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A tax by any other name

Shakespeare said that a rose by any other name would smell as sweet, but the Blagojevich administration apparently believes that a tax by another name will not smell as bad to Illinoisans, especially if they don't see it. In a practice that is becoming increasingly common, the state of Illinois recently sold so-called pouring rights to Pepsi that gave the firm a monopoly franchise to sell soft drinks and related beverages at certain state sites and universities.

The contract applies to many state facilities, including the three University of Illinois campuses, but not Southern Illinois University. Coca-cola is currently appealing the awarded pouring rights that were given to Pepsi on the grounds that it was not provided enough information to submit an effective competing bid. The state reported that this arrangement will generate up to $64 million over the next 10 years, depending on the volume of sales with a guaranteed $14 million in revenue.

Why would Pepsi pay so much for this franchise? The key is the monopoly position that the state has bestowed it. I recently attended the Illinois-Missouri football game at the Edward Jones Dome in St. Louis. One of my most vivid recollections was not of the game itself, but of the beer vendors. Fans were buying 16 oz. plastic bottles of beer for $7.50 each. For those of us counting, that was $45 for a six pack worth of beer, a product that can be purchased for about $5 in most storesapproximately a nine-fold increase over the retail price.

Obviously, the monopoly position of the stadium vendor allowed them to exact this price. You can be sure that most of the profit did not go the vendor, but to the stadium. The cursory search of fans that occurred on entering the arena was more for excluding contraband (and cheap) alcohol than for foiling terrorists' plots.

In the case of the state of Illinois, it is reported that under the pouring rights arrangement, the state will receive a 45 to 50 percent commission on sales. Someone buying a $1 soft drink would find that around 45 cents would go to the state. Once this arrangement is in place, this would be equivalent to around a 90 percent tax on the purchase, 50 cents to Pepsi plus 45 cents to the state. This is clearly better for Illinois citizens than Pepsi being allowed to pocket the full amount if the monopoly rights were given away as has sometimes been the case in the past.

Alternatively, the pouring rights arrangement could have stipulated that Pepsi charge a lower price with the benefits being captured by the citizens of Illinois, not by the state. Viewed in this way, it appears odd that the pouring rights arrangement would be trumpeted by the Blagojevich administration as a great success. Remember that Gov. Blagojevich has been adamant in his opposition to placing tax burdens on individuals. This spring he said: They (business) want me to raise the income tax or increase the sales tax. They want us to raise taxes on people. ... I'm going to say again, what I've said before a million times: I will not raise the income tax or sales tax. I will not raise taxes on people. More correctly, he might have said that he would not raise taxes on people if they could see the tax. A stealth tax presumably is more acceptable.

Pouring rights arrangements are generally accepted in today's world. It is interesting that similar arrangements are now coming under close public scrutiny. For example, arrangements where college aid offices enter into preferred lender agreements with financial organizations are now being questioned around the country. This is viewed as a conflict of interest. These agreements are clearly wrong if they provide private benefits to college officials, but they are also being challenged even when the benefits come back to the universities. Study abroad programs that receive benefits from service providers in other countries are being similarly questioned.

As things go in state government, the pouring rights arrangement hardly constitutes a scandal or even an impropriety. It does, however, illustrate that the aversion to taxing people is only skin deep. If a tax on people can be seen, it is bad. If it is disguised, it appears to be acceptable.

- J. Fred Giertz is a professor of economics within the University of Illinois' Institute of Government and Public Affairs. He can be reached at (217) 244-4822 or jgiertz@ad.uiuc.edu.

NO RELIEF SEEN ON OIL, GAS PRICES

Morris R. Beschloss
CIBM Contributor

According to an extensive report in the Wall Street Journal, the Paris-based International Energy Agency, which monitors energy markets on behalf of the world's 26 most advanced economies, has released its annual medium-term forecast, projecting conditions through 2012.

The agency expects oil supply to be tighter in coming years than it had forecast, with little prospect of relief unless world economic growth falters.

The industrialized world's energy watchdog added to rising concerns that oil and natural gas production won't keep up with the world's growing thirst for energy in coming years, highlighting worries over supplies and prices.

The IEA doesn't normally forecast oil prices, but its conclusions imply that consumers should expect continued upward pressure on the cost of energy. It did not, however, project the impact of inflation on such cost.

Oil and gas price pressures look set to remain in the coming years, the IEA report said. Slower-than-expected gross domestic product growth may provide a breathing space, but it is abundantly clear that if the path of demand doesn't change on its own, it may well be driven to change by higher prices, the report said.

The IEA forecasts that the Organization of Petroleum Exporting Countries, the cartel that supplies more than 40 percent of the world's daily oil needs, will have little spare capacity left by 2012.

Critics of the IEA point to the number of revisions it makes in its data and some notable misses, like a surge in demand from China three years ago that helped send oil prices surging.

Still, the IEA is one of the consistent sources of data on oil supply and demand and is widely respected in the industry:

Growing tight: The IEA said the world could face an oil and gas supply crunch in coming years and rising demand.

Thin cushion: Economic growth is expected to spur demand, but the IEA sees OPEC's spare capacity narrowing and expects growth from non-OPEC sources to dwindle after 2009.

Price pressure: The forecast adds to concerns over world oil supplies and implies continued upward pressure on petroleum prices.

It said global oil demand is projected to expand 2.2 percent a year, on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year.

This forecast is based on global economic growth of about 4.5 percent annually. Oil demand is expected to increase most rapidly in Asia and the Middle East.

Should economic growth slow in terms of gross domestic product to an annual 3.2 percent in the years to 2012, the need for OPEC oil would be reduced by some 2 million barrels a day; but that would merely postpone by a year the point at which demand surpasses the growth in global oil capacity.

It pegged total supply growth in non-OPEC at 2.6 millions barrels a day by 2012, to 52.56 million barrels a day from 49.98 million barrels a day in 2007. This is slower than the rate posted so far this decade and about half the rate of future projected growth in demand.

The report said OPEC's spare capacity, the safety cushion in the world system, is expected to remain constrained until 2010, then shrink to minimal levels by 2012, when the exporters collectively will be able to pump only a paltry extra amount  the equivalent of 1.6 percent of world demand.

While the IEA didn't say so, the shrinking of OPEC's spare capacity in the past decade has made the oil market skittish about any development that could conceivably threaten supply, resulting in volatile markets and prices.

On an optimistic note, the IEA said the world's refinery capacity is likely to increase significantly during this period.

- Morris R. Beschloss graduated from the University of Illinois' College of Communications in 1952.
He is a columnist for the Desert Sun and publishes two newsletters for the pipe, valve and fittings industry. He can be reached at (760) 324-8166 or flem6609@bellsouth.net.

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