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Commentary


Take a Pass On No-Pass-Through Tax Hikes

July 24, 2007
By J. Mark Eason

Taxpayers are no strangers to sneaky tax hike plans. To name just one, simply keeping our incomes in line with the cost of living once propelled us into higher brackets until anti-inflation "indexing" in 1985 put a stop to this sneak attack on our wallets. More recently, just months ago Congress passed a budget resolution that constitutes an effective tax hike of billions of dollars by allowing the 2001 and 2003 tax cuts to expire in the coming years.

It's no surprise that politicians are resorting to hidden tax increases when so many people are opposed to handing over even more of their hard-earned money to the government. Adapting to this reality, some especially light-fingered lawmakers are taking a new approach to revenue grabs. They're calling for tax hikes on oil companies -- nothing new here -- but the catch is that the businesses would be prevented by law from passing along the cost of higher taxes to consumers in the form of higher prices.

The hope is that taxpayers will be more accepting of a tax hike that claims to "target only corporations" while shielding consumers from its costly effects. After all, what's more politically convenient than beating up on big oil?

Three recent state tax hike proposals in Wisconsin, Pennsylvania, and California have employed this strategy, but have they been able to pull the wool over taxpayers' eyes?

In February, Wisconsin Governor Jim Doyle called for a 2.5 percent tax on the gross receipts of all gasoline suppliers. Implementation of this tax was estimated to pour $272 million more into state coffers over the next two years.

Knowing consumers would howl at a policy that in effect increased prices at the pump, Governor Doyle's plan forbade businesses from passing on the tax's cost. An Associated Press story noted that the proposal would give "the state Department of Revenue the authority to audit the earnings of oil companies." The Governor even included criminal penalties of up to six months in prison for violations of the policy.

Doyle underestimated the economic reasoning skills of state residents when he proposed this backdoor tax hike, as one poll found that 82 percent of Wisconsin taxpayers believed the policy would raise gas prices. Yet he pushed forward with the plan, and his allies in the state Senate approved it last month. Still, the Republican-led Assembly has passed a budget that does not contain the gross receipts tax, leaving the outcome of this political battle-royal in doubt.

Still, Governor Doyle would be smart to follow the lead of Pennsylvania Governor (and fellow Democrat) Ed Rendell, who has just dropped a no-pass-through oil tax proposal as part of his state's budget negotiations. Facing an electorate fed up with taxes in general, and a business community worried over which industry would be taken to the woodshed, Rendell decided to relent from his high-tax ways.

California also got into the no-pass-through madness last year, with Proposition 87's proposed severance tax for oil production. It too prohibited the cost of the tax from being passed on to consumers, but the state's own Legislative Analyst's Office noted "it is unclear the extent to which BOE (the Board of Equalization) would be able to enforce this statutory prohibition." Luckily taxpayers saw through this ballot measure's guise and rejected it.

No pass-through tax proposals completely ignore even basic economic principles. Regulatory costs are one example to explain why, but the same goes with direct taxes. A quick glance at your monthly cell phone bill will probably show fees charged by the provider to cover the cost of complying with government telecom mandates. While politicians could try to ban these compliance charges, they couldn't stop a company from increasing the base price of a product without resulting to disastrous price controls. If anything, taxpayers benefit from seeing these regulatory charges broken out on their statements because it shows the hard cost of funding soft, warm-fuzzy programs.

In the case of oil companies, gas prices would have to be frozen to prevent extra costs from emerging at the pump. The result would be a shortage as demand exceeds supply. But there's no need to speculate over what would happen -- the long lines at gas stations during the 1970s were in part a result of price controls imposed by the Nixon Administration.

Gas prices may seem high, but they are downright pleasant compared to what they could be if no-pass-through tax plans pass into law. We would be catapulted back to the 70s -- and as events in Pennsylvania, Wisconsin, and California demonstrate few among us (except perhaps Jimmy Carter and "jimmy" Doyle) want to go there.