A tax on petroleum distributors is rising by 5%. Consumers will likely pay.

ALBANY — A unique state fuel tax charged to petroleum distributors will rise by 5% on Jan. 1, which business groups say will be passed along to consumers and contribute to rising inflation.

The petroleum business tax increase will be charged to fuel distributors statewide.

The tax is assessed on heating fuel for businesses, colleges, hospitals, and also on diesel motor fuel and jet fuel used by aircraft in takeoffs from New York airports.

The tax is not applied to fuel sold for home heating, federal, state and local governments or to fuel used in farming and some other areas of the economy. Other fuel taxes are paid at the pump, directly by consumers.

Kenneth J. Pokalsky, vice president of the state Business Council, said the state petroleum tax hike will be on top of already high fuel taxes compared with other states and comes as inflation is increasing.

"Petroleum taxes are almost 100 percent pass-through, so the cost is ultimately born by the consumer," Pokalsky said.

Greg Biryla, senior state director of the National Federation of Independent Business, said the tax increase "couldn’t be coming at a worse time."

The tax "might be directed at importers and distributors, but it’s passed down and paid throughout the stream of commerce by local employers and their customers as Main Street continues to navigate record inflation, supply chain disruption, worker shortages and an uncertain post-pandemic recovery," Birlya said.

The tax hike contrasts with the efforts of Gov. Kathy Hochul and former Gov. Andrew M. Cuomo to make New York a more affordable state for businesses after the economic damage of shutdowns forced by the COVID-19 pandemic.

On Jan. 1, the current tax will rise to 5.1 cents per gallon of fuel, from 4.8 cents per gallon, or by 5%. The tax is assessed when fuel is imported into New York, before it is distributed.

Bob Ghosio, owner of Jarzombek Energy in Riverhead and a member of the Southold Town board, recalled the many ups and downs of the Petroleum Business Tax he's seen over the years.

"It doesn’t surprise me with everything going up the last couple years," Ghosio told Newsday last week. "The state has to come up with its money somehow, it’s just disappointing they have to use petroleum."

Ghosio said, "I’m just going to have to pass it along. People aren’t going to like that. While I don’t think it will impact my business a whole lot, it’s just another addition to everything that’s coming on."

The state Division of the Budget projects the tax will bring in some $1.1 billion in revenues in 2022, compared with this year’s projected total of $940 million.

Several factors make it difficult to predict precisely how much more the tax hike will cost fuel distributors, state officials said.

Estimating the impact is made more complex because the tax is collected based on a calendar year, while state projections are based on New York's April-to-March fiscal year.

State officials say they also expect increased consumption of petroleum products in 2022, as they don't foresee economic shutdowns forced by the COVID-19 pandemic.

It’s a unique fuel tax in the state, according to the state Department of Taxation and Finance.

The Petroleum Business Tax, a gross receipts levy, is paid by about 1,400 distributors statewide, including more than a dozen on Long Island.

The tax was enacted in 1996, under the administration of Gov. George Pataki, a Republican, after an "excess profits tax" charged to petroleum distributors was ruled unconstitutional.

The state was seeking added revenues during a time of rapidly rising earnings by distributors beyond what the state had determined were "normal" profits.

The Petroleum Business Tax can fluctuate each year based on the producer price index determined by the federal Bureau of Labor Statistics.

The state law caps increases and decreases in the tax at 5% per year.

In 2019, for instance, when fuel prices dropped, the tax declined by 5%.

Revenues are dedicated to highway and bridge repair and mass transportation, in an effort to bolster the commercial transportation network statewide.

But the timing of the 2022 increase has prompted concern as the state economy recovers after months of economic shutdown and slowdown during the pandemic.

"When the price of petroleum is already high and the tax on it is already relatively high compared to other states, it makes a higher cost on all counts," Pokalsky said.

By Michael Gormley

michael.gormley@newsday.com@GormleyAlbany

Michael Gormley has worked for Newsday since 2013, covering state government, politics and issues. He has covered Albany since 2001.