A Deeper Dive into Reasons the Budget Plan Could Be Upended in Court

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In the waning days of this year’s session, legislators passed three bills totaling $476 million in new revenue as they cobbled together just enough money to avoid a special session and avert deep cuts to core government services.

Republican leaders say this was necessary, and done in a way that skirts a constitutional ban against passing bills “for raising revenue” during the session’s final five days.

But the lawmakers’ own previous comments indicate the move represented a shift in what they consider to be revenue-raising bills. The three bills were pushed after it became clear Republicans couldn’t get enough Democratic votes on certain revenue bills that lawmakers from both parties agreed required approval by a three-fourths majority in both chambers.

The shift means GOP lawmakers could find it difficult to fight off any challenges in court, depending on how the Oklahoma Supreme Court interprets language used in court rulings in recent decades.

If the Supreme Court overturns any of the major revenue bills passed in the final week, automatic across-the-board cuts would occur, or lawmakers would be forced into a special session to find new revenue. Cuts approaching the $476 million could be wrenching. But so could getting a supermajority to pass the three bills or alternatives.

The bills included a $1.50 per-pack cigarette fee, a 1.5 percent sales tax on purchases of vehicles and an increase in gross production taxes on a limited number of oil and gas wells.

On Tobacco, a Fee or a Tax?

Oklahoma’s budget hung in the balance for weeks as Democrats and Republicans failed to come up with a deal to raise hundreds of millions in new revenue.

Negotiations went back and forth as Democrats tried to get a deal for a production tax increase in exchange for their 26-member caucus voting for a cigarette tax.

In the session’s second-to-last week, House Speaker Charles McCall, R-Atoka, said they needed to work across the aisle on the cigarette tax and gross production rate. He said the reason was that those must meet the constitutional requirement that revenue bills receive a three-fourths majority, plus must pass before the final week.

“You have to understand that the dynamic in the House is we have to put an agreement that both Republicans and Democrats can agree on for us to move,” he said on May 18. “We can’t just line up and run something through – it requires 76 votes.”

But in the end, that’s exactly what Republicans did.

The House first ran two cigarette tax bills – first as standalone and then as paired with a fuel tax increase and a gross production tax adjustment that required a supermajority vote.

It was only after those proposals failed and negotiations broke down that GOP leaders decided to run the cigarette proposal as a fee instead of a tax so it wouldn’t be considered a “revenue bill.”

The fee bill differs from the tax bills in that it includes policy changes, including banning all tobacco products from state property except at Veteran Affairs centers.

The bill also states an intent is to use the fee money on efforts preventing “Oklahomans from smoking cigarettes and encouraging Oklahomans who already do so to ease cigarette smoking.”

Republican supporters said this makes it a non-revenue bill because the fee will be applied to an anti-smoking-related effort. Nevertheless, at a projected $257 million, it is the biggest single revenue bill passed this year.

The bill states that the bulk of the money will go to a newly created “Health Care Enhancement Fund” to be used for the broader purpose of “enhancing the health of Oklahomans.”

Senate Minority Leader John Sparks, D-Norman, a lawyer, said courts will look at legislative intent to determine if something is a tax or fee. He said judges look beyond only the text of a bill.

“Courts consistently make their analysis based on what the legislation actually accomplishes, not what the legislation states it’s trying to accomplish,” he said. “I think almost certainly this is a tax.”

The Oklahoma Supreme Court has previously overturned laws that were designated as fees.

In 2010, in an unwritten opinion, the state’s high court struck down a bill that assessed a 1 percent fee on employee health plans in order to raise about $78 million a year for the state’s Medicaid program.

But the state Insurance Commission, which filed the lawsuit, argued this was a tax because its purpose was “funding general operations of the state or one of its agencies and was not enacted to fund matters which specifically relate to the business of insurance and the entities the Insurance Commission regulates.”

The court also struck down several court fees that year on the basis that they were going to non-judicial functions. The court said there had to be a connection between the fees and the service it required – in that case, maintenance of the courts.

Questions on Gross Production Rate

Based on GOP lawmakers’ past comments, multiple issues could arise with passage of a gross production rate hike for about 11 percent of the state’s wells.

Wells drilled between 2011 and 2015 are now taxed at 1 percent for the first four years of production and 7 percent afterward. House Bill 2429 increases the 1 percent rate to 4 percent for the rest of each well’s first four years of production.

The bill was not run as a revenue bill, and that puts it at legal risk.

GOP leaders had called an earlier failed bill involving the gross production tax a revenue bill, by saying it needed a three-fourths majority. That bill, which was paired with cigarette and fuel tax increases, would have reduced the number of months allowed for taking a 2 percent discounted rate.

Republican leaders also had regarded as a revenue bill a Democratic proposal to raise gross production rates from 2 percent to 5 percent.

But on HB 2429, GOP lawmakers changed their tune and decided to run the proposals as a simple-majority bill.

Rep. Kevin Wallace, R-Wellston, House Budget vice chairman, said it isn’t a revenue bill because it modifies an incentive, not the original 7 percent rate –even though it will bring in an expected $95 million, most of which goes to the general fund.

That contrasted with what Republicans said when discussing changing the rate on 2 percent wells or the months when the incentive applies.

“When it comes to revenue, we have to have bipartisan support on those issues,” McCall said when asked on May 11 about his thoughts on gross production changes. “And at the same time when there is bipartisan support, that has to be bipartisan support on the level of 67 votes (three-quarters of the House) or higher.”

Some lawmakers also defended their actions on HB 2429 by saying that past changes to gross production incentives survived court challenges.

Oklahoma City attorney and legislative watchdog Jerry Fent filed a lawsuit over a 2014 bill that changed the incentivized tax rates as they were about to expire. But he withdrew the challenge before the Supreme Court could rule.

His case differs from a potential challenge to HB 2429, however. Court documents show then-Attorney General Scott Pruitt and then-Solicitor General Patrick Wyrick hinged much of their defense on the basis that the 2014 law’s primary purpose was not to raise revenue.

“Because the Legislature did not enact (the 2014 legislation) to generate new tax revenue, but rather to offer lower, incentivized tax rates, (the constitution definition of a revenue bill) does apply,” they wrote in a brief. “In other words, even if (the 2014 legislation) levies a tax in the strict sense, its primary purpose is stimulus of the economy through a reduction in tax rates, and not to generate tax revenue.”

Legislative staff scored the 2014 bill as being revenue neutral. This year’s HB 2429 will produce a $95 million increase for next year’s budget, according to the fiscal analysis.

Throughout much of the session, Republicans also argued they couldn’t tax existing wells because the courts would rule it was an unconstitutional retroactive tax.

House Budget Chairwoman Leslie Osborn, R-Mustang, made this case in explaining why Republicans rejected considering Democrats’ proposal to increase the 2 percent gross production rate to 5 percent for wells already drilled, in addition to new wells.
She said it would be unfair to change the tax rate on a company, such as Continental Resources, if the firm had spent money to drill on the “good faith” understanding that it would be taxed at a certain rate.

“We would be going back retroactively and there is legal precedent that that would not be the proper way to do it,” she said. “And if I knew exactly what that tax rate would be and someone came in when the well is not paid off and they pulled the rug from under me, that is my point about retroactive.”

McCall, House Majority Floor Leader Rep. Jon Echols, R-Oklahoma City, and Senate Pro Tempore Mike Schulz, R-Altus, also called it an illegal retroactive tax.

But during the floor debate on the session’s fourth-to-last day, Republicans dodged questions why this wouldn’t be the case with HB 2429, which boosts fees on already-drilled wells.

When asked by Rep. Regina Goodwin, D-Tulsa, to defend McCall’s comments, Wallace responded, “I want to talk about this bill, not what my speaker said.”

Questions on Vehicle Tax Break

On the session’s final day, the Legislature also gave its final approval to HB 2433, which removes the sales tax exemption for vehicle sales and sets a new sales tax rate of 1.5 percent, on top of the existing excise tax. Projected annual revenue is $123 million.

Whether this meets the standard of a revenue bill is unclear. A review of court records by Oklahoma Watch found little, if any, case law and no broad ruling on the subject.

The question divided state officials when Gov. Mary Fallin announced her short-lived proposal to remove the sales tax exemption on dozens of services at the start of the session.

Finance Secretary Preston L. Doerflinger said he didn’t believe a three-fourths vote was needed to broaden sales taxes. Days later, he walked back the remark a bit, saying the issue is up to “legal interpretation” and “we’ll leave that to lawmakers to decide.”

Others said the supermajority law would apply.

“To me, it’s pretty crystal clear – it would need the three-fourths votes,” Alexander Holmes, University of Oklahoma economics professor and former secretary of finance and revenue, said after Fallin unveiled her plan. “If they tried to get it through without that, I can guarantee you it would be challenged in court.”

In February, Schulz added that “philosophically speaking,” he doesn’t see expanding the sales tax base as a tax increase. But he said his interpretation of the constitution is that a supermajority vote will be required since it is a revenue-raising measure.

After the vehicle sales-tax bill was unveiled this week, Republicans argued it isn’t a revenue-raising bill because it removes an exemption instead of creating a new tax – similar to the gross production tax change.

One Supreme Court decision could support that argument. In a 1956 case, Leveridge vs. Oklahoma Tax Commission, the court rejected a challenge that claimed a bill eliminating an exemption for certain cars from motor vehicle excise taxes.

Democrats, however, said the issue is more about whether the average consumer would consider it a new tax, and noted its primary purpose is to fill the state’s budget shortfall.

Rep. Emily Virgin, D-Norman, said during floor debate that the sales tax on vehicle purchases has never been enforced, so it should be considered a new tax.

“No one has ever paid this,” she said. “This is an exemption that has always been there so what is a person who goes to the tag agency when they bought a new car think?”

Republicans Acknowledge Risks

On the session’s final day, Republican leaders wouldn’t categorically reject the possibility their revenue moves could run aground in the courts.

Osborn said like abortion-restriction bills that the Legislature routinely passes, she votes on bills in “good faith” knowing there are risks they could be overturned. That’s why there are checks and balances, she said.

“It’s not up to us to interpret the law,” she said. “That’s why the founding fathers had the wisdom to create three branches of government.”

  • Larry

    “It’s not up to us to interpret the law”… REALLY??? This is what our lawmakers really think? We really expect them to know if a measure is legal before they vote on the measure. We also expect them to know what they are voting on BEFORE voting!! Read it and understand it FIRST!!
    As far as these “revenue raising measures” are concerned, they are either new taxes or tax increases no matter what they say they are. The main reason for passing the measures was to increase revenue to balance a spending budget!! They can lie and call them whatever they want but the truth is still the truth and each one of the measures should be overturned in court!!