Wisconsin Governor: Let’s Go Back to 1970s Energy Policy

May 31, 2007

The Wisconsin legislature has moved one step closer to bringing forth a special tax on oil companies, and the bill is similar to the energy policies of the 1970s in that it includes both price controls and windfall taxes. From the Green Bay Press-Gazette:

The state Legislature’s budget committee is expected to clash today over Gov. Jim Doyle’s controversial proposed tax on oil company profits.

The oil tax, which the Legislative Fiscal Bureau expects to generate $274 million over the next two years, was a major sticking point Tuesday night when some members of the Joint Finance Committee discussed the Department of Transportation’s budget. Democrats and Republicans were unable to reach an agreement.

“It represents a big portion of the funding,” said Jay Wadd, spokesman for state Sen. David Hansen, D-Green Bay. “If you pull that out, you have to find other ways to fund these projects or you have to make cuts.”

Some opponents of the 2.5 percent tax on oil company’s gross revenues argue the increase may be passed to consumers at the pump who already face record gas prices. Other legislators have argued the tax may be unconstitutional.

Responding to critics, Doyle has said he believes the tax is legal. He has also proposed criminal penalties if oil companies offset the increase at the pump.

It’s hard for any economist not to laugh at politicians who try to legally enforce the economic incidence of a tax. Any first-year microeconomics student will learn that the taxpayer who is legally required to pay a tax is not always the one who will really bear the economic incidence of the tax. What students aren’t directly taught, however, is that on rare occasions politicians try to control both the legal incidence and the economic incidence of a tax. For that, the students merely need to flip back to their notes from the first week of class under the heading “price controls.”

Imposing a tax on oil companies in Wisconsin will decrease the supply of energy brought to Wisconsin, ceteris paribus, which will raise the price of energy. And not allowing the price to increase would only lead to a shortage of energy. Of course, certain contracts that have been signed may not allow such short-run supply changes, but such a policy in Wisconsin could have adverse long-term consequences for the state, especially if few other states impose similar policies.

So who would bear the burden of the windfall tax? In the long run, it would likely be to a large extent consumers in Wisconsin. In the short run, the burden would likely be borne by oil industry employees and shareholders, including one of the largest energy sector shareholders – the Wisconsin state pension fund.


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