Wisconsin Oil Tax: Bad on Every Front

By April 26, 2007Energy

The Wisconsin Policy Research Institute, a free-market think tank, has analyzed Gov. Jim Doyle’s proposed gross receipts tax on oil companies, including his scheme to make it a crime to pass on the additional costs to consumers. (News stories here and here.) In a devastating report — The Truth Behind Wisconsin’s Oil Company Tax: Why You’ll Pay More at the Pump — the Institute concludes Doyle’s proposal amounts to illegal government price control and there is no way to avoid it becoming a 5 cent per gallon tax increase. From the Executive Summary:

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.

Doyle has tried to sell the plan with populist drum-beating, but in the end, the proposal fails on a political level, as well. Bad law and bad economic policy make for bad politics, too. One hopes that the plan’s coming collapse — and the collapse of Governor Rendell’s similar plan in Pennsylvania — will discourage other states’ politicians from essaying similar schemes.