Article by Erik Smith. Published on Wednesday, January 26, 2012 EST.

Gregoire Takes a Big Risk by Relying on a Dubious Oil-Barrel ‘Fee,’ Opponents Warn – No United Front

The Senate Transportation Committee hears from a parade of naysayers as the governor’s transportation proposal gets its first hearing.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Jan. 25.—Just three weeks into this year’s legislative session, the governor’s big $3.7 billion transportation proposal is already starting to look like a multi-car pileup on I-5. Interests that normally unite behind highway financing plans find themselves fighting an unaccustomed battle over an oil tax, and they’re slamming on the brakes and skidding for the ditches.

            That much was clear Tuesday as the transportation plan got its first hearings in the House and Senate. The peculiar proposal from Gov. Christine Gregoire for a by-the-barrel tax on oil, rather than a gas-tax increase, is pitting the asphalt lobby against the oil industry and its allies. Not that anyone asked for the fight. But in an area where normally business, labor and government interests try their darndest to march together, the disunity is remarkable.

            Every few years Washington witnesses a new attempt to raise more money for road construction. Conventional wisdom is that the state’s gas tax, now 37.5 cents a gallon, just isn’t keeping pace with the demand for new road construction and maintenance. Multi-billion-dollar tax-and-spending plans are never the easiest things to sell, and normally it takes a united front to put them over.

            But Gregoire’s proposal this year for a $1.50 “fee” on every barrel of oil refined in the state is raising fierce political opposition in the Legislature, as well as the specter of legal challenges. The plan is a tax in every sense in which the word is used by ordinary mortals. But by declaring it a “fee,” Gregoire gets around rules that either would send the plan to the ballot or force an all-but-impossible two-thirds vote in the House and Senate.

            The tactic is doomed to failure, complains state Sen. Doug Ericksen, a Ferndale Republican who hails from oil-refining country. If political opposition doesn’t kill it, the courts will. “It’s clearly a tax,” he said. “The frustrating thing is that the governor is relying on a non-starter for the major part of her funding package.”

            Rotten Timing

Last year it looked as though Gregoire was laying the groundwork for a traditional gas-tax increase. She convened a commission of the brightest minds in the transportation arena – her “Connecting Washington” task force. The panel identified some $50 billion in urgent and semi-urgent needs, then winnowed down the list to $21 billion. The assumption was that the governor would ask lawmakers to send an 11-cent gas-tax proposal to the ballot.

            But two weeks ago Gregoire stunned the Legislature during her State of the State address when she proposed a much-skinnier $3.7 billion plan. Some of it is to be financed with increases in vehicle-license and truck-weight fees. The bulk of it, though, some $2.75 billion, comes from the oil tax.

            Chalk it up to the rotten luck of the recession. Lawmakers this year are expected to send another tax proposal to the ballot, a sales-tax increase to help dig the state out of its $1.5 billion budget hole. Two tax proposals might be too much for the voters to swallow.

            Yet by going for the oil tax rather than a standard-issue gas-tax, Gregoire raises a whole new set of problems. The deep divisions became obvious at the Tuesday hearings of the House and Senate transportation committees.

            An Astounding Stretch

            Start with the fact that the proposal may not even be legal. It is a question for the courts, of course, if the Legislature gets around to enacting it. But Gregoire’s approach hinges on a definition that is such a stretch it might impress Plastic Man.

            The problem is that Washington voters keep imposing supermajority requirements on the Legislature, most recently with Initiative 1053 in 2010. Practically speaking, the rules make it impossible for lawmakers to pass tax hikes on their own, and forces voter approval for new taxes and increases in existing ones.

            So Gregoire borrowed an idea that the environmental lobby has been pushing since 2009, a “fee” on the oil industry to pay for expensive stormwater drainage projects in the Puget Sound area. The idea is that if there is a relationship between a payer and the purpose to which the money is put, then it is a “fee” and it can be approved by the Legislature with a simple majority vote. For years, the green lobby has been arguing that oil causes pollution via stormwater runoff, and so a “fee” for that purpose is permissible. But many are dubious. The argument is untested. And whether oil is a significant cause of Puget Sound water pollution in the first place is one of the hottest debates in the state’s environmental circles.

            Now comes the governor’s proposal. It takes that idea and pulls it like Silly Putty. The oil tax would apply to everything produced by the state’s oil refineries, including aviation fuel, marine gas, and fuel consumed by off-road vehicles. None of these fuels are products that have a direct relationship to highway travel. And as explained by policy analyst Jennifer Ziegler at Tuesday’s Senate transportation hearing, it sounds as if the governor’s staff certainly had to be broad-minded when it came up with the idea.

            Might as Well Tax Toilet Paper

            “We looked at all the things in a barrel of oil that are related to a transportation purpose,” she said. “For instance, people drive to the place where they use an off-road vehicle. So they go on the state system. They drive to the airport on the state system.”

            And so on.

            The problem with that definition is that you could use it to justify taxing just about anything for highway purposes, says Dave Fisher, spokesman for the Western States Petroleum Association. “Think of all the other products that argument could be made for,” he says. “Batteries and cars and tires. For that matter, apples and toilet paper – all the things that rely on the highway system to get to market. There really isn’t a logical connection.”

            With a definition like that one, Initiative 1053 becomes meaningless, Fisher says. And while the Petroleum Association isn’t saying yet whether it would go to court, you can bet other interests would. Tim Hamilton, executive director of the state’s sometimes-litigious service-station association, the Automotive United Trades Organization, hinted as much when he told the Senate panel that the plan is a hidden tax on gasoline that would inevitably be passed on to consumers. “It is doomed to fail, and I would like to stay out of court this time. So please, think of another way to go.”

            Even environmental interests, which would get a share of the proceeds for stormwater projects under Gregoire’s plan and naturally like that idea, appear to be offering a caution. Mo McBroom, lobbyist for the Washington Environmental Council, said the group believes an oil-barrel fee can be justified for stormwater, but observed that the governor’s proposal goes quite a bit further. “I think that can be done, but I think it is tricky, to be quite frank,” she said.

            Strong Political Opposition

            All legalities aside, the plan also faces major political opposition. The oil-refining industry maintains that it already bears a heavy tax burden in Washington state – three times higher than in the state of California, according to a 2009 analysis by the Washington Research Council. It also is the biggest employer and biggest taxpayer in the northern Puget Sound counties. If the expectation is that oil companies will absorb the new tax, that’s an additional incentive for them to move out of state.

            Scott Merriman of the Washington Association of Counties noted that his organization is divided. Some like the idea that the governor’s plan gives them flexibility to impose local transportation taxes. But local governments in Skagit and Whatcom counties are up in arms.

            So are aviation interests. Megan Lawrence, lobbyist for Alaska Airlines, said the plan would cost the airline $6.2 million a year – to pay for roads? “If the Legislature decides to go ahead with this fee, we believe that aviation fuel should be exempt from it,” she said.

            And there are many who would like to support a transportation package who fear the furor over the oil tax will bring the whole thing crashing down. State Sen. Christine Rolfes, D-Bainbridge Island, who represents the ferry-dependent Kitsap Peninsula, said she was dismayed that ferry-system improvements are linked to an oil-barrel proposal with iffy prospects.  

            No Unity

            The disarray was perhaps most striking to those who have watched previous gas-tax proposals work their way through the Legislature. Normally every group with a stake in the state’s transportation arena offers an encouraging word. This time many of their representatives admitted deep misgivings. The Association of Washington Business, for instance, opposes the proposal because of its funding scheme, while acknowledging the need for better highway maintenance.

Amid the parade of naysayers came occasional bits of positive testimony from the groups that normally lead the charge for big-ticket transportation proposals – among them the Washington State Labor Council and the Associated General Contractors. But they acknowledge consensus is a long way off.

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