State Budgets

Proposed Tax Increases Threaten to Stunt Oklahoma Recovery

The Oklahoma legislature is considering tax increases on cigarettes, beer, and fuel taxes along with doubling the severance tax on new oil and natural gas wells.

The Oklahoma legislature is considering tax increases on cigarettes, beer, and fuel, along with doubling the severance tax on new oil and natural gas wells. The estimated $455 million in annual revenue from this revenue grab will likely be as large as a percentage of state GDP than any other tax increase in any other state this year. This weighty burden threatens to erode Oklahoma’s competitiveness even as the state struggles to recover from the regional recession.

The cigarette tax increase would force individual workers to pay hundreds of dollars more annually in taxes. That is $273 for someone smoking half a pack a day. Doubling the cigarette tax from $1.03 per pack to $2.53 per pack would generate more than $243 million annually in new taxes. The tax per pack would soar from 36th in the nation to 12th, joining the ranks of high-tax states such as California, Connecticut, New York and Rhode Island. In addition, this proposed legislation increases taxes on “little cigars” and smokeless tobacco products. The tax in Oklahoma will be a whopping 34 percent to 93 percent higher than these respective neighbors. An Oklahoma taxpayer who smokes half a pack per day would save $430 annually by purchasing cigarettes in Missouri and $308 annually by purchasing cigarettes in Colorado.

Small businesses reliant on revenue from cigarette sales would feel the most damage from this specific tax. Nationally, cigarettes account for 31.3 percent of in-store sales nationwide, according to the National Association of Convenience Stores. Spurring Oklahoma taxpayers to purchase cigarettes across state lines or on the internet in response to a cigarette excise tax increase jeopardizes the economic livelihood of Oklahoma retailers.

An increase in the motor vehicle fuel tax will hurt workers and businesses. A family with two vehicles filling up once each week could forfeit an additional $100 per year, mostly in part to the six cents per gallon tax increase. Oklahoma already spends more funds per state on state-controlled highway mile than four of its neighboring six states. Of those four lower spending states, three rank higher in overall highway performance. Enhanced efficiency in transportation spending should be sought before resorting to additional fuel taxes.

In addition to these taxes, legislators are proposing a four percent gross productive tax on new oil and natural gas wells. Yet another blow to the Oklahoma energy sector is the doubling of the current severance tax on new oil wells. A tax on new wells will be a disincentive for exploration, extraction and development dollars. Other states with energy reserves compete for investment allocations. Many of these locations such as Colorado and Texas are close by. Oklahoma’s current general severance tax of seven percent on oil and natural gas is higher than Colorado’s one percent-five percent rate and exceeds Texas 4.6 percent rate on oil extraction. Loss of this economic activity harms landowners, energy producers and workers.

Spending excess, not a lack of revenue, has created this budget impasse. The total Oklahoma state government expenses reached a record $17.96 billion in  Fiscal Year (FY)2016 and likely hit another record for FY2017, a feat almost certain to be repeated in FY2018. The budget crises could be addressed with spending reforms such as those contained in the ALEC State Budget Reform Toolkit rather than through increased taxes. According to the Kaiser Family Foundation, the state of Oklahoma spent more per capita in the fiscal year 2015 than 21 other states. In fact, for every $1 per capita spent by Texas, Oklahoma spent $1.31.

Tax increases negatively impact Oklahoma’s ability to compete economically with other states. Oklahoma now ranks 6th in economic performance national but just 16th in economic outlook, according to Rich States, Poor States ALEC-Laffer Economic Competitiveness Index. These tax increases could erode outlook further to 20th or below. With effects of the localized recession from the ending oil boom still being felt, Oklahoma needs economic growth. Levying additional taxes on workers and businesses hampers this prosperity.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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