Another Year, Another Attack on Oil Industry – Effort to End ‘Tax Break’ Makes Refiners Target

By Erik Smith, February 11, 2014, Washington State Wire

It just wouldn’t be a legislative session without an attack on ‘Big Oil’ – or rather, an attempt to reach deeper into the pocket of the industry that green groups love to hate.


This year’s proposal, pushed by environmental organizations, legislative Democrats and Gov. Jay Inslee, would eliminate an arbitrary tax exemption from the state’s equally arbitrary tax code. It deals with a rather ephemeral product, and one that has no market value whatever – the gases that are produced and then immediately consumed during the refining process. Yet big money is involved. If you apply the state’s “use tax” somewhere between the boiler and the furnace, refiners would have to pay an additional $30 million a year.


It is a plan that is being touted as a matter of justice, the people versus the powerful. Accusations fill the air about sneaky oil refiners who took advantage of the state tax code and have been quietly evading their fair share of taxes for nearly 60 years. House Finance Chairman Reuven Carlyle, D-Seattle, says it is an example of a tax break gone wrong. “They don’t need public subsidies from the taxpayers of Washington,” he says. Or as elementary-school volunteer Patricia Holm argued at a House hearing last week, it is “children versus an industry that is already doing well.”


But if you take three steps back and squint a little, it really doesn’t seem to have much to do with the hoary old debate about tax exemptions for politically powerful industries. It has more to do with a long-running campaign to raise taxes on the state’s oil refiners. For at least the last six sessions in a row, there has been some sort of a proposal to make the state’s refiners pay millions of dollars more in taxes. The proposals have taken the form of a “barrel fee,” an increase in the state hazardous substances tax, a wholesale excise tax on motor fuel, and the current proposal to end what is called the “extracted fuel exemption.” All have had noble goals — environmental projects, roads, school-bus transportation, or as in the latest version, backfilling the state general fund. The effort has been justified by every argument except the real one. It is about finding a way to take a bigger bite from an industry that generates a mountain of cash.


Said British Petroleum vice-president for government affairs Bill Kidd during last year’s debate, “You know, I don’t think we’re the most popular kids on the block.”


Seen as Cash Cow

Odds are this year’s proposal, House Bill 2465, will fail just like every other plan to raise taxes on the oil industry. It is the second go-round for the current idea; the Democrat-controlled House passed a bill last year but it was ignored by the Senate, where a Republican-leaning majority coalition remains skeptical of any proposal to raise taxes. Yet it does demonstrate what an attractive target the oil industry makes.


Washington’s five oil refiners produce a pile of money – depending on the price of gas, perhaps $8 billion to $10 billion a year in gross revenue from sales in this state alone. The figure is easy to calculate, from the $1 billion or so that is generated in fuel-tax revenue each year. Of course the vast majority of that money goes to the producers of crude oil and can’t be counted as profit. Exactly how much profit refiners make isn’t a matter of public information.


Carlyle says industry profit is the issue. As chairman of the Finance Committee Carlyle says he has seen data he can’t reveal, indicating the figure is enormous. The tax burden seems to be lower than on other industries in the state, he says, and refiners can afford a $30 million annual hit. Where some previous proposals were upwards of $300 million every two years – an amount some suggested might mean a nickel-a-gallon increase – Carlyle says this year’s proposal is small enough that refiners can absorb it. Indeed, not even the oil industry argues that this tax hike would be noticed at the pump. At a time when the Legislature is under court order to spend billions more on education, Carlyle says the exemption for refiners “is simply increasing their margins. That is good for them, but the question is, do the taxpayers of Washington need to subsidize British Petroleum and Shell? I think the question is no.”


The quick answer from refiners is that Carlyle and others are making the wrong comparison. What matters is the way the Washington tax burden compares to other states. A study from the Washington Research Council in 2012 concluded that the typical refinery pays four times more taxes in Washington than in California. It was an industry-sponsored study, to be sure, but it is a conclusion that has never been challenged. Currently Washington refines about 3.5 percent of the nation’s fuel; Kidd told a Senate committee last year that lawmakers have to decide whether it is a business they want to encourage or shoo away. Oil companies can always make investments elsewhere. “For us to suffer that kind of tax disadvantage is already kind of difficult for us,” he said. “Adding another rock to my pack as I try to get over the pass is not helpful.”


Hurts the Children

Those are the central facts of the argument. But the Legislature is a political place, and arguments have a way of spinning toward distraction. You can start with the language people use. Whether a tax exemption constitutes a public subsidy is perhaps a question better left to philosophers. Schools might be the justification here, there have always been justifications. The first few proposals were argued on the grounds that the oil industry is a significant polluter of Puget Sound – a point that has since been debunked by Department of Ecology studies. Other proposals have tried to link the oil industry to the purposes for which the taxes might be earmarked. The latest one seems to abandon that idea — it is hard to see how oil companies have anything to do with K-12 education. This one comes more on general principles. The oil industry is one place where the state can raise money.


The new proposal has been conflated into the long-running war on loopholes, the ever-popular crusade for activist groups and those interests that are dependent on state spending. Green groups raised the idea first a year ago, when the Environmental Priorities Coalition, the umbrella organization of 24 leading Washington environmental organizations, made repeal of the exemption one of their top agenda items. It quickly became a favorite talking point for Inslee and loophole critics in the Legislature. The argument goes like this.


Way back in 1949, after a complicated Supreme Court ruling, the Legislature decided to clarify the law regarding the taxation of wood scraps and sawdust consumed by sawmills in the manufacturing process. It said “extracted fuel” was not subject to the state use tax. But it didn’t limit the tax break to the wood-products industry. And so it was part of the taxation scheme when the oil industry built its first refinery in Washington in 1954. These days, 98 percent of the benefit from the extracted fuel exemption goes to refiners. No evidence suggests that was the Legislature’s original intent. “Because some clever lawyers in the oil and gas industry figured out how to use this tax exemption, we are now losing about $65 million a [biennium] that could otherwise go to our children,” Inslee declared at a press conference last December.


Curious Arguments


The matter appears to have escaped the state’s attention for 57 years, but when the story showed up in a 2011 legislative report on tax preferences, green groups saw an opportunity. Their argumentation is curious — you might get the idea the tax measure has something to do with fighting pollution. One call-to-action email from the Washington Environmental Council last year described the repeal effort as “another fight with polluters on our hands. It’s time to hold Big Oil accountable by closing the Big Oil loophole. …Tell your legislators to once and for all to choose our kids over Big Oil, people over polluters, and to vote for closing this loophole.”


The oil industry offers a clever counter. It is simply reusing gaseous byproducts of the refining process. Why, that’s recycling – and what could be more environmentally friendly than that? At a House hearing on the measure last week, Tom Rizzo, manager of the Shell refinery at Anacortes, said that if refiners didn’t reuse waste gases, they would have to be burned off, contributing to C02 pollution — and then refiners would have to replace them with natural gas. “So taxing the refinery fuel gas is really at odds with sound environmental policy, because it penalizes refineries for efficiently using these resources and reducing our carbon footprint.”


Advocates point out that only other state, Alabama, has passed a law granting such a tax exemption. But that’s because no other state considers refinery gas taxable in the first place.


Tax Burden High


Every now and again, during the numerous hearings that have been held on the matter over the last two sessions, there have been glimpses of the underlying issue. The Washington Research Council study of 2012 identified the high tax burden by comparison with California, a direct competitor for the West-coast refinery business, and it also pointed to a massive contribution the industry makes to the state and local economy.


In 2011 refiners paid $263 million in taxes — and that doesn’t count the state gas tax. They employed 2,000 workers directly at refineries and another 3,000 under contract. The typical refinery job pays an average $120,000, while average non-refinery jobs in Whatcom and Skagit counties pay less than $40,000. The multiplier effect on the local and state economy is enormous – economic activity creates 26,274 jobs, and that creates indirect tax revenue of roughly $120 million a year. Refiners and their trade group, the Western States Petroleum Association, say it is not the kind of business the state ought to discourage.


Clifford Traisman, lobbyist for the Washington Conservation Voters and the Washington Environmental Council, told the Finance Committee last week that the argument belongs on a more theoretical plane. “This bill is not about return on investment, it is not about good or bad, it is about fairness,” he said. “It is about this being a loophole that wasn’t intended for the purpose it is being used for, and we have other priorities of government, specifically education.” House Minority Floor Leader J.T. Wilcox, R-Yelm, said he wasn’t buying. Whatever the intention, the tax break appears to have helped stimulate an industry – and of course, some of the tax revenue the industry generates goes to schools. “Measured by the amount of new activity, this one has been a resounding success,” he said.


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