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Oil's Well, Sort Of 

Louisiana will lose business if a processing tax is implemented on oil and gas, but will the universe really implode, as suggested by Big Oil's lobbyists?

Louisiana's legendary former U.S. Sen. Russell Long, who as chair of the Senate Finance Committee wrote much of the nation's tax laws for more than a decade, had a simple philosophy with regard to tax policy: "Don't tax you, don't tax me -- tax that guy behind the tree."

Besides rhyming, the maxim is routinely invoked to break the ice during public meetings when someone or something is about to get taxed. In Louisiana, it's practically the official state motto. The saying has particular significance for Long in light of Louisiana's history of taxing -- or trying to tax -- oil and gas. The idea of taxing Big Oil dates back to Long's father, the late Gov. Huey Long, who urged higher taxes on Standard Oil in the late 1920s and early '30s. The concept saw several incarnations under various Louisiana governors, including Republican Gov. Dave Treen, during the '80s and '90s. Most of the time, oil and gas interests got their way, usually by keeping a close watch on lawmakers while trying not to look too obvious -- kinda like an elephant hiding behind a crape myrtle tree, to use Russell Long's metaphor.

The latest plan to put a processing fee on oil and gas comes from Public Service Commissioner Foster Campbell, a populist Democrat from Bossier Parish. He has made the proposed tax his central campaign issue in his current bid for governor. As a trade-off, Campbell also proposes to eliminate state individual and corporate income taxes, which he says would save individuals and businesses $3.7 billion a year while still producing a net increase in state revenues of nearly $2 billion a year.

The trade-off is the latest sweetener in a plan that Campbell has been trying to get approved for more than 15 years. At every step of the way, oil and gas lobbyists have been there to warn legislators and the public of impending doom if Campbell's plan were to be adopted, kind of like Chicken Little with charts and graphs. Lawmakers' challenge has always been to weigh the merits of the proposal against its negatives, which is no easy task.

Here's how Campbell says his plan would work:

Currently, Louisiana producers pay a 12.5 percent severance tax on the value of oil and a 6.2 percent tax on the value of natural gas. Minerals that move through Louisiana from foreign countries and federal offshore waters are not taxed at all. Campbell's plan would repeal the current percentages and replace them with a 6 percent processing fee on the value of all oil and gas processed in or piped through the state. That would mean a tax decrease for Louisiana producers, but an increase for out-of-state resources.

Based on an oil price of $57 per barrel and a natural gas price of $6 per MCF (thousand cubic feet), Campbell's plan would generate $5.51 billion each year. The elimination of existing severance taxes, however, would cost the state $693 million. When you factor in the revenue lost by eliminating income taxes -- another $3.7 billion -- Campbell's plan would generate net new revenue of roughly $1.1 billion. He proposes using that to improve roads, shore up Louisiana's coast, expand health care, improve education and more. Campbell is basing his entire campaign on the plan.

Dan Juneau, president of the Louisiana Association of Business and Industry, cites several problems with the plan -- starting with collecting the tax. Juneau says Venezuela and Libya won't get a "tax due" notice from the Louisiana Department of Revenue, so those who consume the oil and gas after it is processed in Louisiana would have to pay the tax. "If the tax ever would pass, it would ensure higher energy prices for Louisiana consumers and businesses and higher feedstock prices for our manufacturers -- not at all what our devastated economy needs for recovery," he says.

The Louisiana Mid-Continent Oil and Gas Association, which represents about 120 energy-based companies, argues that gasoline would cost consumers $1.25 more per gallon if lawmakers pass Campbell's tax. That specific prognosis, however, is rejected by Jonathan Haughton, professor of economics at Suffolk University in Boston and senior economist at the Beacon Hill Institute for Public Policy. "I don't believe that for one minute," Haughton says of Big Oil's dire price predictions. "That doesn't add up. That side of the debate has always presented larger numbers. Even if all of the 6 percent were passed on to consumers all at the same time, we're talking possibly 18 cents."

However, in a 2006 study titled "The Incidence of State Taxes on Oil and Gas," Haughton's team paints two pictures of a state like Louisiana after a processing tax. In the short run, money would flow like, well, oil. But eventually, offshore oil would be diverted to Texas or Mississippi, and the Louisiana Offshore Oil Port, a deepwater fixture in the Gulf, would lose business and possibly relocate. "Our take is it would eventually strangle the refining industry, or at least part of it, and it may eventually redefine itself elsewhere," Haughton says.

Indeed, Don Briggs of the Louisiana Oil and Gas Association has warned for years that the refinery industry would collapse if a processing fee were passed. Even supporters of the idea concede that a processing fee would cost Louisiana some business. The real question is, how much?

Experts disagree. Big Oil estimates that 434 million barrels of crude oil currently coming into Louisiana would be diverted because of the tax. Campbell says that's enough to fill to capacity every refinery in the eastern half of the United States -- at the current "sustainable" refinery utilization rate of 96 percent. Campbell adds that even if 837 billion cubic feet of natural gas is diverted, as claimed by Big Oil, that only about 16 percent of the gas entering Louisiana.

Campbell claims the U.S. is currently short on processing capacity, especially refining capacity, and the construction of new capacity in other states is severely limited and would be a decades-long process. Studies by the LSU Center for Energy Studies show that the tax burden on Louisiana production and refinery operations is currently "competitive" with that of other states. A processing fee could become a huge disincentive, although many say Louisiana has other industry incentives on the books for dry holes and deep-water drilling among others.

In the end, who benefits under Campbell's plan? Haughton says it would likely burden low-income families that drive regularly but pay little in state taxes. The biggest beneficiaries would be the higher-income brackets who would get an income tax break and likely not notice pump prices and other aftershocks. "I'm not so sure that's what Mr. Campbell had in mind," Haughton says.

Campbell made no headway with his plan as a state senator. Lawmakers as well as newspapers rail against it. If Campbell hopes to move his plan at all, it may require him to add a new word to his lexicon: compromise.

Jeremy Alford is a freelance journalist based in Baton Rouge. You can reach him through his Web site at www.jeremyalford.com.

click to enlarge Public Service Commissioner Foster Campbell's - campaign platform is all about oil and gas - processing taxes.
  • Public Service Commissioner Foster Campbell's campaign platform is all about oil and gas processing taxes.
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