By George Lightbourn, Christian Schneider, and Benjamin Artz
Last February, in his speech before the full Legislature, Governor Doyle unveiled a plan to give all Wisconsin drivers a free lunch. The centerpiece of his transportation budget was a new tax on oil companies, a tax that would pump $272 million into the state treasury in the coming two years. That’s $272 million, and not a dime of it will come from anyone in Wisconsin. According to the Governor, we will have miles of new roads, the potholes in the old ones will be smoothed and state government will be able to pay off some debt. The free lunch will be paid by the oil companies. They will be stuck with the bill and they will not be permitted to pass it on in the form of higher pump prices.
Of course, that is not what will happen. The reality is laid out in this report. It details how the new tax, if approved by the Legislature, will indeed be paid by Wisconsin motorists.
Just sixteen months ago Governor Doyle signed a bill erasing indexing of the Wisconsin gas tax from state law. This year that change is saving motorists one cent per gallon. Now along comes this new gross receipts tax and those same motorists will see the pump price of gas increase by five cents per gallon, beginning this fall. The new tax will raise the gas tax five times what the old indexing system would have.
This report examines this proposed new tax from a variety of perspectives all of which suggest the new tax simply cannot work in the way the Governor has described. The report includes an economic refresher showing that, if the no-pass-through feature stays, markets will adjust to the added cost and pump prices will rise. There is nothing nefarious about this phenomenon; it is the way a free market works.
The report also identifies the no-pass-through feature for what it is: a cost control. The federal government and a few states have tried to control the price of gasoline. In every instance, the results were the opposite of what was intended. Most recently, Hawaii scrapped its cost control after just eight months when it discovered that prices were actually higher after the controls were implemented than they were before.
A legal review shows that the new tax is built on shaky legal ground. Similar no-pass-through provisions have been found to be a violation of the Commerce Clause of the U.S. Constitution.
Finally, the report notes that the staff at the Department of Revenue warned that, “The Department’s auditors may have no rational basis to isolate the cause of price increases as the oil company assessment (the gross receipts tax).” Implementing the no-pass-through provision will prove to be nearly impossible.
This tax should be called what it is – a five-cent increase in the gas tax. That is the reality that should frame the debate in the Legislature. The no-pass-through provision, with its promises of jailed oil company executives and cheap gasoline, should have no place in a serious discussion of transportation finance.
Why you’ll pay more at the pump
By George Lightbourn, Christian Schneider and Benjamin Artz
May 2007
