Extras on Excise: Oklahoma’s New Tax Bill Spells Big Changes for Excise Tax Regimes

 Excise taxes have made the news again as the Oklahoma public school teachers’ strike led state lawmakers to pass and sign H.B. 1010XX on March 29, 2018. The bill creates and increases several excise taxes—cigarette taxes, little cigar taxes, oil and gas production taxes, and hotel occupancy taxes. While none of the targeted industries are thrilled about these new changes, there is a possibility that customer reactions to increases in cigarette and hotel taxes may lead to the state bringing in less revenue.

Oil and Gas Production

The production taxes on oil and gas from wells spudded before July 1, 2018, will be subject to a 5 percent tax for the first 36 months of production and then increase to 7 percent.  Currently, the tax rate for the first 36 months of production is 2 percent.

However, the bill acknowledges that there may be a future rate change. On Nov. 6, 2018, Oklahoma citizens may be voting on State Question 795, which, if passed, will add an additional 5 percent gross production tax during the first 36 months of production; this extra tax would specifically fund teachers’ pay, which Question 795 requires to be raised by $4,000 for all “common education certified personnel.” The state question must first gain enough signatures to be put on the November ballot; it recently survived challenges arguing that it would impose retroactive taxes and that it violated the state’s “single-subject” requirements for proposed constitutional amendments. H.B. 1010XX provides that if voters approve Question 795, the tax rate under Okla. Stat. Ann. tit. 68, § 1001(B) for the 36 months of production be reduced back to 2 percent.

Hotel Occupancy Tax

H.B. 1010XX also creates a new hotel occupancy tax of $5 per day for each hotel room rental. This joins the current state occupancy tax (a 4.5 percent gross receipts tax) and local occupancy taxes. This additional tax has state hotel trade association personnel worried that those traveling through Oklahoma will instead drive on through to one of the six bordering states for cheaper rooms, as NewsOK reports.

Another bill making its way through the Legislature, H.B. 1012, would immediately repeal the new hotel tax upon passage. As of March 29, the bill had its first reading in the Senate.

Cigarettes and Little Cigars

The current rate for cigarettes in Oklahoma is $1.03 per pack of 20 ($0.0515 per cigarette); the bill adds an additional $0.05 per cigarette, bringing the per-20 pack total to $2.03 in taxes.

The following states, which surround Oklahoma, have lower rates:

 • Arkansas - $0.0575 per cigarette /$1.15 per pack

 • Colorado - $0.042 per cigarette /$0.84 per pack

 • Kansas - $0.0645 per cigarette /$1.29 per pack

 • Missouri - $0.0085 per cigarette /$0.17 per pack

 • New Mexico - $0.083 per cigarette /$1.66 per pack

 • Texas - $0.0705 per cigarette /$1.41 per pack

Oklahoma may face competition from these other states’ rates, but another threat may be “buttlegging” into the state. Disparities in neighboring jurisdictions’ cigarette taxes generally leads to a greater influx of people smuggling cigarettes in from the lower tax states, as Bloomberg Tax has noted in several cases. With the lowest tax rates in the country, Missouri may become a popular origin point for cigarettes finding their way into Oklahoma.

Additionally, H.B. 1010XX revises how little cigars (cigars that weigh up to 3 pounds per thousand) are taxed. Currently, the rate is $0.036 per cigar; in July, the rate will be the same as the cigarette tax rate.

Last year, the state Supreme Court ruled a legislative proposal to impose a smoking cessation fee was unconstitutional because it was in essence a tax that would have required a supermajority vote to pass.

H.B. 1010XX Unpopular Across the Aisle

The Oklahoma Policy Institute, an non-partisan think tank that promotes proper public service funding, issued a statement on March 27, 2018, in support of H.B. 1010XX, calling the legislation “a good start.”

General sentiment, however, appears to go in a different direction. Chad Warmington, the president of the Oklahoma Oil and Gas Association, told Bloomberg Tax’s Paul Stinson (subscription required) that the tax increases are “‘bad for our industry’” and “‘it’s also remarkably bad to tie teacher pay so heavily to a volatile revenue source.’” Teachers are also dissatisfied, continuing to strike for more funding. It remains to be seen, however, whether legislators will make additional tax changes this year.

Continue the discussion Bloomberg Tax’s State Tax Group on LinkedIn: How best can Oklahoma legislators increase revenue to satisfy teacher demands?

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