Will Stations Have to ‘Eat’ the New Gas Tax?

A new nickel-a-gallon federal tax on gasoline and diesel fuel goes into effect Saturday, but it’s unclear how much of that increase will find its way to the corner gasoline station.

On one hand, service station operators say they can’t afford to swallow any of the tax and must pass the 5-cent hike onto consumers. On the other hand, service station operators may not want to risk losing any more customers, especially since demand for gasoline has already fallen dramatically in the face of high prices resulting from the Aug. 2 Iraqi invasion of Kuwait, analysts note.

“You’re damned if you do and damned if you don’t,” said David Carney, who operates Hillside Chevron in Torrance.

The 5-cent tax was approved by Congress in October as part of the budget reconciliation act, with half of the anticipated $5 billion in new revenues going to reduce the federal budget deficit and half to finance transportation projects. It boosts total federal gasoline taxes to 14 cents a gallon.

Scott Jones, an industry analyst and president of AUS Consultants Inc. in Philadelphia, said his firm’s research indicates most retailers will hike prices the full nickel at first, but then back off in the next two or three weeks, with dealers ultimately eating two cents of the increase.

“Picture four service stations at an intersection,” Jones said. “Given the current market situation, with sellers of gasoline vying for decreasing demand, it will be too enticing for one of those four stations to raise their prices only four cents a gallon while the other three raise theirs a whole nickel. Then it starts.”

There is another scenario: refiners or oil companies could decide to drop the wholesale prices of gasoline sold to dealers to offset the tax hike.

“There’s a possibility that retailers will appeal to branded refiners and say, ‘Look, the competition is forcing us to lower our prices; you guys have to give us some help,’ ” Jones said. But, he added, “Normally this sort of thing falls full force on the retailer.”

None of seven major oil company spokesmen interviewed Thursday would comment on future price changes, saying only that the companies would remain competitive.

Chevron Corp., however, recently dropped posted wholesale prices of gasoline 4 cents a gallon in California. But there was no net effect on wholesale prices, because the change simply reflected a discount already being offered to dealers.

Texaco Inc. said it has dropped Los Angeles wholesale prices of its regular unleaded gasoline 5 cents a gallon and diesel fuel 6 cents a gallon in the last two weeks.

Jerry Kaplan, a Shell dealer in Sherman Oaks, said he believes Shell Oil Co. may drop its wholesale gasoline prices 2 cents a gallon, though a Shell spokesman would not comment on that.

But whatever Shell does, Kaplan said, consumer wrath would still fall on him. “We collect every kind of tax you can think of, and my customer looks at me and says, ‘You ought to get your hand slapped for what you’re doing,’ ” he said. “I think it’s totally unfair.”

In addition to the 5-cent hike on Saturday, federal taxes will rise another 0.1 cent per gallon to raise money for a fund to deal with leaking underground storage tanks.

For Californians, the tax increases follow a state hike of 5 cents a gallon on Aug. 1--the day before the invasion--and precedes another penny-a-gallon state tax hike coming Jan. 1. By then, the price of a gallon of gasoline will include 38 cents in taxes.

Generally speaking, the taxes are paid by wholesalers of gasoline and built into the cost of the fuel sold to retailers: service stations, bulk distributors and others.

Whether they pass that cost onto consumers depends on a variety of factors.

Already, retail prices of gasoline have skyrocketed about 30 cents a gallon since the Iraqi invasion, although they have stabilized in the last five weeks or so. This week, the national average price of a gallon of regular, self-serve unleaded gasoline--the most popular grade--was $1.366 a gallon, according to the American Automobile Assn.

Until recently, the run-up in retail prices had not kept up with the rise in the cost of crude oil, from which gasoline is made, or in some cases with the wholesale cost of gasoline sold to dealers. That meant that many dealers were seeing their operating margins squeezed at the same time demand fell off.

Operating margins for retailers nationally fell from 13.9 cents a gallon on July 6 to 8 cents a gallon on Aug. 24, according to the widely read Lundberg Survey. That margin has recovered to about 13.4 cents a gallon now, Lundberg reported. Out of that margin, dealers must pay overhead, income taxes and other expenses before seeing a profit.

Lou Bacca, who operates Chevron stations in Costa Mesa and Santa Ana, said his sales volume has fallen about 15% and his profits are down 25% since the invasion. “I’m going to do my best to pass (the new tax) on, because our profits are pretty slim right now,” he said.

But there are real concerns that another steep hike in gas prices will further discourage motorists from buying.

Carney said sales volume at his Chevron station in Torrance fell 30% from Aug. 1 to Aug. 4--first, because of the new 5-cent-a-gallon state sales tax, then because of a 5-cent-a-gallon price increase due to the Iraqi invasion. Sales have not yet bounced back, Carney said.

Nationwide, gasoline demand was 2.7% lower in October than a year before.

GAS PRICES

Immediately after the Iraqi invasion of Kuwait, the American Automobile Assn. began reporting national gasoline prices daily. After the first few weeks, it began reporting prices weekly.