Governor’s plan would plug revenue drain from oil companies

By Staff
Bob Martin, The Alabama Scene
Gov. Bob Riley’s proposal to change the severance tax on oil and gas would end another scheme by ExxonMobil to cheat the taxpayers of Alabama.
Under the law, the oil and gas severance tax is a levy on the value of oil or gas at the point of production. However, the taxable value at the wellhead is not known and can only be determined by “working back” from the price at the point of sale.
In the mid-1990’s Exxon and the state agreed to a formula to calculate that value. However, according to the governor’s office, in 2000 a consultant “presented a scheme” to Exxon by which he would help Exxon obtain severance tax refunds in return for a percentage of what the scheme would produce for the giant oil company.
According to Riley, Exxon agreed to let the consultant prepare and file petitions for refunds based on previously unclaimed deductions, including costs unrelated to processing the gas and “indirect costs” which had never before been contemplated by Exxon as legitimately deductible.
Last year, based on the consultant’s scheme, an Administrative Law Judge invalidated parts of the Revenue Department’s regulation, declared that there were no statutory or case law guidelines concerning the work-back method, and ordered that the state refund to Exxon over $41 million plus additional interest after December 31, 2006.
The governor says that taking refunds and interest into account, Exxon successfully reduced its total offshore severance tax liability for a period in dispute to less than zero. For the period subject to the first refund request (January 1992 to December 1996) Exxon paid the state slightly over $16 million in offshore severance taxes. After the Administrative Law Judge’s ruling, the state owes Exxon a total of $21.5 million for offshore refunds and interest for that same period (refunds and interest through March 15, 2008).
Stated differently, the governor says Exxon’s refund of offshore taxes and interest for the period exceeds the offshore taxes paid for the same period. In effect, this means that the natural gas extracted by Exxon during the period in controversy was worth less than nothing, making Alabama actually owe Exxon for taking the gas.
If the governor’s proposal isn’t passed, the Exxon scheme will remain in place and will have a significant impact on the budgets of several cities and counties…Mobile County, $7.5 million; Baldwin County, $1.5 million; Escambia County, $3.4 million; Jefferson County, $258,000;
Tuscaloosa County, $229,000; City of Dauphin Island, $1.1 million;
Miscellaneous Cities, $242,000.
The Exxon scheme has eviscerated the state’s severance tax base. According to the governor, the legislation he proposes would preserve the severance tax by calculating it based on volume instead of the elusive “value” at the wellhead. The tax rate applied to each unit would be adjusted annually according to an industry-recognized index, to ensure that the state doesn’t “leave money on the table” as natural gas prices increase.
The legislature should promptly pass the Riley bill. Exxon has cheated us once and gotten away with it. Will it happen again?
Another bill would remove state sales tax on food
The House and Senate are working on separate bills that would end the four-cent state sales tax on food. It would also help low-income taxpayers by raising the threshold at which they start paying state income taxes. It would do this by raising the standard deduction and personal and dependent exemptions. For a family of four, the threshold would go from $12,600 to about $20,000. All states, except Alabama and Mississippi, remove all or part of their state sales tax from groceries or have a tax rebate for food purchases by the poor.
To make up for the lost food tax revenue, the constitutional amendments would end the state income tax deduction for federal income taxes paid. If approved by the Legislature, Alabama voters would decide the issue when they go to the polls for the Nov. 4 general election.
The Legislative Fiscal Office (LFO) says that a married couple earning $100,000 a year with two dependent children would save almost $300-a- year, even though they would pay more state income tax. A married couple earning $200,000 a year with two children would pay $500 more a year because of higher state income tax.
But these are not typical Alabama families. LFO says of an estimated 1.8 million households in Alabama, about 1.6 million (88 percent) have a household income of less than $100,000 a year and most of them would fare well under the proposal.
The people should be allowed to make this decision.