Three Lawyers Say No-Pass-Through Oil Tax Unconstitutional
WMC Says Expect 7-Cents-A-Gallon Automatic Spike at Pump

MADISON–With gas prices at an all-time high, consumers will likely be confronted with a 7-cents-a-gallon automatic gas tax hike as a “no-pass-through” provision when an oil company tax is struck down as unconstitutional, WMC warned Wednesday.

The Joint Finance Committee is slated to vote on a proposal from Governor Jim Doyle to impose a 2.5 percent gross receipts tax on oil companies as part of his $1.7 billion tax hike plan. Doyle included a provision to prohibit oil companies from passing the tax on to consumers, which legal scholars say violates the U.S. Constitution.

“Lawyers for the legislature, labor and industry all agree that the proposal is unconstitutional,” said Jeff Schoepke, director of tax and corporate policy for Wisconsin Manufacturers & Commerce. “The tax will be either paid by consumers or the oil industry will stand to be refunded millions – and perhaps billions – of dollars by the state of Wisconsin if this tax is passed into law. It’s very bad public policy.”

Diverse Legal Analysts Agree – “No-Pass-Through” Won’t Pass Muster

Non-partisan Legislative Council staff Attorney Bill Ford warned Assembly Speaker Mike Huebsch (R-Onalaska) in a legal analysis:

• “Because the provisions of the anti-pass through provision in SECTION 2496 of 2007 Senate Bill 40 and the New York anti-pass through provision struck down in Shell Oil are similar, it appears that the anti-pass through provision in Senate Bill 40 raises the legal issue of whether it violates the Commerce Clause of the U.S. Constitution.”

Former Attorney General Peg Lautenschlager, who represents organized labor as an attorney in private practice wrote in a memo dated April 19, 2007:

“The burden on interstate commerce is clear: the tax is difficult to administer, it will impact the terms of long term contracts with refiners, it will cause fuel to flow to less costly, less cumbersome markets and exacerbate the problems, and expense, of having to supply needs through spot market purchases.

SB 40 currently prohibits oil companies from passing the cost of the tax to consumers. In 1983, a New York appeals court found that a similar state tax on oil companies’ gross profits shifted the burden of the tax from New York consumers to those of other states (presuming that the oil companies would do so). Shell Oil Co. v. NY State Tax Comm’n, 458 N.Y.S.2d 938, 91 A.D.2d 81 (N.Y.A.D. 1983). This aspect was found to unfairly discriminate against out-of-state purchasers, in violation of the Commerce Clause. The New York legislature subsequently repealed the tax statute.”

Attorney David Crass, of Michael Best & Friedrich, a leading Wisconsin law firm representing manufacturers wrote to WMC:

• “It violates the Commerce Clause . . . because the anti-pass through provision impermissibly insulates Wisconsin consumers from the effects of the gross receipts tax and discriminates against out-of-state consumers . . . . Notably, the Puerto Rico case often cited by proponents of the tax is irrelevant to a challenge under the Commerce Clause.”

A new analysis by WMC has found that the gross receipts tax will drive up the tax on gasoline sold in Wisconsin by 7 cents per gallon. Wisconsin will have the highest state gas tax in the nation if the tax is approved by the Legislature, reports the non-partisan Legislative Fiscal Bureau.

“We all love Wisconsin,” Schoepke said. “But raising the gas tax by 7 cents a gallon is not going to make our state more competitive. We need to look at long-term solutions to make sure we have good roads without raising taxes beyond what we can afford.”

In 2005, the Legislature approved and Governor Doyle signed a plan to eliminate automatic gas tax hikes. If the automatic hikes had been in place, the gas tax would have only increased by about a penny a gallon, Schoepke said.

“Because this is a gross receipts tax, the tax keeps going up as the price goes up,” Schoepke added. “It’s like automatic gas tax hikes on steroids, which will bulk up the size of government but will do long-term damage to our economy.”

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FOR FURTHER INFORMATION CONTACT:
Jeff Schoepke or R.J. Pirlot, (608) 258-3400

Posted: May 30, 2007