After Cigarette Fee Ruling, What Will the Legislature Do Next?

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Oklahoma lawmakers’ late summer and early fall plans likely just got a lot busier.

The state Supreme Court dealt the Legislature a major blow Thursday by ruling that it unconstitutionally passed the $1.50-per-pack cigarette fee during the final days of this year’s session.

The legislation was the single largest revenue-raising measure in a package of bills and budget cuts that lawmakers accepted in order to close a $869 million budget shortfall.

Revenue from the fee was expected to raise $225 million, with $214 million of that amount eligible for appropriation, for the fiscal year budget that began July 1.

But that money now comes off the books. And Gov. Mary Fallin and the legislature will now face some tough decisions as they decide how to respond.

Here are some of the options that lawmakers could consider during the coming days and weeks.

Do Nothing and Allow Cuts to Take Effect

If Fallin and lawmakers chose not to call a special session, the state Constitution essentially treats the situation as a revenue failure and triggers automatic budget cuts.

But only three agencies would be impacted since revenue from the cigarette fee was earmarked for a special Health Care Enhancement Fund that supports health and social programs instead of going to the general revenue fund that supports almost all agencies.

This would mean the Department of Mental Health and Substance Abuse Services would lose $75 million (23 percent of its budget), the Health Care Authority would lose $70 million (7 percent of its budget) and the Department of Human Services would lose $69 million (10 percent of its budget).

Those types of cuts would impact a wide variety of vital services and likely cause the elimination of entire programs. Compounding the impact, several of these agencies say they are already underfunded already.

The Department of Human Services, for example, announced last month that it had to cut $30 million because the legislature didn’t give them enough money to cover the agency’s rising costs and responsibilities. The department’s reductions included freezing child-care subsidy applications, reducing community-based programs and nutrition services for seniors, and cutting foster and adoption assistance programs.

After Thursday’s ruling, Fallin signaled that doing noting and allowing more cuts would be unacceptable.

“These agencies and the people they serve cannot sustain the kind of cuts that will occur if we do not find a solution,” she said in a statement. “My belief is we will have to come into special session to address this issue.”

Spread Out the Burden by Finding Cuts Elsewhere

If lawmakers do return for a special session, which would cost taxpayers about $30,000 a day, they will be confronted with many of the same obstacles they faced earlier this year.

The legislature has already exhausted most one-time revenue options, such as tapping millions of dollars from the Rainy Day Fund. And Thursday’s court ruling showed that the court will not allow lawmakers to exceed their authority by trying to skirt the requirement that revenue bills pass with a three-fourths vote in both chambers.

Getting to that threshold proved difficult because even though Republicans have a substantial majority, they still need at least some Democratic votes in the House.

If lawmakers run into the same problems as earlier this year and can’t agree on way to find new revenue –  or just make up a small portion of the $215 million shortfall – they could effectively rewrite the state’s budget.

This would allow them to look for cuts outside of the health and social programs or try to more evenly distribute the cuts across state government so the Health Care Authority, Department of Human Services and the Mental Health Department wouldn’t bear the full burden of the reductions.

Lt. Gov. Todd Lamb, who is among the GOP candidates hoping to replace Fallin next year, seemed to favor this approach, at least to begin with.

In a statement, he wrote that lawmakers “must now focus first and foremost on identifying existing state funds to allocate to healthcare-related programs” that had expected to receive revenues from the cigarette fee.

“It is my belief this can be done without drastic cuts to agencies,” he said. “State government can and must operate more efficiently, and this ruling provides an excellent opportunity to start that process.”

Close the Shortfall by Restarting Bipartisan Talks

Hours after Thursday’s ruling, Republican leaders in the legislature were noncommittal on their next steps.

Senate Pro Tempore Mike Schulz, R-Altus, said in a statement that there “are several options available to us” and he looks forward to working with the governor and the House on their next steps.

But House and Senate Democrats almost immediately issued calls for a special session to find new revenue solutions. And they asked for bipartisan talks to do so.

“As we have been all year, the Democratic Caucus stands ready to negotiate a long-term solution to fix Oklahoma’s funding crisis,” said Rep. Monroe Nichols, D-Tulsa.

Legislators have the opportunity to fill the $215 million shortfall in one move by passing the cigarette as a tax instead of a fee. Earlier this year, Democrats promised to deliver the votes needed to reach the three-fourths majority to accomplish this if Republicans agreed to raise gross production taxes.

Although it seemed the two parties were on the cusp of a deal several times, talks broke down near the end of session.

But with fewer options and greater urgency now, there could be more incentive for lawmakers to find a compromise.

In a statement, the 26-member House Democratic Caucus additionally announced it is requesting legislation be drafted immediately on several proposals it backed last year.

In addition to raising gross production rates from 2 to 5 percent, the group’s other proposal includes raising $204 million by reversing state income cuts for high earners, $157 million by eliminating the capital gains exemption, $112 million by converting itemized deductions to a credit and $290 million by eliminating sales tax exemptions on specific industries.

Another item on the table could be revisiting a GOP-backed plan to raise the fuel tax 6 cents. This could generate $124 million a year.

But this will also need Democratic votes – something that they offered last year only if Republicans were open to repealing income tax cuts.

Find a Grand Bargain

There are some who are hopeful that a special session will give lawmakers a chance to do more than just fill the $215 million shortfall caused by the cigarette fee ruling.

A group of more than 20 advocacy organizations, known collectively as the Save Our State Coalition, is already calling for major structural reforms that could shore up the state’s budget for years.

This could head off problems next year when lawmakers are expected to arrive for the 2018 legislative session facing at least a $500 million shortfall.

House Minority Floor Leader and Democratic gubernatorial candidate Scott Inman, D-Del City, also said lawmakers should start budget talks immediately to work out a major budget agreement that goes further than just fixing this year’s budget.

“This cigarette tax was just a Band-Aid put on their gaping wound of a budget hole,” he said in a statement. “Schools are down to 4-day weeks, hospitals are closing down, and public safety is in a crisis, not because cigarettes are too cheap, but because Republican policies benefitting their donors have failed us.”

Others, meanwhile, want lawmakers to use the special session to find money for teacher pay raises, something many perceive as a big failure from this year’s regular session.

“Lawmakers broke their promise to our teachers passing an unconstitutional budget and adjourning without passing a teacher pay or investing in education,” said Amber England, executive director of Stand for Children Oklahoma. “By calling a special session that compels the legislature to address teacher pay and investments in education, our governor can show true leadership and leave a legacy that under her watch, Oklahoma did right by our schools and our teachers.”

Passing major revenue bills, however, could prove to be a heavy lift for a legislature that has shown deep philosophical divides when it comes to the state’s budget.

Even among Republicans, disagreement remains on whether the state has a revenue or spending problem.

House Speaker Charles McCall, R-Atoka, seemed to echo the latter when he responded to Thursday’s ruling.

“State revenues are a reflection of the people of our state,” he said in statement. “When our citizens have less money in their pockets to spend the state will realize less revenues. I am a firm believer that government must live within its means.”

He also signaled that a major deal with Democrats would be unlikely as he criticized the minority party for failing to work with Republicans during the past session.

“The minority party decided to play games with the budget, and now that opportunity has passed,” he said. “I look forward to working with the Governor and the Senate to overcome this latest challenge.”

  • Three Dollar Bill

    Oklahoma could create a budget surplus if the lobbyslature would impose a stupidity tax.

  • Chris Powell

    What about the other challenged “fees” that could be struck down? That just makes the hole deeper and would make a special session even more unavoidable.

  • JOHNSON54

    An increase of $1.50 per pack may not have generated any income. The State of Washington did that and tax revenue did not increase. All of the nonsmokers were scratching their heads wondering why the smokers weren’t paying up to support their excessive spending habits. One could argue that sin taxes change behavior but using them as a revenue source in a tight budget is not a wise move. Raise the income taxes on everyone if you want to have the funding to continue social services.

  • Hubcap Axelrod

    Getting rid of things like over lapping agencies, hasn’t even been talked about.
    How do we compare to a state like Kansas in the amount of agencies we support?