Proposed cap on gas tax could suffer from poor timing

With gasoline prices already climbing since December, a Meriden lawmaker and Connecticut’s service stations want to put the brakes on a volatile state fuel tax that accelerates prices hikes even further.

But with Connecticut taxpayers still recovering from the $1.5 billion increase ordered across all state taxes last year to close a record-setting budget deficit, any plan to revisit taxes in the legislative session that starts Feb. 8 could run into trouble.

Republican Sen. Len Suzio pledged Thursday to introduce legislation to effectively cap state government’s revenues from the petroleum products gross receipts tax, a levy applied primarily to wholesale gasoline transactions, but also to other fuel sales, excluding home heating oil.

“The state has been reaping windfalls from this hidden tax on consumers,” Suzio said. “With gas prices going up, we’re collecting more in gas taxes. It’s the wrong thing to do. The state shouldn’t be benefiting from the pain that higher gas prices cause our residents.”

The “hidden tax” Suzio referred to is not the 25-cents-per-gallon retail levy on gasoline that most consumers are familiar with. Instead he is citing a second levy dating to the late 1970s, when state government tried to impose a direct tax on major profits by oil companies. But the state couldn’t prevent the companies from passing that tax burden onto consumers, losing a legal fight that went to the state Supreme Court shortly after the tax was enacted.

Over the past three decades, Connecticut gradually has increased the levy, with some lawmakers conceding it is politically popular given that most in the general public don’t know it exists.

According to the Independent Connecticut Petroleum Association, the average wholesale price at New Haven Harbor — the single-largest fuel importing site in Connecticut — stood at $2.81 per gallon on Thursday, up 13 cents since Dec. 1.

Based on that average price and the 7 percent tax rate, the wholesale levy would appear to add 20 cents per gallon to the price of gasoline when it is sold by a distributor to a local filling station.

But complicating matters, the state allows fuel distributors, who actually collect and pay the wholesale tax, to pass the cost along to station owners, and through them to motorists. This is part of a complicated system that effectively replaces the 7 percent levy with a rate of 7.53 percent, a system that the state Supreme Court affirmed in 1987.

When the fiscal smoke has cleared, state government currently collects 46 cents per gallon when consumers fill up: 25 cents from the retail tax, and another 21 cents on the wholesale levy.

But while the retail tax is fixed, the wholesale one is not. As wholesale prices rise, so does the state’s take.

In 2008, when wholesale prices in New Haven hovered around $3.50 per gallon, Connecticut set a record-high retail price of $4.39 per gallon. State taxes alone comprised nearly 52 cents, including a wholesale levy of 27 cents.

The current uncapped fuel tax has provided state government with considerable “windfalls” in past fiscal years when fuel prices rose, charged Michael J. Fox, executive director of the Stamford-based Gasoline & Automotive Service Dealers of America, which represents over 450 filling station owners. Fox’s group is helping Suzio with a petition drive that they hope will collect over 5,000 signatures in support of a cap by next spring.

Consumers and association members are particularly frustrated, Fox added, because past windfalls were not spent on transportation programs or to clean up fuel contamination sites — the purposes most consumers expect when they hear about the tax.

For example, 56 percent of the nearly $370 million in wholesale fuel taxes collected in the 2007-08 fiscal year was spent outside of these areas.

State fiscal analysts are projecting the tax will bring in $342 million this fiscal year.

Gov. Dannel P. Malloy, who campaigned last fall against a growing trend of using fuel revenues for general budget purposes, worked with the legislature last spring to begin shifting fuel dollars back into transportation programs. They dedicated nearly $227 million, or two-thirds, for that purpose this fiscal year.

One option for capping this tax, Suzio said, is to set an artificial wholesale price ceiling. For example, he said, if prices climb above $3 per gallon, the state could nonetheless calculate the tax owed based on a $3 price.

Another option would be to replace the current percentage-based tax with a fixed number of pennies per gallon, similar to the retail tax.

“I think we need a robust debate on tax reform,” Suzio said, adding he isn’t fixed on any one capping solution.

But the co-chairwomen of the legislature’s tax panel, the Finance Revenue and Bonding Committee, said the chances of a robust debate this spring are slim.

“I will keep an open mind, but we have to look at the overall perspective,” said Rep. Patricia Widlitz, D-Guilford, who said residents and businesses still are adjusting to increases in income, sales, corporation, cigarette and liquor and other taxes. “We have to monitor our new system. We need a little time for that to ride and see what the results are before we make more changes.”

“There is at least one person in favor of cutting every tax,” said Sen. Eileen Daily, D-Westbrook, who asked how officials consider a new cap or limit on one tax and not be prepared to ease all of the other burdens as well. “It really is a Pandora’s box. We always try to look at everything in the tax system, but what we really need right now is some stability.”