Oklahoma Supreme Court 
2017 Cigarette Tax Unconstitutional 

The Oklahoma Supreme Court has invalidated the levy on cigarettes enacted by the Legislature in the last session.  It holds that the new law is a revenue raising measure and creates a tax in the strict sense of the word.  This two-part test defines a "revenue bill".  The Court's ruling today merely reiterates the distinction between a fee and a tax that has been applied to municipalities.  Red Slipper Club, Inc. v. City of Oklahoma City, 1979 OK 118, 559 P.2d 406.
The Court ruled that a mere statement that a law has a regulatory purpose is not controlling.  Instead, the Court looks at the actual regulatory program established by the legislature to determine whether the primary purpose of the bill is to regulate activity or to raise revenue. First, there must be an actual regulation and enforcement program. Second, the revenue generated by a fee must be "incidental" to the program.  In other words, there must be a nexus between the costs of the regulatory program and the revenue received by the fee.
The Court found that the new law did not establish a substantive regulation aimed at the stated purpose of reducing smoking.  Also, the amount of expected cigarette sale revenue ($225 million) far exceeds the costs of the cigarette cessation activity required by the bill.  The Court rejected the attempted justification that the new revenues would fund the state health agencies.  It held that the purpose of a fee is to pay for a specific service provided by government to the payor of the fee. This purpose cannot be extended to providing for the general expense of the governmental agency.
The Opinion on page 10, paragraph 15, describes what happens when the State collects less revenue than anticipated.  All appropriations in excess of actual collections are voided by the failure.  The Legislature can attempt to cure the failure by calling a special session to raise revenue or tap the Rainy Day Fund.  If these steps are not taken, all appropriations are automatically reduced on a pro rata basis to account for the deficiency and to bring the budget into balance. 
A more comprehensive summary of the case will appear in our next Municipal Insight.

© 2017 Oklahoma Municipal League 
About Oklahoma Municipal League
The Mission of the OML is to provide services and programs required by municipal officials to assist them in better serving their citizens, and to act as the representative of Oklahoma municipalities in interactions requiring a united voice. Since 1913, the League has served as the individual and collective voice of local officials on the state and national level.
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