Update Aug. 10: The Supreme Court ruled in the cigarette fee case that the fee was unconstitutionally passed. 

The Oklahoma Supreme Court ruled Thursday that the Legislature unconstitutionally passed a $1.50-per-pack cigarette fee on the final day of this year’s session.

The ruling will have an immediate impact on the state’s budget. Lawmakers must go into a special session to find $215 million in new revenue or allow deep cuts to health and social programs, which would’ve received the bulk of the revenue from the fee.

But the ruling, as well as the decisions in two other lawsuits that have yet to be decided,  could also have long-term effects on the state.

The court’s precedent in these cases could make it easier – or more difficult – for the Legislature to pass revenue bills for years or decades to come as it further defines what type of bills are subject to the constitutional measure that requires “bills that raise revenue” to pass with a three-fourths majority in the Legislature.

Their rulings, for instance, could determine whether future attempts to increase the fuel tax, repeal the state’s many sales tax exemptions, create new fees on unhealthful products and a host of other measures need to meet the high standards that were passed as a result of the 1992 state question.

Fee vs. Tax

The main question on two of the challenged bills – the $1.50 fee on a pack of cigarettes and a $30 to $100 annual fee for electric or hybrid vehicles –  comes down to the distinction between a fee and tax.

The court has routinely upheld that fees that pay for related services, such as court fees that help fund the legal system, are allowable. But there have been times when the court says the state has gone too far in labeling something a fee.

This includes when the court struck down a bill in 2010 that assessed a 1 percent fee on employee health plans to raise about $78 million a year for the state’s Medicaid program.

But the debate over the cigarette fee showed there still wasn’t a consensus on the issue.

Arguing for the state, Solicitor General Mithun Mansinghani said that this is a fee because the higher cost will deter Oklahomans from smoking and, in turn, will save thousands of lives.

But Robert McCampbell, the attorney for the tobacco  firms challenging the fee, said this could allow lawmakers to raise additional revenue by treating many other so-called “sin taxes” as fees if the court lets the law stand.

“We can readily think of other unpopular products,” McCampbell said. “I just jotted down some while sitting here: tanning salons, wine, potato chips and soft drinks.”

The court ultimately agreed with McCampbell as Justice Patrick Wyrick, who wrote the opinion in the cigarette fee case, called it a “quintessential sin tax.”

“While it is true that we have historically given the term ‘revenue bill’ a more restricted meaning than its text suggests, we have never held that the term does not encompass a quintessential excise tax designed to raise a near-quarter-billion dollars in new revenue each year,” he wrote.

Wyrick further wrote that other sin taxes would be permitted under the state constitution. But he wrote that just placing a higher cost on the item in order to deter its use doesn’t make it a fee that is not subject to the three-fourths vote requirement.

“Surely the people did not intend that the Legislature could blatantly tax them without complying with (the constitutional requirements for revenue bills) by merely wordsmithing their bills to describe some ‘regulatory’ purpose for the tax,” he wrote. “Thus, we reiterate that whether a measure is intended to ‘raise revenue’ must be the overarching consideration in determining whether a measure is a ‘revenue bill.’”

While the court’s opinion in the cigarette fee case will add clarity to the fee-vs.-tax debate, some of the remaining rulings could provide even more guidance of what is allowable.

The debate over the new fee on electric and hybrid vehicles prompted justices to question whether allowing the fee based on the state’s contention that the fee would pay for road work could also allow lawmakers to treat the fuel tax the same way.

“If they are effectively the same, then the gas tax is a user fee as well,” said Justice Patrick Wyrick.

Lawyers for the state responded that it would depend on whether the primary goal of a fuel tax increase is to raise revenue or maintain and regulate the state’s transportation network.

But allowing it to be treated as fee could have political consequences because  clearing the simple majority threshold in the Legislature would be an easier task than getting 75 percent of lawmakers to sign on to a tax increase that historically has proven unpopular with voters.

Millions  in Exemptions Could Be Decided

The fate of hundreds of millions of dollars in tax exemptions could also be affected  by the court’s decisions.

The question of whether repealing an exemption would classify it as a “revenue bill” and subject it to the tougher legislative requirements was one of the pivotal issues surrounding the pair of lawsuits that challenged the bill that repealed a portion of the state’s longstanding sales tax exemption on vehicle sales.

Both GOP gubernatorial candidate Gary Richardson and the Oklahoma Automobile Dealers Association are challenging the law, which would tack on the 1.25 percent sales tax for new and old vehicle sales.

Even though this isn’t creating a new tax, they argue that the primary purpose of the bill is to raise revenue and it should be treated as a revenue bill.

If the court agrees with this argument, it could have deep consequences on any attempts to roll back sales tax exemptions on dozens of services.

Oklahoma could see hundreds of millions of dollars in new revenue if lawmakers repeal its many tax exemptions.

Gov. Mary Fallin, for instance, proposed earlier this year to raise $840 million a year by doing away with sales tax exemptions for dozens of services, such as cable TV bills, haircuts and car repairs.

That proposal failed to gain much momentum during this year’s session. But it or a smaller-scale version could be an option to address future budget shortfalls.

After Fallin announced her proposal, lawmakers and Finance Secretary Preston L. Doerflinger couldn’t agree whether it would have required the three-fourths vote in the Legislature, so the court’s decision will likely dictate what’s allowable in the future.

But some justices indicated that removing tax exemptions are not the same as increasing taxes.

“I’m having trouble connecting exemptions to (State Question 640),” said Justice John Reif. “I see an exemption as an entirely different creature, and the Legislature has the power to give it and they have the power to give it away that is separate than their taxing power.”

Correction: An earlier version of this story incorrectly stated the amount Gov. Mary Fallin’s sale tax reform was expected to raise. 

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