Houston – How will the refiners and petrochemical producers fight environmental regulation? With a little help from their friends at the state capitol, that's how.Petrochemical companies and refineries operate under new environmental laws, which increase refining costs by requiring cleaner fuels to be produced with fewer emissions. U.S. companies face having to spend as much as $36 billion over the next 10 years to comply with federal environmental, health and safety regulations, according to the National Petroleum Council.
According to GOP operatives who guide state taxing policy, they should be exempted from paying huge portions of their property taxes through abatements calculated at the local appraisal districts.
Let the small businesses and homeowners take up the slack to provide what services and support of infrastructure may be offered under a balanced budget. That is the conventional conservative wisdom.
It's a question that begs much attention from students of tax equity and parity, the variable of either taxing the means of production, or the basis of wealth – the real properties of home and business.
There are 27 refineries in Texas, most of them on the Gulf Coast, and most of these in the ten-county Houston region surrounding Harris County.
Houston is the fourth most populous city in the nation, trailing only New York, Los Angeles and Chicago, and is the largest in the southern U.S. and Texas. The Houston-Sugar Land-Baytown Metropolitan Statistical Area consists of 10 counties: Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller. The size of this ten-county Houston region covers 8,778 square miles, larger than the entire state of New Jersey.
According to the Texas study group guiding tax policy, a GOP-dominated committee of state government, “Ironically, that is the same number of refiners as there were in the 1930's.”
Yeah, how ironic. Very. It's a shame Ma and Pa Kettle couldn't put up a quick initial stock offering on Wall Street and finance a new refinery or two after the east Texas oil boom of the depression years. What a shame. Who knew?
One of these refiners, Valero, a San Antonio-based producer and marketer, applied to the Harris County Tax Appraisal District for a 70% tax abatement.
But refinement of fuel is only a small part of the picture. There is the refinement and mixture of gases used to make the feedstocks required to make pesticides, fertilizers, herbicides, plastics and composites.
Texas is the nation’s largest chemicals producer, manufacturing 14 percent of the nation’s value of chemical output. The Gulf Coast complex of chemical plants and refineries is the largest petrochemical complex in the world, home to over 200 chemical plants.
The recommendations don't stop there. A key part of the State of Texas Petroleum Refining and Chemical Products Cluster Assessment of August 2005 is that “In lieu of tax abatements, industry should be offered assistance with capital investments and land purchases. Relocation grants should be used to attract employers and should apply not only to key personnel but costs for relocation of equipment.”
It sounds like they're talking about some brand-new high-tech startup industry and not something that came out of the horse and buggy era of the late 19th century, boomed in Texas in the early 20th, and peaked in 1970. Abatement? That's something you offer as an incentive to start-up business, not something as entrenched as petroleum enterprises in this area of the world.
Local and state governments should “Streamline the environmental hurdles to building new oil refineries; make it easier for small refineries to increase capacity; allow more offshore (e.g. Outer Continental Shelf) and inland (e.g. Arctic National Wildlife Refuge) oil drilling.”
Valero sought a tax break for its refineries in Houston, Texas City, Port Arthur, Corpus Christi and Moore County. The requested exemption would cover more than 70 percent of the appraised value of Valero's Houston refinery.
Check the logic. While only a tiny portion of the fuel produced at the site is sold locally, “Harris County is getting less than one percent of the environmental benefit (from the low-sulfur fuels), but Valero wants a 100 percent tax benefit,” said Bernardo Garcia, deputy general counsel for the Harris County Appraisal District.
Valero spokesman Bill Day disputed the Harris County appraisal district's numbers, saying the majority of fuel produced by the company in Texas stays in the state. He didn't mention that all the roads and bridges, the school districts, the junior colleges and port facilities stay in Harris County. They are not for sale and neither are the refineries and petrochemical plants – only the products they produce.
Mr. Day also said the company had acquired, installed and operated the hydrotreaters to meet federal mandates, not to improve the bottom line, so it would be wrong to tax the equipment.
“Without that federal requirement (for low-sulfur fuel), we wouldn't have the hydrotreaters,” Day said. “That should make them exempt from property taxes.”
So, the people who refine the petroleum to make your $4 a gallon gasoline should only be required to pay 30 cents on the dollar of their assessed valuation, while you, the hard-working, tax-paying, ever-loving, God-fearing working man or woman should pay 100% parity of whatever they say your place is worth.
Such a deal. Want some more tea?
It doesn't stop there.
A recent economic study concluded that approximately 785,000 jobs in Texas are related to activity at the Port of Houston. These jobs generate over $39 billion in personal income annually. The Port of Houston, which has an annual economic value of nearly $118 billion, is a major economic engine for the Houston/Harris County region, Texas and the nation.
When that economic engine needs expansion and modernization, guess who gets to pay the interest on the tax-exempt municipal bond issues used to raise the money for all that.
You got it.
What's more, the bond issues come in small measures, general obligation issues, which are put to the voters during low turnout March elections so that property tax rates will not need to be raised to cover their feasibility.
Then there is the matter of the transport and storage of crude petroleum and natural gas from its far-flung origins. Whether it's from the Permian Basin, offshore, southwest Texas, Kilgore and Longview, or out of state, a molecule of crude is the same, whether it's headed for marketing intrastate or interstate. How does one tell the difference?
That's where things get complicated, according to a consortium of Texas counties who joined the Midland Central Appraisal District in a case that wound up in the Eleventh Texas Court of Appeals. The area of controversy was simple enough. Interstate product stored in injection wells that tap massive underground caverns left by salt domes and pressurized by natural gas is not up for taxation; that which is headed for intrastate refinement and marketing – is.
Three Texas county central appraisal districts, Chambers, Liberty, and Smith, as well as the entire Texas Association of Appraisal Districts, joined the Midland Central Appraisal District in a suit against BP America Production Company in a suit that sought to get the right to tax crude and natural gas stored in the 217,000 miles of interstate pipelines and 58,000 miles of intrastate pipelines and underground caverns in this state.
According to the lawsuit, nearly $300 billion yearly is added to the gross state product by such transactions – about 25% of the total revenue produced in Texas.
When last seen, the tax men were running in a pack, headed for the U.S. Supreme Court.
“Article VIII, section 1 of the Texas Constitution requires that all real and tangible personal property used for the production of income, unless exempt, be taxed "in proportion to its value, which shall be ascertained as may be provided by law."
Not everyone sees it that way.
Harris County Appraisal District v. Shell Oil Co. involved a unique set of facts and issues that are unlikely to arise in many other property tax cases.
In 1993, the Port of Houston Authority applied to the federal government to establish a foreign trade subzone that would cover Shell’s refinery and petrochemical complex in Harris County. As part of the application process, Shell and Harris County entered into an agreement by which Shell agreed to forego its right to the foreign trade zone exemption (“FTZ exemption”) under Tax Code Section 11.12 (“Federal Exemptions”) for its goods in the subzone. In exchange, Harris County agreed not to oppose the application to create the subzone. The subzone was then established, and thereafter the Harris County Appraisal District (“HCAD”) appraised Shell’s inventory and Shell paid property taxes, or “ad valorem” taxes, to Harris County for the next several years.
In 2004, Shell believed that Harris County had violated the 1993 Agreement. So, when HCAD sent Shell a notice of appraised value for its inventory for that year, Shell filed a protest with the Appraisal Review Board (“ARB”) challenging HCAD’s denial of an FTZ exemption from Harris County property taxes on inventory located in Shell’s foreign trade subzone.
In the resulting lawsuit, the world learned that not only Shell gets a break by having the federal government declare its part of the Houston Ship Channel area part of a foreign country, for all practical purposes, especially taxation.
The Court of Appeals concluded that Shell had proven that Harris County had not fulfilled the condition quoted above because it had allowed the FTZ exemption for 2004 to several other companies in a similar industry as Shell. Thus, Shell’s waiver was not effective for that year, and it was entitled to the FTZ exemption on its inventory in its subzone, that little bit of The Netherlands located right there in that friendly, quiet little suburb of New Jersey - Houston.
Time takes time, as they say in the awl bidness. The basic conflict is still the same.
Ultimately, the cost of doing business will be passed on to the consumer. Will the consumers have to bear the cost of taxation, as well, or will that be extracted from the huge windfall profits the petroleum and petrochemical industries extract from the consumer?
The answer is to be found at the polls, especially at off-season elections in March in which bond issues and constitutional amendments are settled.
Remember, 40% of registered voters now identify themselves as “independent.” Will these newly registered independent voters differ from historical performance and come out to vote at primary and special elections held in March? That's the question, and the answer will likely be costly to taxpayers.
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