MANY state-tribal tobacco compact agreements are set to expire at the end of the month. More than 20 tribes asked Gov. Mary Fallin to extend existing compacts through August 2017, but Fallin struck a hard line, agreeing only to short-term extensions and insisting on renegotiating the terms of the compacts.
In particular, the governor opposes “border” tobacco tax rates for tribal smoke shops. Those rates allow some shops to collect only 6 cents in tax per cigarette pack. The extremely low rate has distorted markets and cost millions in state revenue. Fallin deserves praise for trying to resolve this long-festering problem.
Oklahomans voted in 2004 to increase the cigarette tax by 80 cents to $1.03 per pack. But tobacco compacts allowed some tribal smoke shops facing competition from neighboring, lower-tax states to collect only 6 cents per pack. This gave those shops a price advantage of as much as $10 per carton over other Oklahoma retailers.
The definition of “border” shop proved elastic. In 2005, former Rep. Kevin Calvey, R-Del City, noted that two tribal smoke shops in Cushing were granted “border exceptions” although they were located roughly 70 miles from the nearest state line.
The tax difference had a dramatic impact on consumer behavior. Former state Rep. Ron Peterson, R-Broken Arrow, pointed out that 4,500 nontribal retailers had average sales of 3,265 cigarette packs per store in June 2005, according to Oklahoma Tax Commission figures. In comparison, the 197 American Indian smoke shops in Oklahoma sold an average of 64,399 packs per location.
Although they comprised less than 5 percent of outlets, American Indian smoke shops at one time accounted for nearly 50 percent of Oklahoma cigarette sales (and as much as 70 percent in Tulsa). By 2006, Oklahoma government was losing an estimated $48 million per year in tobacco tax collections because of the shift. The situation has improved in recent years, but there were still 330,000 packs sold last month at the 6-cent tax rate.
Tribal retailers have every right to maximize sales based on legally obtained advantages. Any retailer would do the same. But there's no reason for the tax difference to be so extreme. Oklahoma can't require tribal businesses to collect state tobacco tax on sales to tribal members. As a compromise, past compacts have simply allowed for a lower tax rate at tribal outlets.
Conservatives understand that if you want less of something, tax it more. Thus, excessive income taxes are detrimental because they discourage work. High tobacco taxes are beneficial because they discourage smoking. This is one reason a majority of Oklahomans voted for the 2004 tax increase. But the 6-cent per-pack border rate effectively gives Oklahoma the lowest tobacco tax rate in the nation.
Fallin has signed new tobacco compacts with the Kaw Nation, the Cheyenne and Arapaho Tribes and the Fort Sill Apache Tribe. None of those agreements includes border rates. Under those new compacts, tribal smoke shops will pay wholesalers the full $1.03 per-pack tax with the associated tribal government later being directly rebated half to three-fourths of the tax paid. That's a reasonable compromise which protects tribal interests, levels the retailer playing field and disincentivizes smoking across the board.
Surely this is an issue where tribal and state leaders can reach common ground for the common good.