Fewer Exceptions – Tobacco tax revenues rise while sales fall

Five years after voters approved a State Question increasing the tax on tobacco, there is good news to report: over the course of the recently completed fiscal year (FY ’09), tobacco sales in Oklahoma declined by 7.2 percent over the prior year, while revenues from those sales increased 8.9 percent. In essence, it seems that fewer Oklahomans were smoking but the state was still to able to collect increased revenues. Over the next few years, however, if smoking continues to decline, we are likely to see less  funds available for important health programs funded with tobacco revenues.

Last year, though, less cigarette sales yielded more revenue. The explanation for this apparent trick lies with tribal tobacco tax compacts.  Back when Oklahoma voters approved SQ 713, which raised the tobacco tax by $0.80 per pack, the state negotiated new compacts that increased taxes on sales by compacting tribes. The problem was that only some tribes were subject to the highest tax rate under the new compact ($0.86 per pack). Some tribes remained subject to the original tribal compact rate of $0.26 per pack, while others, based on their proximity to non-compacting tribes, were granted an “exception rate” of just $0.06 per pack.  As the new law took effect, there was a massive shift in sales to cigarettes sold under the exception rate: in the first two years, a full two-thirds of all tribal cigarette sales were made under the  exception rate.  As a result, revenues from the tobacco tax increase fell far short of the initial projections of increased revenues dedicated to various health care projects and programs (for more details, see OK Policy’s fact sheet).

The  Oklahoma Tax Commission has worked to halt the unauthorized  sale of cigarettes under the exception rate, with some apparent success.  But the big change that occurred last year was that original tax compacts expired for three tribes – the Comanche, Kaw and Otoe-Missouri.  Under new compacts that took effect July 1, 2008, the tax rate for those three tribes went from $0.26 to $0.56 cents under a new “unity rate”. Not only did revenues increase for sales made by those tribes, but once those tribes were no longer under their original compacts, several tribes that had been legally entitled to sell cigarettes under the exception rate because of their proximity to those three tribes lost their proximity exception and also became subject to the new  unity rate.

The result is that  cigarette sales under the exception rate plummeted by 62 percent in FY ’09. The share of total tribal sales under the exception rate fell from 47 percent in FY ’08 to just 21 percent in FY ’09. The new unity rate accounted for 20 percent of tribal sales. Not only was there a shift within tribal sales from the low exception rate to higher rates, but tribal tobacco sales declined overall by 17 percent. At the same time, sales by non-tribal retailers remained essentially unchanged between FY ’08 and FY ’09.

The result of the shift in tribal sales was that tobacco tax revenues from tribal retailers rose by $11.7 million in FY ’09.  Overall,  the programs being funded by increased tobacco taxes approved by SQ 713 received $135.0 million in FY ’09. This amount still falls  short of the initial $150 million projected as new revenue from SQ 713, but is up 26 percent compared to the amount generated in the first full year under the new law (click here to see our spreadsheet showing annual revenue collections).

This revenue growth means increased funding for health care programs and projects. Of the total $135.0 million raised by increased tobacco tax revenues in FY ’09, $95.2 million was allocated to the Oklahoma Health Care Authority for Medicaid provider payments, services for developmentally disabled children and the Insure Oklahoma premium assistance program. The remaining $39.8 was used to fund trauma care, the OU Cancer Center, telemedicine, tobacco cessation efforts, substance abuse services, breast and cervical cancer treatment, and the emergency response system.  Precise numbers are available from our spreadsheet.

Amidst the good news, however, there is also a cautionary message. We are now close to the point where tribal tobacco tax revenues are where they should be. We will soon no longer to be able to play the trick of generating greater revenues from declining sales. If tobacco sales continue to fall as the smoking rate declines, the revenues dedicated to ongoing health care programs and services will decline as well, increasing the fiscal gap between the public services we are committed to supporting and the revenues we generate to pay for them.