An embattled cigarette tax proposed as a health care funding measure would damage convenience store businesses statewide, said an industry spokesman — but at least one major Oklahoma Indian tribe disagrees.
Although the cigarette proposal was considered dead as the 2016 session drew to a close this week, state lawmakers struggled to plug a $1.3 billion-dollar hole in the state’s budget in the midst of dire predictions for health and education services. However, according to the AP, House budget chairman Earl Sears claims the shortfall will be made up by changes to the tax code, eliminating some tax credits and bond packages, and would protect health and education services.
Many chafed at the defeat of the cigarette tax bill, which purportedly would bring in $180 million through a $1.50 sales tax increase on a pack of cigarettes. The bill was defeated when House Democrats backed out of the plan, saying Republicans had dropped an agreement to expand Insure Oklahoma with federal dollars.
Others opposed the tax for business reasons. Mike Thornbrugh, manager of public and government affairs for the QuikTrip Corporation, said the increase would drive business to tribal smoke shops, which ultimately get to keep more than half of the taxes collected.
Oklahoma currently pays about 70 percent of taxes collected through tribal smoke shop sales back to the tribes, through compacts governing state tobacco sales. Thornbrugh said those payments effectively subsidize tribal tobacco sales.
The agreements were negotiated by Gov. Mary Fallin’s office through last year. While amounts vary from tribe to tribe, the average amount of taxes collected by all retailers is around $10 per carton, which contain ten packs of cigarettes. The proposed tax would increase taxes by $1.50 a pack, to about $25 per carton.
At such prices, Thornbrugh said, consumers would change their habits. Many would quit, he said, but many more would find cheaper cigarettes.
“There are an awful lot of people who will go across the street (to a tribal shop) and buy their cigarettes. We will lose sales, the state will lose sales, and they will never get the money they wanted.”
Why will the tribal smokes be so much cheaper? Because they will receive up to $13 per carton of the tax money back in the form of rebates, he said.
“The tribes wouldn’t be doing anything wrong. They can,” Thornbrugh said. “When you’re going to pay someone thirteen dollars a carton, they can sell at cost. If they choose to do so, they would become the preferred cigarette retailer for the state of Oklahoma. If that happens, the state is not going to get the money they say, based on consumer habit.”
The state’s compact with the Cherokee Nation spells out the payments from the state until December. The percentage returned to the tribe will begin dropping, leveling off to 50 percent of the total taxes being returned by 2018.
Kimberly Teehee, the Cherokee Nation’s director of Government Relations, said Thornbrugh’s claims are off the mark. She said large corporations such as QuikTrip deal in such volume that the tribal smoke sales will have little effect on the company’s bottom line.
“Our individual sellers, they are individual mom and pop smoke shops, licensed through the Cherokee Nation,” TeeHee said. “If you consider our little individual smoke shops versus the QuikTrips of the world, if you consider the volume of product they purchase, it far outweighs what our little individual smoke shops would ever receive in terms of discounts. I don’t believe there is an advantage that has been characterized with regard to our compact.”
“Compacts” are agreements between the state and individual tribes, which are sovereign governments within Oklahoma. They outline terms regarding casinos, license plates, hunting and fishing licensing and rights, as well as what taxes may be levied on tobacco sold at tribal smoke shops.
An initial agreement, passed in 2004, quickly fell apart as many smoke shops worked around the tax collections by acting as wholesalers. The most recent agreements, signed in 2013, unified the tax to $1.03 per pack across all tribal agreements.
In the fiscal year 2015, tribes charged about $84 million and were rebated back about $58 million from the state, according to tax commission records.
Money retained by the state, both from tribal and non-tribal tobacco sales, is used to fund many state health care expenditures, as well as 16.8 percent going to the general revenue fund.
TeeHee said the tobacco compacts remain important to the Cherokee Nation. She said tribal officials watched the budget debate, and the tobacco tax proposal, very closely.
“We are a diversified economy. I don’t know why wouldn’t continue to pursue every opportunity that’s available to us,” she said. “The main thing I guess is that our compact not be impacted at all. We don’t believe the legislature can unilaterally alter our compact.”
Secretary of State Chris Benge said the proposed tax, if it were enacted, would not change the compacts with the tribes in any way. He said the agreements, signed by Fallin approximately a year ago, reformed the process by collecting taxes at the wholesale level rather than on an unenforceable shop-by-shop basis.
Oversight in the old system was difficult. While some tribes were required to collect almost a dollar a pack, others collected as little as six cents.
“There was some cheating going on. It was overly complicated,” Benge said. “They moved the collection point to the wholesale level. You could manage the collections better.”
Benge said that by collecting the taxes up front at an earlier level, the state ensures the full take before the cut is given back to the tribes. Benge said the steep price cuts described by Thornbrugh have not been observed so far by his office.
“I’ve never seen or heard of that occurring, or seen any evidence to make that kind of accusation,” Benge said.
However, former Fallin chief legal counsel Steve Mullins said tribes would be able to subsidize smoke shops with their tax rebates if they chose to do so.
The proposed $1.50 tax appears defeated for now. Because of changes enacted in recent years, tax increases now require a supermajority to pass through the legislature, a difficult hurdle to overcome. This time, the Republican-authored measure faced strong opposition from Democrats, led by Minority Leader Scott Inman, D-Del City, after Republicans withdrew an agreement to expand Insure Oklahoma with federal dollars.
Inman said the cigarette tax is at best a short-term, weak attempt to address a massive deficit created by the governor when she refused to accept the Medicaid expansion. He said Oklahoma’s federal tax dollars are paying for Medicaid expansion in other states, and Oklahoma’s refusal creates a billion-dollar hole that the proposed cigarette tax won’t fill.
“It is a regressive tax. It will diminish over time. Fewer dollars will come in as people fall off of it. We don’t think it’s the right way to pay for it. But we were willing to do it and accept the governor’s health care plan. Then they backed out on it. They said they just wanted the revenue. That’s why we’re in this mess. A one-time Band-Aid of $180 million does not solve uncompensated care in this state,” he said.
TeeHee said the tribes also support strong government health-care funding. She said the tribe operates health services for poor and elderly, with as many as half of the recipients being non-tribal members.
“The Cherokee nation administers many Medicaid funded programs, like the PACE program for elderly home health, nursing programs. If Medicaid cuts are made, they impact us too,” she said. “It is in the tribe’s vested interest that Medicaid is funded at an adequate level.”