Flat out wrong. That’s the only way to describe the oil industry’s claims about a proposed increase to Washington’s hazardous substance tax. Consider this ill-informed article at Washington State Wire:
[subhead] As Much as Six Cents a Gallon
The money has to come from somewhere, though—your local gas station, for instance. Opponents say the plan could raise gas prices as much as six cents a gallon, if oil companies can find a way to pass the full amount on to consumers. Because of the competitive nature of the oil business, refiners may have to eat some of the cost.
This is wrong—obviously wrong—on at least two counts. 1) It’s bad math. 2) It’s self-contradictory.
First, let’s do the math. The current tax is 0.7 percent on the wholesale price of toxic substances, including gasoline and other refined petroleum products. A new bill would raise the tax to 2.0 percent.
Calculating the maximum impact on consumer gasoline prices is simple arithmetic. Assuming that the wholesale price of gasoline is $2.30 (roughly consistent with recent and current prices, as well as the near-term futures market) the calculation is simple: $2.30 x 0.7% = 1.6 cents. In other words, the current tax adds 1.6 cents to the price, at most.
Now let’s calculate the proposed higher tax rate: $2.30 x 2.0% = 4.6 cents. In other words, the proposed higher tax rate could raise the tax amount to 4.6 cents.
The last step is so easy that even an oil lobbyist can do it: 4.6 cents – 1.6 cents = 3 cents. So, in reality, the proposal might increase prices by just 3 cents. Not 6 cents. 3 cents. The oil industry has wildly overstated the effect of the new tax. (It’s an over-statement of 100 percent for math-inclined folks). The only way the oil industry claims could be accurate is if wholesale gasoline prices were about double what they actually are.
But it gets worse: the arguments from the oil industry are actually contradictory. Remember that they admit “refiners may have to eat some of the cost.” In other words, even according to the oil guys, consumers won’t pay the full cost of the tax anyway, because the refiners will pick up a portion of it. So the real impact on consumers is less than 3 cents.
The extent of “price pass-through” is a somewhat debateable subject. It’s often assumed that gas taxes get fully passed on to consumers, but that may not be true. (And it’s instructive that the oil industry apparently believes it’s not true.) In fact, a 2004 article in the Journal of Economic Education makes a strong empirical case that gasoline excise taxes are not fully reflected in consumer prices—meaning that producers and consumers share the cost of new taxes (and share the benefits of reduced taxes).
Still, one might wonder whether its fair for the oil industry and refiners to pay a higher tax rate on the import of hazardous substances into Washington. I’ll leave that values question alone except to note one final thing. The tax increase helps pay for water cleanup. And while it’s levied on all hazardous substances that harm water quality, not just on oil, petroleum products are, by volume, easily the largest pollutant in the runoff that fouls Puget Sound.