Our View: ‘Racking’ our brains

Posted: May 18, 2013

While Jill Vogel spoke splendidly to the political wherefores and whys of the transportation bill, we went straight to a petroleum-industry source — Ken Rice, executive vice president and CEO of H.N. Funkhouser & Co. — for a breakdown of precisely how the bill’s new funding mechanism will work. In no small way, as you will see, Mr. Rice serves as our informational “rack.”

Allow us to explain: When fuel retailers go to pick up product, they do so at what is called “the rack” — the point at which the pipeline delivers what we eventually pump into our cars and trucks.

Now the wholesale price, on which the new fuel tax will be computed, is called the “rack price.” As Mr. Rice explained to us in an e-mail, the Oil Price Information Service (OPIS) reports these prices, for gasoline and diesel fuel, every day. And it’s from these prices that the state will derive the twice-yearly averages on which the 3.5 percent gasoline tax (computed on the price of regular unleaded fuel) and the 6 percent diesel tax will be based. Hence, the “fluidity” to which Mrs. Vogel referred in the editorial above.

To receive some sort of inkling how this new approach will work, we asked Mr. Rice what the “hard numbers” would be if this mechanism were imposed Friday. His quick synopsis: The OPIS price for gasoline on Friday checked in at 2.8085 cents per gallon. At a 3.5 percent tax rate, this comes out to .0983 cents per gallon — as opposed to .175 cents per gallon with the soon-to-be-replaced excise tax.

Now, this differential between “rack tax” and excise tax closes markedly when the 6 percent tax is applied to “road diesel.” On Friday, the OPIS price for diesel registered at 2.8908 cents per gallon, which would provide a tax yield of .173 cents per gallon, or just a smidgen below the excise tax.

So what would the bottom line be, for the state and its roads program, if the new law went into effect Friday, based on those OPIS prices? Mr. Rice explains: “The actual amount of revenue going to the roads goes up, but the actual tax collected at the rack for now goes down for gas and [is] about even for diesel. This was a compromise recognizing that cars and trucks are becoming more fuel-efficient, so revenues were going to continue to decline if you solely rely on the cents per gallon [excise] tax.”

Thus, if the taxing structure were imposed Friday, consumers initially would benefit, given the lighter per-gallon tax on gasoline. But, two things to remember are: Those OPIS prices are subject to change (i.e., they could rise), and this tax on the “rack price” is but one component of a measure that raises taxes by a variety of means, most notably that increase in the state sales and use levy. And remember, too, that if Congress fails to pass the Marketplace Fairness Act relative to Internet sales by January 2015, the tax on the “rack price” for gasoline jumps to 6 percent.

“Convoluted”? You bet.