Off Target
Aimed at Big Oil, Tax Hits Co-ops
Even in today’s world of trillion-dollar efforts to rally an economy in full retreat, $20 million is nothing to sneeze at, especially when the amount represents private-sector consumer spending in small rural communities where it’s recycled back through the same, local economies that produced it.
Last year, the nation’s largest cooperative supplier of motor fuels returned significantly more than $20 million in patronage dividends to farm-supply cooperatives and others in Wisconsin that sell gasoline and diesel fuel. Paid back to individual co-op members based on their retail patronage, the bulk of that money promptly finds its way back into local transactions. The consumer spending and cooperative reinvestment in rural communities fueled by this return of patronage dollars makes a very real contribution to Wisconsin’s economic health.
Over the coming weeks political decisions in Madison may determine whether that reinvestment continues, or whether co-op patronage capital is siphoned out of rural communities and into the state treasury, to be spent according to government’s priorities. They wouldn’t necessarily be bad priorities, but it’s a pretty slender hope they’d be the same ones chosen by the people whose hard work and necessary purchases created those millions of dollars in economic activity.
Double Diversion
The state budget proposal placed before the Wisconsin Legislature in February by Governor Jim Doyle calls for a new tax on motor fuels.
Projected to raise more than $270 million annually, the tax was introduced in the governor’s February 17 budget address as “an oil assessment so that big oil companies, which are still making record profits, pay their share for our roads.”
He added, “These companies make money when people drive on our roads, so it is appropriate that they help maintain them—and we will go after companies that break the law by passing that assessment on to consumers.”
In places far from the boardrooms of big oil, red flags went up. Co-op patronage payments come from earnings over and above those needed to meet expenses and it was clear the proposed tax could severely curtail or even, in some years, eliminate them.
Mislabeled in the budget bill as an “Oil Company Profits Tax,” in reality, the tax has nothing to do with profits. As is immediately clarified by the language of the bill itself, what’s proposed is a “gross receipts tax.” That means it would skim off a percentage of total sales regardless of whether a profit is made. A company that’s losing money (admittedly unlikely among petroleum refiners) would have tax liability as long as it had sales. Increasing with sales volume, rates would vary from one-half of 1 percent to as much as 3 percent of annual gross receipts.
All proceeds would be deposited in the segregated transportation fund. This is cause for concern.
Segregated funds are revenues from taxes and fees related to specific activities and reserved for spending in support of those activities. But they have been routinely diverted from their designated purposes—by governors and legislatures of both parties—to patch holes elsewhere in state budgets.
So millions of dollars would be diverted from rural economies to pay the new fuel tax only to then be at risk of diversion yet a second time—to uses other than the highway maintenance and transportation projects for which they were supposedly collected.
Over the past three state budgets, the segregated transportation fund has been the target of bipartisan raids to the tune of more than $1.2 billion to pay for spending unrelated to transportation. About two-thirds of that amount has been replaced in the transportation fund with general obligation bond revenues, exposing taxpayers to financing costs for the state to borrow money it already had.
A more modest example of what some have called bait-and-switch taxation can be found in the short history of the utility public-benefits fund. Collected as an added fee on the monthly bills of natural gas and electric utility customers, a total of $102 million designated to support energy conservation programs wound up paying for other areas of state spending in the 2003–05 and 2005–07 budget periods.
In the fall of 2005 a coalition—in which Wisconsin’s electric cooperatives had a leading role—finally secured the integrity of the utility funds by lobbying successfully to change state law governing custody and disbursement of energy conservation dollars.
Broader protection for segregated funds could be on the way, but it will be some time coming. State Senator Jeff Plale (D–South Milwaukee), State Rep. Gary Tauchen (R–Bonduel) and an impressive list of cosponsors have introduced a measure prohibiting such diversions. A constitutional amendment, it must be adopted by two consecutive legislatures with an election in between and then ratified by voters in a statewide referendum.
To accomplish all that will take at least until April 2011. By then, work will be well underway on the two-year budget bill to succeed the one currently before the Legislature.
Problems, Constitutional and Practical
Promises that the gross receipts tax won’t come back to bite consumers will almost certainly prove impossible to keep.
The budget bill contains “anti-pass-through” language saying sellers can’t recover the tax by raising prices for their product. A New York State court has already declared similar language unconstitutional, reasoning that anti-pass-through provisions violate the U.S. constitution’s commerce clause by imposing higher costs on consumers in other states; in effect, exporting New York’s tax across state lines.
In 2007, Wisconsin’s nonpartisan and nationally respected Legislative Council warned such language would invite a constitutional challenge. When that sort of challenge succeeds, there is just one remedy: The state has to refund all the money collected by the unconstitutional tax. That’s what happened in New York.
In any case, retailers have more than one way to recover a cost of doing business. Greg Blum, CEO of Central Wisconsin Electric Cooperative, told Wisconsin Energy Cooperative News the oil tax would find its way back to consumers one way or another.
Nearly a decade ago, Blum’s electric co-op provided financing and launched a 24-hour, credit-card operated CENEX gas station in Iola. Central Wisconsin Electric no longer has direct ownership, but as the first facility of its kind in the area, the station represented a genuine service to the community. Blum dismissed the relevance of pass-through language for customers.
“Regardless of whether [the tax is] passed on, it’s still going to result in less services and smaller margins for the owners who will have to cut back on services or increase prices somewhere else to cover it,” he said. “Either way, it’s an increased cost to the membership, to the customers.”
And while it’s understandable that high gasoline prices breed populist sentiment to “stick it” to oil companies, Blum pointed out that even during last year’s rapid price run-ups, many retailers weren’t making money on gasoline sales.
When a retailer pays two dollars a gallon to refill storage tanks and local pump prices are $1.90 from previous loads, he explained, “If your competitor was lucky enough to fill up the day before the price went up you lose money until your competitor needs to refill.”
Meanwhile, government has not been on a starvation diet. The Energy Information Administration (EIA), an arm of the U.S. Department of Energy, has estimated refiner costs, including their profit margins, account for 19 percent of the pump price of a gallon of gasoline. State and federal fuel taxes claim that very same percentage, another 19 percent of the total price, according to the EIA.
But those are nationwide averages are based on data that’s a few years old. Individualized numbers provide a sharper focus. Right now, the federal motor fuel tax is 18.4 cents per gallon. The State of Wisconsin motor fuel tax is 30.9 cents per gallon, for a total of 49.3 cents. The retailer’s profit per gallon trails far behind the share claimed by government.
The proposed new Wisconsin tax will further enlarge government’s share. And because it’s based on gross receipts, when prices rise it will add more cents per gallon.
Reflecting on the misaimed thrust at big oil, a retired cooperative lobbyist remarked last month that elected officials who “decide to go ahead” and support the gross receipts tax “must be relying on a political judgment that there won’t be any hard feelings if government shoots at somebody no one likes very much and hits us instead.”
Saving Private Enterprise
Cooperative Network (formerly Wisconsin Federation of Cooperatives), the statewide trade association for cooperative businesses, pointed out problems with the gross receipts tax the day after the budget bill was introduced.
The choice is between locally owned farm-supply co-op earnings returned to member-owners and a tax that would “wipe out most if not all of this patronage distribution,” said Cooperative Network President and CEO Bill Oemichen. He emphasized that the new tax would automatically drain more money out of local economies in the same years when energy costs are highest.
In a statement February 18, Oemichen said cooperatives “fully realize the governor has a difficult fiscal challenge on his hands” with a budget that starts with a huge deficit—at $5.7 billion the biggest in state history. But he pointed out the new tax would “scoop up millions of dollars now being directly plowed back into the local economies of rural Wisconsin communities by the farm supply cooperative system and its thousands of member-owners.”
In a March letter to the governor, Oemichen said, “Patronage dividends are an important source of investment capital for local cooperatives as well as a source of deferred income for cooperative members.”
That income, he noted, doesn’t usually sit idle. “Cooperative members, in turn, often convert the patronage payments they receive into the consumer spending our state so urgently needs to spark a broader economic recovery.”
The proposed oil tax, Oemichen wrote, “would have the perverse effect of taking something we ought to prize—local people spending their own money and helping to grow their own local economy—and treating it as if it were an excess profit.”
Governor Doyle responded, “We just see this issue differently,” adding, “I believe the oil companies should participate, in some small part, in the funding of our roads from whose use they profit.”
The Legislature’s Joint Finance Committee has been holding statewide hearings on the budget bill and will presumably make revisions. That proposal may then be further modified by the two houses and if everything stays on schedule, a bill will be passed and presented for the governor’s signature before the state fiscal year ends June 30.—Dave Hoopman |
