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The repository of one hard-boiled egg from the south suburbs of Milwaukee, Wisconsin (and the occassional guest-blogger). The ramblings within may or may not offend, shock and awe you, but they are what I (or my guest-bloggers) think.

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WPRI understates how much the minimum markup law costs

by @ 19:12 on July 24, 2008. Filed under Business, Politics - Wisconsin.

By now, you should have seen the press reports (this one from the Milwaukee Journal Sentinel is representative) on the Wisconsin Policy Research Institute’s study that states the minimum markup law on gasoline costs us 8 cents a gallon. Some of you may even have taken the time to read the report itself. I hate to do this to Christian Schneider, but the report actually understates how much the minimum markup law is costing us, as it is far closer to 18 cents/gallon.

Allow me to explain how it was understated. The report references a 1999 WPRI report that states at that time, when gasoline was $1.27/gallon, the minimum markup law cost between 2 and 3 cents per gallon. Despite noting earlier in the report that, due to the fact that the markup law is a percentage of the price, its growth is independent of the costs of doing business, Christian uses the simplistic multiple of the current cost of gasoline now versus its cost in 1999 to state that the effect is only 8 cents.

A more-accurate estimate that is based on the earlier WPRI report would take into account not only the increase in the cost of gasoline, but the actual increase in cost of doing business. The Bureau of Labor Statistics does have a statistic called the Employment Cost Index, which is a better measure of how much it costs to run a business than the Consumer Price Index as wages tend to go up faster than prices. I don’t have the time to include increased taxes and property costs, or attempt to figure out how other goods and services offered by the gas stations interact, or even to adjust this for the increase in the amount of gasoline sold in 2008 versus 1999, but the ECI should yield a rather close estimate in the increase in the cost of doing business.

Before I get to the ECI, I need to establish what the “fair” markup was in 1999. I don’t have the report from that year handy, and the new report doesn’t explicitly mention what it is. However, I do have enough information to infer what that is. Gasoline was $1.27/gallon, the “excess” markup was between 2 and 3 cents per gallon (I’ll be generous to the protectionists and use the lower 2 cents), and the mandated markup was 9.18%. That made the minimum markup $0.107 cents/gallon, and the “fair” markup a maximum of $0.087 cents/gallon.

Back to the ECI; I am choosing to use the current-dollar version as it does not attempt to factor out inflation, and I need to include the effects of inflation. Since the BLS changed the definitions of the various categories of employees, including “service occupations”, at the end of 2005, and reports using the current definitions only go back to 2001, I have to note there may well be a discrepancy in this. Specifically, the report using the old definition had an ECI for service occupations of 84.8 in March 2001 (with a base of 100.0 in December 2005), while the report using the current definition and the same base of 100.0 in December 2005 had an ECI for service occupations of 85.5. Since I’m all about simplicity, I’ll otherwise ignore that discrepancy.

In March 1999, the ECI for service occupations was 78.9. In March 2008 (the last quarter the figures are available), it was 108.4. That translates to a 37.4% increase in the ECI.

Now, I can estimate what the “fair” markup per gallon of gasoline should be in 2008. Multiplying the 1999 “fair” markup by the increased cost of employment yields an estimated “fair” markup of 12.0 cents/gallon.

With that established, figuring out how much the minimum markup law costs us is a simple matter of subtracting the “fair” markup from the mandated markup. That mandated markup is, at a price of $4.07/gallon, 30.2 cents per gallon. Subtracting the 12.0 cents per gallon the station needs to stay in business means that the minimum markup law is costing us 18.2 cents per gallon.

Even if one were to accept the premise that gas stations needed the entire 10.7 cents/gallon in 1999, the minimum markup law is costing us significantly. The increased cost of business only brings up the necessary markup to 14.7 cents/gallon, which would mean the minimum markup law is costing us 15.5 cents/gallon.

Now, who wouldn’t like a 15-18 cent drop in the price of a gallon of gas? Gov. Jim Doyle supports the repeal of the minimum markup law, even though he believes it wouldn’t do anything to gas prices. The Wisconsin Institute for Leadership issued a call to Doyle for a special session, and Representatives Bill Kramer and Leah Vukmir joined WIL’s call. Now that a repeal of the minimum markup law has been demonstrated that not will have a significant and positive impact on gasoline prices, it is past time to repeal it. Every day that it remains on the books, it costs Wisconsin residents even more money.

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