Tobacco tax revenue declined last year. Here’s why that’s mostly good news.

In 2004, Oklahoma voters approved SQ 713, which increased the excise tax on cigarettes and other tobacco products while eliminating the state and local sales tax on these products. The new revenues from the increased taxes were dedicated to a variety of health-related purposes, including the Insure Oklahoma premium assistance program, a comprehensive cancer center, trauma care, tobacco cessation, and others.

Tobacco tax revenues allocated for health care under SQ 713 rose from $107.1 million in FY 2006, when the new taxes took full effect, to $145.6 million in FY 2012. However, these revenues fell slightly in FY 2013 and then dropped dramatically by $18.3 million (13 percent) in the fiscal year that just ended. The two largest recipients of tobacco tax funds – Oklahoma Health Care Authority general operations and the Insure Oklahoma fund – saw their funding decrease by $7.3 million and $6.0 million respectively in FY 2014. The shortfall contributed to the Health Care Authority having to enact larger cuts to provider payments and services.

TobaccoTaxRev06-14What accounts for the drop in tobacco tax collections? The answer is complicated.

Tobacco sales are gradually declining

Since passage of SQ 713, tobacco sales have declined significantly. Over the past decade, the number of cigarette stamps in the state has fallen by 32.2 percent, from $356.8 million in FY 2004 to $241.8 million in FY 2014. Just in the past two years, there has been a 9.7 percent decline in the sale of cigarettes. There is no way to tell to what extent the most recent drop may be due to the growth of the e-cigarette trade in Oklahoma. We do know that smoking prevalence has declined somewhat in Oklahoma.

cigarettestamps04-14However, the decline in tobacco tax revenue (-13 percent) this past year far exceeded the decline in sales (-6 percent).  Something else has been going on.

The state collected less revenue from tribal retailers

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 tribes, with a portion of the revenue allocated back to the tribes to go in trust. However, 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.

Beginning in 2008, the state renegotiated compacts with a number of tribes that had been assessing tax at the lowest rates, as we discussed here.  Under these compacts, the tax rate rose to $0.515 per pack. Once tribes no longer enjoyed a large competitive tax advantage, tribal sales declined substantially, yet revenues from tribal sales went up thanks to the higher rate. The effect was great enough to allow total state tobacco collections to rise for several years even as total sales were declining.

This year, the situation changed. The compacts for many tribes were set to expire at the end of June 2013. Between July and October last year, the state, under the leadership of the Governor’s office, negotiated new compacts with almost every tribe (the compacts can all be viewed here). These compacts created a new “unity rate” tax of $1.03 per pack, the same as for non-tribal retailers. The tax is to be divided between the state and the tribe according to formulas laid out in the compact. For some tribes, such as the Quapaw Tribe of Oklahoma, Ottawa Tribe, Miami Tribe and Wyandotte Tribe, the state receives just 6 percent of the revenue initially, increasing annually to 50 percent in 2023. For other tribes, including the Comanche Nation, Cherokee Nation, Chickasha Nation, Osage Nation and Seminole Nation, the state receives 30 percent of the revenue initially, rising to 50 percent by 2017 or 2018 (The Muskogee-Creek Tribe remains under a separate compact signed in 2012; its tax remains at $0.515 per pack). According to the Governor’s office, the new compacts are less prescriptive in how tribes allocate their tobacco tax dollars and provide less state entanglement in Native affairs.

Most of the new tribal compacts took effect in November 2013. For FY 2014, 57 percent of tribal sales were under the new $1.03 per pack unity rate. As can be seen from the figure below, total tribal tax revenue shot up from $54.7 million in FY 2013 to $73.7 million in FY 2014. However, with only 6 percent to 30 percent of the tribal tax initially being allocated to the state in the initial year of the new compact, the state’s share of tribal tax revenues actually decreased by $12.9 million in FY 2014.

tribaltobaccorevenuesFor most tribes, the initial state/tribal revenue split remains in effect through the end of 2015. Beginning in 2016 and for the next seven years, the state will receive a gradually increasing share of tribal tobacco taxes.

Although the new compacts produced an immediate drop in state tobacco tax revenues for health care programs, they have several advantages. They have created a level playing field between most of the tribes and between tribal and non-tribal retailers. They generate tens of millions of new dollars for the tribes to dedicate to health care and other services for their citizens. The higher initial payments for tribes provide them an opportunity to diversify their tax base and invest in economic development that will promote long-term growth. That counts as a win for all Oklahomans.

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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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