Tobacco taxes have increased substantially. The tobacco tax is a “sin tax,” a selective sales tax on items whose use society frowns upon. As tobacco use has become less socially acceptable, Oklahoma and most other governments have found tobacco to be one of the few taxes that voters are willing to increase. By passing SQ 713 in 2004, voters quadrupled the tobacco tax, while eliminating the sales tax on tobacco purchases. This dramatic increase helps explain why tax collections have increased at an annual average rate of 9 percent over the last fifteen years. It now produces two percent of all tax revenue in Oklahoma.
Since Oklahoma’s increase, many other states have increased tobacco taxes and Oklahoma’s rate is now 50 cents under the national median, according to the Federation of Tax Administrators. In 2016, the Oklahoma Legislature considered proposals to raise the cigarette tax an additional $1.50 per pack; a bill to do so came to a vote in the House of Representatives but fell short of achieving the three-quarters majority needed to approve a tax increase.
The advantages of a tobacco tax include:
- It is avoidable by choosing not to smoke;
- There is some tie between use of tobacco and health care costs that governments face; and
- The tax can discourage smoking.
The major disadvantages of a tobacco tax include:
- It can be a burden on low-income taxpayers;
- The relatively high rates can encourage avoiding the tax by purchasing from tribes or out of state; and
- Revenue can fall in the future as more people give up tobacco use.
Oklahoma has had a tobacco tax since 1917. Rates have been raised several times and now stand at $1.03 per pack. Other tobacco products are taxed at separate rates. Starting in 2004, the general sales tax did not apply to tobacco products.
Tobacco taxes are complicated in Oklahoma by the presence of Native American tribes with unique tax rules. Taxes on tribal cigarette sales vary depending on the terms of compacts negotiated with the state. Under compacts in place in the mid-2000s, tribal tobacco taxes ranged from 5.75 to 103 cents per pack, depending on the tribe’s compact with the state and proximity to border states. Under new compacts negotiated since 2012, the tax on most tribal tobacco sales is $1.03 per package of cigarettes. The tribes are rebated a portion of the tax they collect. For more information, see this OK Policy blog post.
Tobacco taxes are collected only by the state. The tax is paid by wholesalers to the Oklahoma Tax Commission. The tax is included in the price consumers pay for the product. The first 23 cents tax on each pack of cigarettes goes to the state’s sinking fund to repay bonds. Most of the 80-cent increase adopted in 2004 is divided among various health uses. Seventeen percent of the increase goes to the state general revenue fund and 14 percent goes to counties and cities to make up for revenue from sales taxes on cigarettes, which ended in 2004.