The Petro Bonus

A neglected loophole in the state tax code.

With the state budget hemorrhaging, officials are scrambling to find programs to cut, taxes to raise, and loopholes to fill, but no one's looking at a troublesome tax break that the oil companies receive. Legislators propose nixing millions of dollars in fuel-tax exemptions to commercial airlines, fuel wholesalers, farmers, and off-road operations such as construction and logging to help close the $2.4 billion hole in the $22 billion biennial state budget. But their proposals don't touch an exemption in the state "oil spill tax" that has long vexed both the revenue officials who collect the tax and the environmental and marine-safety officials who defend it.

Washington collects 5 cents for each barrel of petroleumi.e., North Slope crude from Valdez, Alaskashipped into the state. This tax was implemented in 1991, in the wake of the Exxon Valdez disaster, to fund oil-spill prevention, response, and cleanup programs at the Washington state departments of Ecology and Fish and Wildlife. But the tax is rebated to the oil companies ("credited" in the official lingo) for all petroleum that's subsequently exported from the state. Most often, that means fuel refined at the Cherry Point and Anacortes tank farms that's shipped, barged, or pumped by pipeline to Oregon, which has no refineries of its own, and other states. (The oil industry is also credited for petroleum put to nonfuel uses, such as lubricants.) The oil industry won this credit in 1991, and the logic for it is straightforward, says Greg Hanon, who is a lobbyist for the industry's Western States Petroleum Association at the state Legislature in Olympia. "The credit overlays general tax policies and principles on the Legislature's attempt to get a source of revenue" for oil-spill prevention, he explains. "Any manufacturer in the state gets a tax credit for items exported out of state. You're talking about interstate commerce issues and competitiveness."

This argument recalls one made in the increasingly heated debate over whether to tax interstate retail sales: A product shouldn't be liable for tax in one state when it's going to be similarly taxed in another. But spill taxes, like sales taxes, vary from state to state. Oregon, the prime destination for Washington's exports, doesn't charge a barrel tax. Instead, it collects $4.75 per "load" of petroleum products brought in, whether by water, rail, truck, or pipeline, and uses this to partially fund the hazardous-material teams that respond to everything from highway spills to terrorist attacks. This flat fee favors tanker and barge operators, who haul much more than, say, tanker trucksas much as 150,000 barrels more. Oregon would collect as much tax for a tanker's 150,000-barrel load as Washington collects for 48 barrels.

Meanwhile, Washington's export credit doesn't just reduce the funds available for spill protection and cleanup, it throws a wrench into efforts to plan for them. That's because companies don't necessarily take the credits in the same years they pay their taxes, or according to any predictable schedule. As a result, the state's net spill-tax revenues (after the credits) have swung widely, from $5.5 million in 1994 to $3 million in 1995, $6.2 million in '96, $4.6 million in '97, and $6.9 million in '98. Initial confusion caused many companies to delay claiming credits in the early '90s and "made it difficult to forecast the future receipts," a 1999 Department of Revenue report notes. Furthermore, the report continues, "because of the magnitude of export tax credits and increased imports of oil into the state via pipeline (which are not subject to the tax), the tax base has been declining."

The department of Ecology, which operates Washington's spill response and prevention, hasn't taken a position on the export credit or tried to change it. But Ecology policy analyst Jon Neel acknowledges that the variation in funding "has caused significant problems in managing our program."

Marine-conservation activist Fred Felleman sees another, underlying policy issue: The tax is designed to mitigate the hazards of shipping oil and petroleum products on Washington's fragile waterwaysbut it's not charged to those who double the hazard by shipping oil in and fuel out. "Put our waters at risk once and you pay once," Felleman says. "Put our waters at risk twice and you don't pay at all."

Oil lobbyist Hanon counters that that's not really how it works: "It is a program directed at oil spills. It is not directed at the transport of oil." Every type of motorized vessel endangers the waters to some degree. As he notes, large freighters carry enough bunker fuel to cause dreadful spillsincluding Washington's worst, the Tenyu Maru spill.

But whether or not commercial shippers should also pay to protect the waters is another question. The credit is a bonus to those who use the local straits and sounds as a tanker highway and an incentive to refine more petroleum here for use elsewhere.

"It is a complex issue," says Neel.

Even in this era of new scrutiny for corporate windfalls, however, no one's rushing to sort this one out.

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