Revenue from voter-approved "sin taxes" still growing

In 2004, Oklahoma voters approved a series of measures intended to raise new revenues for education and health care through a state lottery (SQ 705 and 706), gaming compacts (SQ 712), and increased tobacco taxes (SQ 713).  OK Policy has now released a set of newly updated fact sheets that explains how these revenue sources operate, how much revenue each generates, and where the dollars are allocated. You can access all three 1-page fact sheets as a single document, or you can download the PDF separately for the lottery, gaming and tobacco.

During the most recently completed budget year, FY ’11, Oklahoma collected $346.2 million from these three revenue sources. This is an increase of $10.8 million, or 3.2 percent, from FY ’10. While the rate of revenue growth for the three “sin taxes” has clearly slowed compared to the first years following their enactment, their steady and uninterrupted growth over recent years stands in marked contrast to most other revenue sources, which were strongly affected by the economic downturn of 2008-09.  General sales tax revenue, for example, declined 8 percent in FY ’10, before recovering in FY ’11.

Looking at the new revenue sources separately yields the following key findings:

• Since 2005, lottery revenues have remained remarkably consistent, coming in every year between $69 million and $72 million, regardless of the ups and downs of the economy, the addition of new lottery games, and growing competition from casinos and the new state lottery in Arkansas. Net proceeds from lottery sales were $69.4 million in FY ’11, a slight decrease of $0.6 million from FY ’10
• Gaming revenues continued to grow in FY ’11, reaching $139.4 million, an increase of $7.2 million, or 5.5 percent from FY ’10. Of total gaming revenues, 87.7 percent ($122.2 million) came from tribal gaming and 12.3 percent (17.2 million) from gaming terminals at racetracks that were also authorized by SQ 712.  However, the growth in tribal gaming revenues has slowed noticeably in the past two years, which may reflect the state gaming market approaching saturation. About half of the 31 tribes that compact with the state to operate Class III games paid less in gaming fees in FY ’11.
• Tobacco revenues grew in FY ’11 by 3.1 percent to $137.4 million. Of total revenues from the new tobacco taxes approved in 2004, $110.9 million was collected by non-tribal retailers and $26.5 million by tribal retailers. Total tobacco sales increased by 1.3 percent in FY ’11 but sales remain some 25 percent below their levels in FY ’04 prior to the tax increase. The reason tobacco revenues have continued to grow even while sales have remained flat or declined is the success of various measures aimed at curtailing the purchase and resale of cigarettes taxed under a tribal “exception rate” of just 5.75 cents per pack (See our discussion in this blog post).  Tribal sales now account for just 29 percent of all tobacco sales, compared to 46 percent five years ago.

Overall, the promise of these revenue streams to provide additional revenues to help fund education and health care has been fulfilled. However, while the new  “sin tax” revenues have boosted funding for education and health care, these gains have been more than offset by cuts to the personal income tax approved by the Legislature in the mid- and late-2000s. Income tax cuts led to lost revenue of an estimated $775 million, or more than twice the amount of additional revenue from the lottery, gaming, and tobacco. This trade-off of increased “sin taxes” for cuts to the income tax has also placed more of the responsibility of paying for public services on the shoulders of lower-income taxpayers. And as we reach the point where revenue growth from the new revenue streams is slowing, and may soon begin to decline, this is yet another factor contributing to the fiscal gap between the cost of services we are committed to supporting and the revenues we generate to pay for them.