Another Budget Crisis, Another Processing Tax Proposal

Here we go again!  Louisiana’s consumers of oil, natural gas and electricity need to be on high alert, because a hydrocarbon processing tax is looming at the state Capitol. Following in the footsteps of previous proponents of higher taxes on energy, Sen. Rob Marionneaux has introduced SB 432 which is a constitutional amendment to allow for a processing tax.

There is a thirst for more money for state government, and the oil and gas industry—along with the producers and consumers of energy—are once again in the crosshairs of a massive tax increase in order to fuel continued growth in the state budget.

Our state constitution currently prohibits any tax on oil and gas other than severance taxes.  SB 432 would remove that prohibition and allow the Legislature to levy a tax on the use of “hydrocarbon processing facilities.”  Since this is a non-tax year, the bill wouldn’t raise any taxes at the moment, but it would open the door for a massive tax increase in 2011.  No one really knows how big that tax would be, because there’s no tax rate, point of taxation, or definition of what will be considered “processing” in the constitutional amendment.  However, the bill’s author has publicly stated that he would come back with a 3 percent tax on “foreign oil” to raise a net of some $3 billion.

So, what’s wrong with this picture?  First, foreign countries and other states will simply not pay the tax. You can’t pass taxes back to foreign countries or on to consumers in other states.  One thing is certain: Louisiana’s consumers would be captive, since they would have no other sources for energy to run their homes, vehicles, businesses and industries, except for the ones that were “processed” and “taxed” in Louisiana.

Our industries that consume energy or use hydrocarbons in their manufacturing processes would be immediately put at a huge competitive disadvantage.  For Louisiana’s commodity-based petrochemical industry, this added tax burden would be disastrous.  Commodities are priced in a global market, and the added tax couldn’t be passed on in the price of the products.  Thus, our petrochemical companies would be at a distinct disadvantage, because commodity prices are so competitive.

Even the cost of gasoline will go up in Louisiana, but not for out-of-state drivers, because the tax will not be paid by the wholesalers in other states.  Therefore, instead of being passed on, the tax burden is going to stay in Louisiana, raising the cost of making and purchasing gasoline and other refined products.  In fact, Louisiana consumers may pay a proportionately higher share than they deserve, since producers and refiners will attempt to pass on as much as they can to the end user.

The mere introduction of a tax sends shock waves through boardrooms of not only oil and gas-related companies, but all types of companies which might consider either locating or expanding in Louisiana.  The state’s public policy should be to encourage—rather than discourage—all types of manufacturing jobs.  The key to economic prosperity is adding value to a state’s natural resources—oil, natural gas, timber, agricultural products, or food products.  Adding value is “processing.”  Taxing processes which enhance the value of any commodity discourages investment in the most highly productive segment of our economy.

This bill needs to be dismissed out of hand.  The concept has been studied and rejected dozens of times since 1982, and it needs to be rejected again this year.  Driving up the cost of value-added manufacturing is economic development in reverse.

(Dan Juneau is the President of the Louisiana Association of Business and Industry. Ginger Sawyer, Vice President and Director of LABI’s Energy Council, contributed to this column.)



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