another way to make up for the lost revenues. As Governor Fallin said to lawmakers, perhaps anticipating an unfavorable ruling in the tobacco challenge: “You’re on notice. You may have to return back to work.”

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Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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