Taxing Oil Companies: Lessons from Wisconsin?

State lawmakers around the nation are clearly torn on the issue of oil/gas taxes. On the one hand, you see folks like Patrick Bauer and future Indiana gubernatorial candidate Jill Long Thompson arguing that consumers need a cut in gas taxes. On the other, you see lawmakers in Wisconsin and Pennsylvania proposing higher taxes on companies bringing petroleum products into the state.

In each of these case, lawmakers clearly want to do two (potentially contradictory) things simultaneously: make oil companies pay more, and give consumers a break (or at least hold them harmless). Indiana Rep. Bauer bemoaned his ability to tag "gouging" oil companies with higher taxes even as he proposed tax cuts for consumers, and in both Wisconsin and Pennsylvania, lawmakers have drafted bills that would impose a new tax on oil companies while forbidding them to pass the tax through to consumers.

The Wisconsin-Pennsylvania approach is certainly creative. The big question is, how are lawmakers going to enforce it-- and will they even try?

It's easy to enact language forbidding companies to pass on a tax to consumers, but very hard to enforce. For example, suppose Wisconsin's new tax was roughly equivalent to 5 cents for each gallon of gas sold in the state. Now suppose that, one week after this new tax goes into effect, the price of gas in one particular gas station goes up 2 cents per gallon. Can the state impose sanctions on the gas station? Obviously not, because there are a lot of other factors governing weekly changes in gas prices. State taxes are a pretty small part of the gas prices we're paying now. And it could well be that, in the example here, these other factors would tend to drive up the price of gas by 7 cents per gallon in that week. If that were true, the gas station in this example would be perfectly justified in jacking up the price of gas by 2 cents-- they'd be doing exactly what the legislature told them to.

Just as interesting, as ITEP's Jeff McLynch points out, is whether lawmakers will even try to enforce such a provision. Lawmakers of both parties know that you can score cheap political points by knocking big oil for not paying their taxes (and, as various groups have shown in the past, the oil industry richly deserves these knocks), but there's not necessarily all that much political payoff from following through and making sure that companies refrain from passing through the tax hike to consumers. Posturing may be sufficient to win votes.

A better approach, from a federal perspective, would be to eliminate the host of tax subsidies for oil companies that have sprung up over the past quarter century. Since state corporate taxes generally piggyback on the federal corporate base, shoring up the federal base would help states too. That won't win state lawmakers any political points, of course-- but would help ensure that oil companies pay their fair share of state corporate income taxes in a quiet way.