How a Law Designed to Promote Fairness Is Hiking Gas Prices in Wisconsin

New Deal-era legislation is causing major headaches for Wisconsin’s consumers and businesses.

A law that has been on the books in Wisconsin since 1939 forces consumers to pay an extra 9 percent on fuel, in the name of fairness. A report by the Wisconsin Policy Research Institute examined the law and its impact on consumers and business owners in the Badger State.

The Unfair Sales Act was enacted to stop a “flood of small-business bankruptcies during the Great Depression,” according to the institute’s report, which was released last year. The law initially applied to all merchandise and required retailers not to sell anything for less than 8 percent more than what they paid for it at cost.   

To avoid “predatory pricing,” the law was designed to stop retailers from lowering prices so much that competitors would go out of business, after which the original retailer could raise prices again.

Several legislative changes over the years updated the law, but rules are still in place for alcohol, tobacco, and motor vehicle fuel.

According to the Wisconsin Policy Research Institute’s report, alcohol and tobacco products may not be sold below cost. The definition of “cost” includes a presumptive 3 percent markup by wholesalers and 6 percent markup by retailers. Motor fuel must be marked up 9.18 percent above the “average posted terminal price,” determined by an independent oil-price-survey company every day.

The Unfair Sales Act also states that general merchandise may not be sold below cost by wholesalers or retailers. Exceptions to these rules are made for matching a competitor’s price (which turns out to be the crux of many disputes over the law), or for clearance or liquidation sales, as well as the sale of perishables or damaged goods. The law does not apply to services.

Rick Lemke, who owns a gas station and car repair garage in Wauwatosa, Wisconsin, said he thinks the state should repeal the law, but that the regulation of gas prices serves a purpose.

There’s an exception to the unfair competition law that says a retailer is allowed to sell their product for below the minimum markup rate to meet a competitor’s price. This most often plays out with gasoline because, as Lemke pointed out, it’s the only product that has to have a price posted along the roadside for consumers to see. If his competitor sells gas for less than what the law requires, he can do the same, as long as he fills out a “Notice of Meeting Competition” form and sends it to the Wisconsin Department of Agriculture.

Lemke said every day he must drive around town, observe his competitors’ prices on gas, report who is selling for less than markup, and file paperwork so that he won’t get in trouble for selling his gas at the same or lower price.

“I would like to see the law repealed because it creates paperwork on my part every day,” he said. “You’re automatically assumed in violation of the law if you don’t have the paperwork.”

While the law causes him extra work, Lemke said he’s glad the law keeps big companies, like Meijer or Wal-Mart, from selling gas at a loss while making money elsewhere in the store. Such practices could put small shops out of business, he said.

Wisconsin is not the only state with minimum markup or unfair competition laws.

According to a 2006 article by the Foundation for Economic Education, many states—including Michigan, Maryland, and New York—have similar laws, “however, none are as extreme as the one in Wisconsin, where fuel taxes are also among the highest in the nation.”

Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy in Michigan, said the law is outdated and a burden on consumers.

“It’s a suffocating economic mandate that has been around too long for its own good. It’s an anachronism,” he said.

LaFaive has done extensive research on Michigan’s liquor control laws, which are similar to Wisconsin’s minimum markup laws, and lead to high prices on alcohol. But, he said Wisconsin’s law is much more pervasive and suffocating than Michigan’s.

“This is protectionist legislation that was born of a different era,” he said. “Protectionist sentiments are universal. I see them everywhere.”

Salim Furth, a research fellow in macroeconomics at The Heritage Foundation, called these laws a price gouge.

“There is, generally speaking, no justification for a law of this type,” he said. “The defenders will cite the idea of monopoly protection, but a monopoly wouldn’t be stopped by this law: large markups are exactly what a monopolist would do. Low markups are a hallmark of competition, not monopoly.”

Several of the Wisconsin Policy Research Institute report’s authors interviewed consumers around the state and found that many of them say they think the free market should determine gas prices, not a law.

One woman quoted in the report sums it up this way: “We purchase gas wherever we can get the best deal.”

The minimum markup law hurts consumers, LaFaive said.

“No consumer ever got killed in a price war,” he said. “If they’re defending this law based on a [potential] price war, they’re admitting that consumers come second.”

He called the laws “economically harmful and unfair.”

While proponents of the law say it keeps small businesses in competition with big stores, LaFaive said big stores can’t be blamed for succeeding in a free market.

Several consumers in the report stated that they will shop wherever they can get the best price, whether it be a big box store or a mom-and-pop shop. Another shopper said she thinks long-established, small stores would survive if the markup law was repealed because of a dedicated clientele, even if their prices are slightly higher.

In 2009, the minimum markup law nearly died after a federal judge ruled on a suit involving gas station chain Flying J. The judge said the minimum markup law violated the federal Sherman Antitrust Act, according to the Wisconsin Policy Research Institute’s report.

Both the attorney general and governor of Wisconsin at the time (one a Republican and one a Democrat) decided not to appeal the decision. However, a trade association supporting the gas and convenience store industry in Wisconsin was granted an appeal, which overturned the federal judge’s decision. So, opponents of the law have turned to the state Legislature to try to repeal it.  

The most interesting part of his research, report contributor Dave Daley said, was discovering that the state government has the equivalent of two employees responsible for enforcing minimum markup laws, and that they do not actively look for offenders.

The employees receive complaint forms from businesses claiming that another company is not following minimum markup rules. The two employees can then issue warning letters to the supposed offenders and, if necessary, can refer a case to a local prosecutor, though no cases have been referred for more than 10 years, according to the report.

“The research seems to show that the state is doing the minimum it has to to make offenders aware of law,” Daley said. “It has more of an impact on some of these businesses being forced to jump through hoops, especially gas stations. No matter what you want to charge, you have to deal with the minimum markup law.”