COMMENTARY
Squandered chance to tax gas-price gouging

By Richard W. Baker

Reports that gasoline prices in Hawai'i are more than 40 cents a gallon above Mainland prices — and have not declined even as international oil prices have dropped significantly — raise again the question of why gasoline prices in Hawai'i are so outrageous.

A proposal during the just-ended legislative session called for imposing a tax on excess profits taken in by Hawai'i's two oil refiners in the hope of lowering gas prices or at least keeping the money in the state. Advertiser library photo • March 12, 2003

What may be news is that at the recently concluded legislative session, our state lawmakers had an opportunity to do something simple and effective about it. But they didn't, even as they struggled to produce a nominally balanced budget at the cost of withholding $30 million for school repairs and taking $85 million from special and rainy-day funds.

The opportunity came in the form of a proposal floated at the start of the session by state Sen. Gordon Trimble, R-12th (Waikiki, Ala Moana, Downtown), to tax the oil refiners on their excess profits.

There is no question that the refiners are making huge profits on their gas business in Hawai'i.

In the mid-1990s, Chevron derived more than 20 percent of its nationwide gasoline profits from the 3 percent of its sales made here; in 2002, Tesoro reported that its Hawai'i refinery had the largest gross margin of all its refineries.

This profiteering is possible because the gasoline market in Hawai'i is not genuinely competitive, and the two refiners are able to use their dominant position to earn excessive profits.

It's not that they collude — they just don't compete.

But gasoline pricing is incredibly complex, and the suppliers are the ones who provide most of the data, which they can easily manipulate. So efforts to prove price-fixing violations in court are at best problematic (as the Cayetano administration discovered with its $1.8 billion suit), and government has great difficulty directly regulating prices (as the convoluted gas-cap law tries to do).

This is one of the beauties of an excess-profits tax: It deals more simply and directly with gasoline prices than either suits or regulation, and at the same time can relieve pressure on the state budget.

The formula for an excess or windfall profits tax need not be complicated, and need not depend on data from the refiners. For example, it could be based on a comparison between the prices charged to local station owners and the price of delivering refined gasoline imported directly from, say, Singapore.

Such a tax could earn substantial revenues. By one recent estimate, gas prices in Hawai'i in a normal period run around 30 cents a gallon higher for regular unleaded gas than it would cost to import and sell refined gasoline from Singapore. (The difference is even higher for premium grades, which make up almost half of Hawai'i sales, and higher still when there are abrupt changes in international prices, like now.)

A 30-cent differential amounts to more than $120 million in "excess" profit for the approximately 400 million gallons of gasoline sold annually on O'ahu alone. This is money that is leaving Hawai'i and going to corporate headquarters on the Mainland. At a 75 percent tax rate, a minimum of $80 million of this amount could be recovered annually and put back into circulation in the state.

Despite the refiners' anticipated screams, such a tax need not cripple them. Allowance could be made for the relatively small scale and high costs of the Hawai'i refineries, and there would be incentives for increased efficiency. And refiners could avoid the tax completely by reducing their prices to internationally competitive levels — returning the excess profits directly to consumers.

Why did this eminently sensible — or at least highly intriguing — proposal disappear without a trace in the just-concluded session of the Legislature? Was it because the Lingle administration was struggling so hard to produce its own budget proposal in almost no time that they simply weren't able to give the necessary consideration to truly novel ideas? Was it because the proposal came from a freshman Republican legislator in a Democrat-controlled body?

It is certainly true that many legislators — and the administration — are firmly opposed to new taxes. But an excess-profits tax on oil refiners would not be a general tax — as is the long-term-care levy that was passed. This would be more of a refund or reimbursement, saving state taxpayers and consumers money.

Could it be that the fate of this bill reflects the influence of the oil industry, reaching so deeply into our Legislature and government that the refiners can stifle such proposals?

I certainly hope that is not the case — and I have no evidence that it is. But the fact that the government apparently simply ignored an opportunity to raise $180 million in new revenue over two years — or at least to recapture the money that now leaves the islands but should stay here and add to our state economy — does make you wonder.

The Lingle administration and Legislature will have an opportunity to clarify this point definitively next year.

Richard W. Baker is a political analyst who lives in Hawai'i Kai.