BusinessReport.com

A common saying around the Louisiana Legislature, and other state houses for that matter, especially during fiscal years, is, “Don’t tax you, don’t tax me, tax that guy behind the tree.” Aside from rhyming, the maxim has no real value and is habitually used to break the ice during public meetings where someone or something is about to get taxed. It’s the official state truism, having been repeated so many times as to become almost trite.

But it takes on a humorous tint when the history of the Louisiana oil and gas processing fee is reviewed. The idea of taxing Big Oil dates to the 1920s at the birth of the Long dynasty and matured under various Louisiana officials during the 1980s and 1990s. All the time, though, oil and gas has remained partly veiled and yet highly visible, like an overgrown elephant hiding behind a crape myrtle.

These days, the plan to implement a processing fee on oil and gas lives on through one man, Public Service Commissioner Foster Campbell, a Democrat-cloaked populist from the piney woods of Bossier Parish. He has made the fee his central campaign issue in his bid for governor. As a trade-off, Campbell also proposes eliminating state individual and corporate income taxes—that would be a hit to state coffers to the tune of about $3.7 billion annually.

It’s a sweetener, a perk to a plan that Campbell has been trying to get approved for more than 15 years. And every step of the way, oil and gas lobbyists and hitmen have been there to warn a weary public of impending doom, kind of like Chicken Little with charts. The challenge has always been to weigh the merits of the proposal against its negatives, which is hard enough to do in the political world of spinmasters.

Here’s how the plan would work: Currently, Louisiana producers pay a 12.5%-of-value oil severance tax and a 6.2%-of-value natural gas severance tax. Resources moved 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%-of-value processing fee on all oil and gas, meaning a tax decrease for Louisiana producers. The same would apply to foreign and out-of-state resources as well, which move tax-free through the state today, amounting to a tax increase for those parties.

Based on an oil price of $57 per barrel and a natural gas price of $6 per million cubic feet (MCF), Campbell’s plan would generate $5.51 billion each year, which is the figure that has been widely reported by the mainstream media. The elimination of the severance taxes, however, would tally up as a $693 million dent. In addition to the money lost through income taxes—about $3.7 billion—the state’s new net revenue under the Campbell plan would be $1.1 billion. He wants to use that annual stream to improve roads, build coastal improvements, expand health care, progress education and whatever else stands in the way. It’s his entire campaign plan.

Dan Juneau, president of the Louisiana Association of Business and Industry, says there are several problems with the plan, chief among them actually collecting the tax. He says Venezuela and Libya aren’t going to get a tax due notice from the Louisiana Department of Revenue. Only those who consume the oil and gas after it is processed to some extent 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 gas at the tank will actually cost consumers $1.25 more per gallon if the tax is approved. It’s an assumption rejected by Jonathan Haughton, a professor of economics at Suffolk University in Boston and senior economist at the Beacon Hill Institute for Public Policy. He has written several research papers on the impact taxes and fees can have on oil and gas, and he doesn’t think the sky would fall. “I don’t believe that for one minute,” Haughton says. “That doesn’t add up. That side of the debate has always presented larger numbers. Even if all of the 6% were passed on to consumers all at the same time, we’re talking possibly 18 cents or more.”

In a 2006 study entitled “The Incidence of State Taxes on Oil and Gas,” Haughton’s team paints a rosy image of a state like Louisiana in the immediate years after a processing tax is applied. There would be a huge boost in revenue, as detailed by Campbell’s numbers, and in the short run, Campbell would certainly position himself as a true rainmaker and problem-solver, thanks to all the new cash. But eventually, offshore oil would be diverted to Texas or Mississippi, and the Louisiana Offshore Oil Port, a deepwater fixture in the Mexican Gulf, would lose business and possibly be relocated somewhere else. “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 industry would collapse if a processing fee were passed. Unarguably, Louisiana would lose business, but the real question is how much.

PROBLEMS, PROBLEMS: Dan Juneau, president of the Louisiana Association of Business and Industry, says there are several problems with Foster Campbell’s plan to collect an oil and gas processing fee, chief among them actually collecting the tax.

Could the entire industry disappear? It’s unlikely; Louisiana should be able to maintain something, experts just don’t know how much. An estimated 434 million barrels of crude oil currently coming into Louisiana is assumed to be diverted because of the plan, if you believe Big Oil. That’s enough crude oil to fill up to capacity every refinery in the entire eastern half of the United States, according to Campbell, keeping in mind there’s a 96% sustainable refinery utilization rate. Anything beyond that range would surely be unfeasible. As for natural gas, even if 837 billion cubic feet of natural gas is diverted, it’s equivalent only to about 16% of all the gas entering Louisiana, he adds.

The U.S. is already short of processing capacity, Campbell continues, and the construction of new processing capacity in other states is severely limited and would be a decades-long process. Still, studies by the LSU Center for Energy Studies show that the tax burden on Louisiana production and refinery operations is currently “competitive” with other states. A process fee could be a large hurdle to overcome, but Louisiana does have stellar incentives for the industry on the books, or at least that has been the perception portrayed by oil interests under the oil-friendly tenure of Gov. Kathleen Blanco, a Democrat from Acadiana.

In the end, who does Campbell’s plan—trading income taxes for a processing fee—impact and empower? Haughton says such a swap would likely place a burden on low-income families that drive regularly, but pay little in state taxes. The biggest beneficiaries would be the higher-income brackets who would get a break on tax forms and likely not notice the pump prices and other aftereffects. “I’m not so sure that’s what Mr. Campbell had in mind,” Haughton says.

In all the years that Campbell and others have pursued a processing tax, it has never made headway. The Legislature routinely rejects the plan and newspapers ranging from The Daily Town Talk in Alexandria to The Times-Picayune in New Orleans have editorialized against it. If Campbell wants to even remotely stir his plan beyond the traditional he said-she said debate known well to generations of Louisianans, it’ll likely come down to one word the wily populist won’t like and Big Oil won’t recognize: Compromise.