Big Oil, Little Oil, They All Get Taxed

By April 9, 2007Energy

In seeking new and politically palatable ways to raise hundreds of millions of dollars, the governors of both Wisconsin and Pennsylvania hit on the scheme of taxing “Big Oil.” Governors Jim Doyle (D-WI) and Ed Rendell (D-PA) made their case on the basis of the old and untrue argument that the large energy companies are gouging the consumer. Then, heightening the invidiousness of the strategy, they said the new oil taxes could not be passed on to the customer.

Trouble is, the oil industry — you know, the industry that meets customers’ demands — cannot be separated into big, small and medium sectors, all independent of one another. The American Petroleum Institute and Wisconsin Petroleum Council have been making that point very effectively recently in a statewide appearances. From Northland News Center in Duluth/Superior:

“We feel that this is an unfortunate proposal that will harm hundreds of thousands of Wisconsin residents,” said Dr. John Felmy, chief economist, National Petroleum Institute. …Felmy says the tax would take money that would otherwise be used to increase gas supplies by expanding refineries like Murphy Oil in Superior.

“This proposal could make the situation worse for consumers. What we propose is we need to increase supply; we need to reduce demand and improve the infrastructure.”

And local Wisconsin Public Radio reports,

Petroleum [Council’s] Erin Roth says the state constitution’s uniformity clause doesn’t allow for exceptions. He says taxing the oil industry could also hurt fuel supplies in Wisconsin. “We’re committed to supplying our customers as an industry, but remember, this is a punitive tax, singles out the oil industry for no good reason. The governor has pitched this tax as basically a free lunch. We don’t view it that way.”

An unconstitutional free lunch does not seem like much of a productive long-term tax strategy.

In Pennsylvania, the Pittsburgh Tribune Review’s Colin McNickle demolishes the arguments from Rendell and his revenue secretary, Tom Wolf:

As Wolf said, as reported by The Associated Press, this proposed tax would be applicable to 274 companies that benefit from the sale of vehicle fuel, heating oil and propane, whether they drill for it, refine it or deliver it.

So, not only would those “ungodly” Big Oil gross profits be slapped with a 6.17 percent excise, so, too, would be the poor Joes and Janes and Marks and Marys who have decidedly smaller profit margins than their suppliers. For 2007, that would be a $346 billion pool of money just begging to be taxed by Rendell, Wolf & Soakem Inc.

And as for the “gouging” claim used to justify the higher taxes, both McNickle and the Wisconsin petroleum reps note that oil companies pull in about 10 percent in annual profits, hardly excessive.

In choosing to cast their massive tax increases as limited only to “Big Oil,” the governors of Wisconsin and Pennsylvania are playing an obviously populist game. But anti-petroleum populism fails in the face of state and federal constitutions, legislative politics, and economic reality: You cannot just tax the big guys without hurting the medium and small guys too, up and down the line, all the way to the consumer filling up at the pump.