Naifeh v. State ex rel. Okla. Tax Comm'n

• Decision Date: 10 August 2017
• Docket Number: Case Number: 116102
• Citation: 400 P.3d 759
• Parties: James P. NAIFEH, Standard Distributing Company, Brian Hutchinson, Hutchinson Oil Company, LLC, Philip Morris USA Inc., R.J. Reynolds Tobacco Co., Rogers Oil Co., Inc., Corey L. Cooper, Stephenson Wholesale Company, Inc., Petitioners, v. STATE of Oklahoma, EX REL. OKLAHOMA TAX COMMISSION, the Honorable Mary Fallin, Governor, in her Official Capacity, the Honorable Senator Mike Schulz, Senate President Pro Tempore, in his Official Capacity, the Honorable Representative Charles Mccall, Speaker of the House, in his Official Capacity, Respondents.
• Court: Oklahoma Supreme Court

400 P.3d 759

James P. NAIFEH, Standard Distributing Company, Brian Hutchinson, Hutchinson Oil Company, LLC, Philip Morris USA Inc., R.J. Reynolds Tobacco Co., Rogers Oil Co., Inc., Corey L. Cooper, Stephenson Wholesale Company, Inc., Petitioners,

v.STATE of Oklahoma, EX REL. OKLAHOMA TAX COMMISSION, the Honorable Mary Fallin, Governor, in her Official Capacity, the Honorable Senator Mike Schulz, Senate President Pro Tempore, in his Official Capacity, the Honorable Representative Charles Mccall, Speaker of the House, in his Official Capacity, Respondents.

Case Number: 116102

Supreme Court of Oklahoma.

Decided: August 10, 2017

As Amended August 10, 2017

Robert G. McCampbell, Jay P. Walters, and Justin Lollman, GableGotwals, Oklahoma City, Oklahoma; Lisa S. Blatt, Sarah Harris, and Rosemary Szanyi, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Petitioners, James P. Naifeh, Standard Distributing Company, Brian Hutchinson, Hutchinson Oil Company, Philip Morris USA Inc., Corey L. Cooper, and Stephenson Wholesale Company, Inc.

Robert A. Nance, Riggs, Abney, Neal, Turpen, Orbison & Lewis, P.C., Oklahoma City, Oklahoma, for Petitioners, R.J. Reynolds Tobacco Company and Rogers Oil Co.

Mithun S. Mansinghani and Michael K. Velchik, Office of the Attorney General, State of Oklahoma, Oklahoma City, Oklahoma, for Respondents.

Wyrick, J.:

¶ 1 Article V, Section 33 of our Constitution restricts the Legislature's ability to enact "revenue raising" measures. It does so by requiring 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 the people or by a three-fourths majority in each legislative chamber.¹

¶ 2 Senate Bill 845, the "Smoking Cessation and Prevention Act of 2017,"² will generate approximately $225 million per year in new revenue for the State through a new $1.50 assessment on each pack of cigarettes. 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.

¶ 3 All parties agree that if Article V, Section 33's requirements apply to SB 845, the measure must be invalidated for failure to comply with those requirements. The question presented by this case is thus whether SB 845 is a "revenue raising" measure. We conclude that it is and was thus enacted in violation of Article V, Section 33.

I.

¶ 4 After years of declining revenues forced the Legislature to repeatedly make use of non-recurring revenue sources to balance the budget, both the Legislature and the Governor recognized that balancing the budget in 2018 would be impossible without either significant reductions in government spending, the creation of new revenue streams, or perhaps both.³

¶ 5 In her 2017 State of the State address, Governor Mary Fallin pleaded with the Legislature to "focus on the REALITY of our state budget deficit," arguing that the Legislature could not "afford to pass another budget using a large amount of non-recurring revenue" because "[i]t is important to provide sufficient revenues to meet the basic responsibilities that our government owes to its citizens."⁴ To accomplish this goal, the Governor urged the Legislature "to raise our cigarette tax" so that "[t]he revenue raised can be spent on current health care needs."⁵

¶ 6 The Legislature heard the Governor's call. Four proposals originated in the House of Representatives,⁶ each of which proposed to levy a new $1.50-per-pack excise tax that would be assessed against cigarette wholesalers by the Oklahoma Tax Commission, who would then transmit the collected revenue to the State Treasury for deposit in certain health-agency operating funds. The Tax Commission would enforce collection of the tax through its Cigarette Excise Tax Stamps regime. Each of the proposals also allowed for Indian tribes to receive portions of the new tax revenues pursuant to their Tobacco Tax Compacts with the State. Two of the four proposals received a floor vote in the House and garnered majority support, but none of the proposals advanced, due to their failure to receive the three-fourths support required by Article V, Section 33. By May 20, 2017, six days prior to the end of the legislative session, the House proposals were abandoned.

¶ 7 On May 24th, however, SB 845, a shell appropriation bill relating to funding for the State Department of Health, was rewritten in the Senate as a measure to impose a new $1.50-per-pack assessment on cigarettes. Like the House proposals, SB 845 proposed that the $1.50-per-pack assessment would be imposed upon the cigarette wholesaler, collected by the Oklahoma Tax Commission, and enforced by the Tax Commission through its Cigarette Excise Tax Stamps regime. Likewise, the revenues collected would be transmitted to the State Treasurer to fund state health agencies,⁷ and Indian tribes would be entitled to a portion of the revenues pursuant to their Tobacco Tax Compacts. Unlike the failed House proposals, though, SB 845 described the $1.50-per-pack assessment as a "smoking cessation fee" rather than a tax, said that the purpose of the assessment was to reduce the incidence of smoking by increasing its cost, earmarked $1 million of the expected $257 million in new revenues for enforcement of prohibitions on underage tobacco use,⁸ and created several new sections of law that expressed in various forms the State's policy against smoking. The Senate passed SB 845 the same day it was introduced, by a 28-18 vote.

¶ 8 The failed House measures did not indicate that the purpose of the $1.50 assessment was to reduce the incidence of smoking, nor did they mention any non-revenue-raising regulatory purpose. Three of the four explicitly stated that their purpose was to "provid[e] revenue for the support of the functions of state government,"⁹ while the fourth described itself as "[a]n Act ... imposing additional tax levy upon cigarettes."¹⁰ There is nothing in the legislative record demonstrating why, in the handful of days between May 20th (the date of last amendment to the last House proposal, HB 2414) and May 24th (the date the newly amended SB 845 was introduced), the Legislature's stated purpose shifted from raising revenue to reducing the incidence of smoking. There were no committee hearings held, no testimony taken, and no evidence received by the Legislature in that timeframe that would explain the sudden shift in purpose.

¶ 9 What is apparent is that by May 26th, with the end of the legislative session looming, the Legislature had not yet fulfilled its constitutionally-mandated duty to enact a balanced budget.¹¹ The House had just passed SB 860, the General Appropriations Bill, but that budget was predicated on SB 845's creation of over $200 million in new revenues.¹² This meant that the House was confronted with a constitutional conundrum: either pass SB 845, which was essential to balancing the budget but would perhaps require violating Article V, Section 33, or don't, and violate Article X, Section 23 by failing to balance the budget. As one legislator put it, this was "a decision between bad or worse."¹³ The House ultimately passed the measure that day, by a vote of 51-43. The measure was set to take effect ninety days after it became law.

¶ 10 This original action was commenced shortly thereafter by individuals who purchase cigarettes and retailers, wholesalers, and manufacturers of cigarettes, each claiming they will suffer economic harm if SB 845 becomes effective. These Petitioners seek a declaration that SB 845 was enacted in violation of Article V, Section 33, and a writ prohibiting the various State Respondents from enforcing the measure. Petitioners also sought a stay of the enforcement of SB 845 should we not render our decision prior to the measure's effective date. We now assume original jurisdiction, and grant Petitioners declaratory relief,¹⁴ rendering moot their request for a stay.

II.

A.

¶ 11 Our Constitution grants to the Legislature the power to legislate on any "rightful subject."¹⁵ Thus, "[e]xcept where it encounters a specific constitutional [provision] prohibiti[ng]" it from taking a particular action, "the Legislature has the right and the responsibility to declare the fiscal policy of Oklahoma."¹⁶

¶ 12 One such constitutional provision limiting the Legislature's ability to make fiscal policy is Article V, Section 33, which places several restrictions on the Legislature's power to enact "revenue bills." Included in Oklahoma's original Constitution, Section 33 required that "[a]ll bills for raising revenue shall originate in the House of Representatives. The Senate may propose amendments to revenue bills. No revenue bill shall be passed during the five last days of the session."¹⁷

¶ 13 Section 33 remained in that original form until 1992, when State Question 640 was placed on the ballot through initiative petition, with a ballot title asking the people the following:

This measure amends the State Constitution. It adds new provisions to Section 33 of Article 5. These would change the method by which state government makes laws that raise revenue. The measure requires that a bill to raise revenue be voted upon by the people at the next general election. A bill would not be effective until it was approved by a majority of the voters. The measure also provides a way that a revenue bill could become law without a vote of the people. A bill would have to be approved by a vote of each house of the legislature and go to the Governor for proper action. A revenue bill approved by a vote of each house of the legislature would not become effective until ninety days after the approval date. Such a bill would not be subject to the emergency measure provision.

Shall the proposed Constitutional amendment be approved?¹⁸

Opposed by many then serving in the Legislature,¹⁹ the amendment was widely regarded as a decision by the people of Oklahoma to greatly limit the...