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Thursday, November 23rd, 2017Last Update: Sunday, November 5th, 2017 11:44:31 PM

Supreme Court Ruling Prompts Special Session of Legislature

By: Constitution Staff

Governor Mary Fallin issued an executive order calling for a special session of the Oklahoma Legislature which convened on Monday, September 25. She called for the legislators to address the shortfall in the current fiscal year budget, to develop long-term solutions to government inefficiencies, and to fund a pay increase for K-12 government school teachers. The state’s 2018 fiscal year budget, which began on July 1, has a shortfall of $215 million as a result of a ruling by the Oklahoma Supreme Court which overruled a smoking cessation fee that was estimated to raise that amount.

The Oklahoma Supreme Court declared on August 10, 2017, that the $1.50 cigarette cessation fee was unconstitutional. In its unanimous decision the court explained that Article V, Section 33 of the state Constitution places restrictions on the Legislature’s ability to enact “revenue raising” measures. It requires that such measures (1) originate in the House of Representatives, (2) be enacted prior to the last five days of the legislative session, and (3) be approved either by a statewide vote of the people or by a three-fourths majority in each legislative chamber. Since the measure originated in the Senate, was passed on the last day of the legislative session, and garnered only a bare majority of votes in each legislative chamber, it failed to meet any of those requirements. While all of those characteristics where clear to the Legislature and the Governor when they approved the measure, they proclaimed that rather than being a “revenue raising” bill, they claimed instead that it was a “fee increase” bill. But, the state high court said the measure failed to meet the requirements that would have qualified it as a fee. Indeed, after the measure failed to get the three-fourth vote needed to pass it as a tax increase, the legislators rewrote the bill to call it a fee increase. The legislation was one of the ten bills selected to rate legislators on the 2017 Oklahoma Conservative Index prepared and published by this newspaper, and the conservative votes were the votes against the bill.

While all of the justices agreed that the smoking fee legislation was unconstitutional, they split on the other major revenue bill that was also challenged. On August 31, the Oklahoma Supreme Court let stand House Bill 2433. That measure partially removed a sales tax exemption on vehicle purchases. In effect, this placed a 1.25 percent sales tax on the sale of new and used motor vehicles. This sales tax was on top of the 3.25 percent excise tax which was already in place. It is estimated that the added sales tax will take an additional $123 million from state taxpayers each year. Like the smoking cessation fee legislation, this bill was also passed during the last five days of the legislative session. But, legislative leaders claimed that it was not really a “revenue raising” measure, but was instead a partial removal of the sales tax exemption on vehicles. Therefore, it did not matter that it was passed during the final days of the session, or that it was not passed with the constitutionally required three-quarter super-majority.

The decision came down to a 5 to 4 split with Justices Gurich, Kauger, Winchester, Reif, and Wyrick deciding the legislation was constitutional, while Justices Combs, Watt, Edmondson, and Colbert disagreed. The majority decision declared that HB 2433 “does not levy a tax in the strict sense” because it only removes a tax exemption from an already levied tax rather than creating a new tax. But, writing in dissent, Justice Combs wrote: “The clear intent and purpose of H.B. 2433 was to increase the amount of tax paid by an Oklahoma consumer to 4.5%. Had the Legislature in a straight forward manner attempted to increase the excise tax by 1.25% the requirements of art. 5, º 33 would clearly have been applicable. Calling it a sales tax but collecting it as an excise tax makes little difference to the consumer. It is a tax. The effect of the majority opinion is that the many special exemptions from taxation currently existing in our tax code, $10 billion worth according to the Oklahoma Tax Commission, will be subject to elimination by a simple majority of the legislature and the approval of the Governor. No one presently enjoying a tax exemption will be immune from this procedural vote. The purpose and intent of State Question 640 is now eviscerated, and the citizens of Oklahoma who enjoy a benefit of a tax exemption will be subject to the legislative act of a simple majority as a method of raising revenue.” The bill was also among the ten bills included on the 2017 Oklahoma Conservative Index. As with the smoking cessation fee, the conservative vote was against the tax.

While filling the budget hole would have been a much larger task if the court had also struck down the vehicle tax, the loss of revenue from the smoking cessation fee was especially troublesome since it had a major impact on only a few state agencies, and the money was also being leveraged to obtain federal funds. The $215 million represents just the state funds provided by the fee. With the loss of matching federal funds, state agencies estimate the total loss to the budget will be nearly $500 million. The greatest impact will be on the Department of Human Services, the Department of Mental Health and Substance Abuse Services, and the Oklahoma Health Care Authority. These three agencies were to receive the bulk of the money that was to be generated by the smoking cessation fee. The Oklahoma Health Care Authority would have received $70 million (about 7 percent of its total appropriation). The Department of Mental Health and Substance Abuse Services would have received $75 million (about 23 percent of its total appropriation). The Department of Human Services would have received $69 million (about 10 percent of its total appropriation). The funds were designated to these health agencies was part of the cover to support the claim that it was a fee rather than a tax.

“Urgent action is needed,” said Fallin in her call for the special session. “Lawmakers need to come together quickly to fill this fiscal year’s budget hole so our citizens can be assured they will receive necessary core services.” However, by the end of the first week of the special session, legislative leaders decided to adjourn the session when it became clear that as was the case with the regular session, the votes were not there to pass the cigarette tax by the required super-majority. While a majority of Republicans would vote for the tax, there were enough conservative votes in opposition to prevent it from passing without the help of Democrats. And, the Democrats would not go along with the cigarette tax, unless Republicans supported other tax increases.

On October 23, Gov. Mary Fallin and Republican leaders in the Legislature unveiled a new proposal to solve the budget hole. Fallin said the plan included the $1.50 per-pack cigarette tax, increasing the motor fuel tax by 6 cents per gallon, and increases to alcohol tax rates. The plan also included restoration of the earned income tax credit, a $3,000 teacher pay raise, and a $1,000 raise for state employees. Democrats immediately rejected the plan because it did not include additional taxes on the oil and gas industry. As we went to press, it was unclear if the various sides could agree upon a resolution to the budget hole. If they do find the votes to increase taxes, the legislators will need to meet a minimum of five days after passage of the bills, since “revenue raising” measures cannot be passed during the last five days of a legislative session. If they fail to increase taxes, they will need to cut spending to keep the budget balanced.

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