Behind Wisconsin's Oil Company Tax:
By George Lightbourn, Christian Schneider, and Benjamin Artz
Table of Contents:
I. Executive Summary
Last February, in his
speech before the full Legislature, Governor Doyle unveiled a plan to give
all Wisconsin drivers a free lunch. The
centerpiece of his transportation budget was a new tax on oil companies, a
tax that would pump $272 million into the state treasury in the coming two
years. That’s $272 million,
and not a dime of it will come from anyone in Wisconsin.
According to the Governor, we will have miles of new roads, the
potholes in the old ones will be smoothed and state government will be
able to pay off some debt. The
free lunch will be paid by the oil companies.
They will be stuck with the bill and they will not be permitted to
pass it on in the form of higher pump prices.
Of course, that is not
what will happen. The reality
is laid out in this report. It
details how the new tax, if approved by the Legislature, will indeed be
paid by Wisconsin motorists.
Just sixteen months ago
Governor Doyle signed a bill erasing indexing of the Wisconsin gas tax
from state law. This year
that change is saving motorists one cent per gallon. Now along comes this new gross receipts tax and those same
motorists will see the pump price of gas increase by five cents per
gallon, beginning this fall. The
new tax will raise the gas tax five times what the old indexing system
This report examines this
proposed new tax from a variety of perspectives all of which suggest the
new tax simply cannot work in the way the Governor has described.
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
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.
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
This tax should be
called what it is – a five cent increase in the gas tax.
That is the reality that should frame the debate in the
no-pass-through provision, with its promises of jailed oil company
executives and cheap gasoline, should have no place in a serious
discussion of transportation finance.
After having handily won
reelection last November, Governor Doyle, surrounded by his budget team,
turned his attention to the next two-year budget.
In his East Wing office, he dispatched hundreds of fiscal and
policy decisions that would eventually fit within the covers of his budget
book he delivered to the Legislature.
Compared to the previous two budgets Governor Doyle had prepared,
this budget had a little breathing room.
The revenue forecast showed state revenues growing by 6.8% over the
next two years.
as the Governor and his top advisors buttoned down decision after
decision, one stubborn problem remained.
There was a gaping hole in the transportation budget.
This was hardly a surprise since it was a hole Governor Doyle and
the Legislature created in previous budgets.
They had used $1.1 billion from the transportation fund to cover
shortfalls in the general fund and had backfilled the transportation fund
by issuing debt.
hole in the transportation fund presented both a fiscal and a political
challenge for the Governor. Fiscally,
the gap was too large to be finessed with a transfer of one-time funding
or a technical adjustment. There
simply had to be more money added, which led to the Governor’s political
problem. The logical source
of transportation funding is the gas tax, but gas tax increases are always
a dicey proposition. An
increase now would be a particularly tough sell since, just over a year
ago, the Governor and the Legislature had repealed the indexing of the gas
tax. Rather than
increasing every April 1 as had been the case for twenty-two years, the
tax would remain fixed at 30.9 cents per gallon.
How could he act so soon to increase the hated gas tax?
solve this dilemma, Governor Doyle turned to the unlikeliest of sources,
Tommy Thompson. What was Governor Doyle’s solution?
He borrowed a long forgotten idea from the playbook of Governor
Thompson. In spite of the
fact that the two men have never been close, Governor Doyle followed
Governor Thompson’s lead and turned to a gross receipts tax on oil
companies to resolve a shortfall in the transportation fund.
Governor Thompson’s gross receipts tax was removed by the
Governor Doyle’s gross receipts tax may prove more difficult for the
a bold political move, Governor Doyle announced that he would force the
oil companies to eat his 2.5% gross receipts tax. When the Governor
delivered his budget and announced his new oil company tax, he cast it as
an initiative that was pro-consumer.
He decried the gas tax increases and toll roads that governors in
other states had served up. In fact, giving the Wisconsin taxpayers a “refund” is how
Governor Doyle portrayed the new tax.
The state would get miles of smooth new roads and the taxpayers
wouldn’t pay a dime. Big
oil companies would be forced to cover the cost entirely out of their
profits. To ensure that the
tax would not be passed on, the Governor included criminal penalties for
companies caught adding the tax to the pump price.
In that one stroke, the Governor had solved both his fiscal and his
report puts the gross receipts tax and its no-pass-through feature under a
microscope. Has the Governor
found a way to create a tax that will not affect consumers? According to basic economic theory he has not.
According to the courts he has not.
And even according to the Wisconsin Department of Revenue he has
Governor Doyle has done is to propose a tax that will be almost certainly
be passed on to consumers. The
bad news to the motoring public is that the new tax will add five cents to
the price of a gallon of gas beginning this fall.
This far surpasses the one cent increase they would have paid under
report will explain the budget hole the Governor’s new tax is intended
to fill. Further, the report
will detail why, in spite of the way the new tax has been portrayed, it
will indeed show up at the pump. The
analysis here might surprise a few people who have been promised the
ultimate free lunch, as well as those who might have been looking forward
to “sticking it” to big oil.
course, the new tax will only become law if the Legislature agrees with
the Governor and leaves the new tax in the budget.
But will the tax be included in the bill sent to the Governor later
this summer? The options
available to the Legislature are:
will be interesting to watch as the Legislature grapples how to fund the
transportation budget. Clearly
the fact that the tax will add five cents to the pump price should
influence their deliberations.
The focus of this report, Governor
Doyle’s proposed 2.5% tax on the gross receipts of oil companies, is
estimated to produce $272 million of new revenue in the coming two-year
budget. Is that significant
in the context of the overall transportation budget and why is the new
money so necessary? Those two
questions will be addressed in this section.
As to the importance of the new revenue, suffice it to say that
without the revenues from the tax, the budget would be significantly
unbalanced. And the imbalance
would affect the general fund as well as the transportation fund.
In order to understand the need
for the money from the new tax, it is necessary to go back four years -
since the budgeting decisions made over the past two biennia have created
the need for new revenue in the current proposed budget.
At the center of the Governor’s budget dilemma stands the
transportation fund. For four
years the transportation fund has been used to make up for shortages in
the general fund. This time,
as the Governor prepared his two-year budget plan for the 2007-09
biennium, he likely recognized that the overextended transportation fund
could not be relied upon to supplement the general fund. More importantly, if he wanted to accomplish his
transportation agenda it would be necessary to add significant revenues to
Let’s back up and look at what
caused the current shortfall in the transportation fund.
The transportation fund is one of several segregated funds within
the state budget. The
segregated nature of the fund means that transportation revenues and
expenses are not to be commingled with the general fund.
The principle behind keeping these funds separate is that
transportation users, mostly drivers, are assured that their user fees are
to be used exclusively for transportation purposes.
For decades there was a fiscal brick wall between the
transportation fund and the general fund. Rarely was there movement of dollars or expenses between the
two funds. However, four
years ago, in constructing the 2003-05 budget, the Governor and the
Legislature effectively replaced that brick wall with something akin to a
tennis net. For the past four
years, revenues and expenses have flowed freely between the two funds.
In 2003, Governor Doyle entered
office while state finances were still reeling from the effects of the
2001 recession. Also pinching
the state budget was the full effect of a tax cut package which was
phased-in between 2001 and 2003. Overall,
the new governor was welcomed to the East Wing of the Capitol with a $3.2
billion mismatch between revenues and spending.
His first budget was marked by
some significant cuts, including a $250 million reduction in the
University of Wisconsin budget and eliminating the requirement to pay for
2/3 of local school costs. In
order to avoid even deeper cuts, the Governor and the Legislature turned
to the transportation fund. The
budget Governor Doyle signed into law included a $675 million transfer of
transportation revenues to the general fund, including $400 million for
shared revenue payments to local government and $100 million for school
To mitigate the impact that this
transfer would have on transportation projects, the Governor and the
Legislature significantly increased the degree to which highway
construction and rehabilitation costs were debt financed.
Table 1 shows the new bonding authorized in that budget.
Transportation Bonding in the 2003-05 Budget
The move to increasingly rely on debt to finance road projects did not thrill the road builders. The road building community has historically advocated a conservative use of debt financing and they made their displeasure known. The Executive Director of the Transportation Development Association of Wisconsin, in discussing the 2003 budget as initially introduced, predicted the transportation fund would be “devastated” after 2005. He referred to Governor Doyle’s plan to bond for portions of the rehabilitation fund “unprecedented,” and said the proposal went against the Governor’s promise not to bond for day-to-day operations. “Rehab is an everyday operation for transportation. There’s never been bonding for rehabilitation,” he said.1
The Governor’s Secretary of Transportation felt compelled to articulate the pragmatics of budgeting. He emphasized that the focus of the administration was getting through the next two years. The future,” he said, “can wait.” “The Governor’s philosophy, and our philosophy, is let’s fix this now,” said the Secretary. “We’ll face what we have to face in the next biennium. I think that’s a sound strategy to have economically."2
When the budget was signed, the
Governor and legislators alike hailed the tough job they had done in
closing a seemingly insurmountable budget gap.
Little note was made about the hole that was building in the
transportation budget. Also
not mentioned at the time were the expenses that had been pushed off into
the future. When work began
on the next two-year budget, it became apparent that, once again, the
general fund would have insufficient revenues to support the ongoing
The 2005-07 Budget:
While the subsequent 2005-07
biennial budget was slightly less contentious, the state entered the
biennium facing a deficit largely due to the use of one-time money
(including transportation revenue) in the previous budget. By this time,
the Governor and the Legislature had overcome whatever shyness they might
have had about dipping into the transportation fund.
In the course of budget deliberations, the Governor and the
Legislature both forwarded ideas for the general fund to use
transportation revenues. In
the final analysis, the Governor settled the matter with one sweep of his
veto pen. In a controversial
move, he vetoed 752 words to cobble together a single sentence.
When the words of that sentence were reassembled, $427 million had
been transferred from the transportation fund. In
its place, the Governor and Legislature authorized $250 million in new
bonding to fund highway rehabilitation.
Further exacerbating the fiscal
challenge facing the Governor was the repeal of gas tax indexing.
In 2005, the Governor signed the repeal of gas tax indexing, which
further restricted growth to the transportation fund.
According to the Legislative Fiscal Bureau, indexing repeal reduced
revenues to the transportation fund by an estimated $5.2 million in
2006-07, $26 million in 2007-08, and $49.1 million in 2008-09.
Table 2 shows the net effect of
the transfers out of the transportation fund in the previous two budgets:
to Transportation Programs Associated with Transfers in 2003-05 and
Legislative Fiscal Bureau, 2007 Informational Paper 40, “Transportation
The imbalance between transfers
out of transportation and bonding provided to replace those transfers
presented two problems as the Governor prepared the 2007-09 budget.
First, additional transfers from the transportation fund were
probably unsustainable. It
would not be possible to continue to supplement the general fund while
also funding an acceptable highway construction and rehab program.
Thus a new revenue source had to be found to replace the $330
million that had come from the transportation fund.
A second and related issue was that the debt service on
transportation bonds that had been earmarked for repayment by the general
fund would have to be shifted back to the transportation fund where they
belonged. This post-election budget would be the logical time to put the
transportation fund back onto sound footing.
The 2007-09 Budget
the next two years, the Governor needed to address the long-term repayment
of transportation debt for the debt service from previous bonding. The
Governor’s budget currently before the Legislature estimates debt
service on the bonds issued to offset transfers to the general fund to be
$175.9 million for the biennium. The
Governor’s budget proposes splitting payment on the debt service for
these bonds, assigning $69.9 million to the transportation fund and $106
million to the general fund.
decision in previous budgets to back-fill transportation funds with
borrowing has been a costly one. By
the end of the 2007-09 budget, Wisconsin taxpayers will have had to pay
$332 million in interest on the bonds used to replenish the transportation
fund. When these replacement
bonds are retired, they will have cost taxpayers an extra $1.1 billion in
The residual effects of previous
budgets created transportation-related problems in both the transportation
fund as well as the general fund. Strategically, the Governor needed to add new revenues and to
isolate the impact of the new revenues within the transportation fund.
The Governor’s budget attacked both problems with vigor by
creating new taxes and fees.
The major revenue increases
included in the Governor’s budget came in the form of an increase in
auto registration and titling fees, and the subject of this report, the
gross receipts tax on oil companies.
The auto fee increase will generate an estimated $171.8 million
while the oil company tax will generate an estimated $272.1 million.
With the repeal of the indexed gas
tax, base transportation revenue growth is projected to be modest, growing
by just $75 million in the coming two-year budget.
Revenue from the new taxes and fees account for 85.5% of the growth
in the transportation fund for the 2007-09 budget.
Without the new fees, the Governor could not have funded general
fund programs and paid the debt service on the past replacement bonds, as
his budget proposes. In
addition, it is likely that cuts would have to be made to the spending
plan for road construction and renovation. The new revenues are the lynchpin of the Governor’s
Revenues to the Transportation Fund 2007-09
Legislative Fiscal Bureau, Summary of Governor’s Budget Recommendations
Table 4 lists the major
transportation spending increases included in the Governor’s budget.
Not only did the Governor’s budget include many expected
increases, e.g. transportation aids, it also transferred $164 million of
spending obligations related to 16 programs from the general fund to the
transportation fund. Therefore,
the new revenues accomplished several objectives, including supporting a
robust highway package, and it permitted the transportation fund to pick
up part of the responsibility to fund debt service on transportation bonds
issued in the previous two budgets. Further,
the new money allowed the Governor to once again aid the general fund
through the back door, this time by moving whole programs over to the
transportation fund. As the
legislative debate of the budget unfolds, it will become apparent that the
impact of the new transportation money affects nearly every nook and
cranny of the budget.
transportation expenditures in the proposed 2007-09 budget
Funding was replaced by new bonding
Legislative Fiscal Bureau, Summary of Governor’s Budget
©2007 Wisconsin Policy Research Institute, Inc. P.O. Box 487 Thiensville, WI 53092