SADOW: The Oil Processing Tax Is A Terrible Idea, Even For The Coast

The idea of a processing tax on energy production in Louisiana is not new. Nor is its endorsement by one who sees energy producers aspiñatas waiting to be busted anything new. What’s new is when a usually-sensible tax-cutting advocate adds support to an inferior idea that will siphon out of Louisianans’ wallets hundreds of millions of dollars for no good reason.

The leftist involved here is author John Barry, late of one of the state’s two regional flood protection authorities and prime instigator of a jackpot justice suit against nearly 100 companies that have produced petroleum over the decades around the state’s coast. He envisions billions of dollars sliced from them to be put towards coastal restoration.

On that matter he rightly is chastised by columnist Quin Hillyer, who lends the Baton Rouge Advocate his considerable writing and critical thinking talents, now housed at perhaps the country’s premier opinion journal National Review, on an episodic basis. But in an intellectual lapse, he joins Barry in promoting the processing tax idea, a revived Coastal Wetlands Environmental Levy that would tax each barrel of oil or cubic foot of gas that comes into Louisiana’s processing pipeline from the coastal area, whether extracted, transported, or imported.

The lurch to the left on his part undoubtedly dulled his acuity in the text the pair present explaining their idea, arguing that companies that receive the product through pipelines are causing some environmental degradation, implying that the current taxing regime did not adequately cover this. For oil, they recommended a tax at a level similar to the previous effort of this nature in 1982 suggested by Gov. Dave Treen but defeated legislatively, which they estimated with oil price inflation would be $1.08 a barrel, arguing that “surely the companies could afford a similar, meager levy today.”

But what Hillyer seems to have forgotten, marrying his amnesia to Barry’s denial, is that it’s not a question of what companies can “afford,” as if there’s a Marxian surplus the owners of capital extract from workers and the public that a rigged free enterprise system grooves to them, but of whether it is legitimate that consumers/taxpayers pay this. Inevitably, this cost, in large part or entirely, will be passed along to the public. It’s little more than reaching into citizens’ pocketbooks and having them pay for this, and Hillyer has lost his bearings if he doesn’t understand that he’s endorsing an indirect tax increase on the people.

Advocates of the idea often attempt to justify it by noting that since some portion of the oil gets exported to consumers in other states, the costs actually get passed on to them and creates a presumably clever offloading of a tax burden on non-Louisianans to benefit Louisiana, thinking surely the negative economic repercussions will be minimal given that the state’s population is only 1.5 percent of the country’s. However, the flaw in this thinking is that it does not account for thevery high rate of Louisiana energy consumption – third per capita and fourth in total of all the states. When adjusted for this, taking into account the total maximum amount that can be processed (which means as that often isn’t reached Louisiana’s proportion actually is higher), roughly 28 percent of the state’s oil output is consumed right in state.

Of course, there are a number of other negatives associated with this idea. Some importers will abjure the Louisiana Offshore Oil Port or other ports of entry if it means an extra cost coming their ways. It will encourage drillers of new wells to route distribution to Texas. Oil coming in to be refined in Louisiana from the coast will be rerouted where possible. All of these will reduce expected revenues from this, which assuming all oil processed at maximum capacity (of 3.2 million barrels a day) is subject to it (not all of it will be, and maximum capacity is not often reached) at the rate suggested above would extract almost $1.3 billion annually. Worse, this will discourage economic activity in the state and cost jobs. (Note that this analysis does not include taxation on gas, where about half of Louisiana production is consumed in state, but a greater proportion of it comes from outside the coastal area.)

The authors may argue that, even if only some of the oil and gas is captured under this tax regime and production is reduced as a result of the disincentive and it only raises a few hundred million a year costing Louisianans maybe $200 million, it would be worth it despite these drawbacks given the need to engage in restoration, which they claim will cost anywhere from $50-95 billion over the next 35 years. Yet using these numbers, they are looking at funding only 20-35 percent of that needed, and it’s obvious that only the federal government can provide the remainder – especially when a prominent argument made for coastal restoration is that it helps the entire nation out because of issues of energy security, international trade, and ecosystem preservation.

And the cavalry is on the way. In 18 months the state should begin receiving the first substantial monies from the Gulf of Mexico Energy Security Act, which by then will be shuttling 37.5 percent of royalties from the western and central parts of the Gulf to coastal states, of which Louisiana historically has gotten about a fifth of these. It also would get much of the 12.5 percent allocated to the Land and Water Conservation Fund, dedicated to conservation unlike the other disbursements which have no stipulations for use, given the amount of its coastline and degree of degradation. Together, if royalties hit the $500 million cap for all states for revenue sharing, the state could pull in for restoration purposes $200 million or more a year – probably not as much as the proposed tax, but enough alone, provided Louisiana legally binds its revenue-sharing portion to coastal restoration, to demonstrate to the rest of the nation that it is serious about this and that the rest of the nation should be serious enough at least to match this, if not double or triple up or even go higher – asking to commit a sum of money each year that the federal government spends in an hour or two that represents all of 1/50th of one percent of the entire on-budget expenses of the federal government in each recent year.

In short, if alarm about coastal erosion is suitably placed, which seems quite likely, it’s a national concern where Louisiana (which already spends several hundred million bucks a year on restoration, not including the bonus penalty payments from the Macondo oil spill disaster of 2010 in recent years) within a year will have the means of dedicating a good chunk of its own change to the task, wedded to federal efforts without any need of a state tax increase. Undoubtedly present and future members of Louisiana’s congressional delegation have the ability to make this case successfully in the appropriations process.

To address this issue, beyond that there’s simply no need to increase the burden upon Louisianans with the implementing of a bad idea. It’s a bit much to expect Barry to grasp that, but it’s disappointing that Hillyer did not.

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