Thursday, February 15, 2007

Oil tax may not play as well as it looks

I have not had the time to look at the details of Governor Doyle's proposed "windfall" profits tax on "Big Oil," although it strikes me as political pandering. If you focus on the absolute dollar profit of companies of companies like Exxon or Wal-Mart, they are huge because the companies are huge. For example, if you look at Exxon Mobil's margin in 2005, it's a bit over 10%. Very good, but hardly drug dealer money. In 2002, it was a lot less and, over time, the oil industry has not earned returns that are out of line with other industries.

In 2005, Disney did better than Exxon Mobil, but I haven't heard a call for a windfall profits tax on Big Movies.

When I was in college, Jimmy Carter famously said that world oil production would peak in a few years. It hasn't yet and won't for a long time. Oil is, at some point, a finite reason and, putting aside its more hysterical manifestations about which we are supposed to accede and shut up, alternate sources of energy are worth pursuing - preferably through market mechanisms. But running out of oil before we have to is a stupid policy and giving companies an incentive to extend rising production well past the point at which we formerly thought that it would peak is a good thing.

Of course, little Wisconsin cannot have an impact on global petroleum production. In fact, little Wisconsin may not even have the capacity to tax and, because Doyle says the companies pass on the tax, regulate the price of oil. One difficulty may be that the price he wants to regulate (i.e, the one that cannot pass on the tax) may take place outside of the state, if, for example, the companies that he calls "Big Oil" sell to wholesalers outside the state who, in turn, sell to retailers in the state. If Wisconsin tries to regulate the price at which that transaction occurs, it will almost certainly violate the Commerce Clause.

There are other potential legal problems, but, even if a way around them can be found, the Governor will have made it less profitable to do business here than elsewhere. Would we be surprised if that leads to gas shortages in Wisconsin?

Moreover, he will have enacted a tax that is very difficult and expensive to impose (because you have to enforce the "no passing it on" requirement).

Seems like all style and no substance.

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