Foster Campbell’s Plan for “Collecting on Past Debt”

ON DECEMBER 19, CenLamar featured a small news item about Public Service Commissioner Foster Campbell‘s decision to run for Governor. At the time, Campbell had not formerly announced, but he had stated he was “99.9%” certain he would be entering the Governor’s race. Shortly thereafter, Campbell made it known that he was, in fact, a candidate for Governor, and he was in the race to stay.

During the past eight months, Campbell has been actively raising money and traveling the State in support of his candidacy for Governor of Louisiana. Although Campbell has campaigned on a number of different issues, the hallmark of his campaign is a bold plan to eliminate the state income tax and “update the 1921 severence tax on oil and gas produced in Louisiana.” (Note: severence tax is defined as “A tax imposed by a state on the extraction of natural resources, such as oil, coal, or gas, that will be used in other states.”) Quoting from his website (bold mine):

The Campbell plan will replace the money given back to Louisianans (with the repeal of the state income tax) by updating the 1921 severance tax on oil and gas produced in Louisiana. He’ll institute a 6 percent user fee on ALL oil and gas produced, processed, refined or distributed in Louisiana. Although Louisiana is now an oil and gas processing state instead of a major producing state, the system adopted 86 years ago collects a tax ONLY on minerals produced in Louisiana. But 95 percent of oil and gas produced and processed in Louisiana–most of it from foreign oil companies and companies owned by foreign nations–is untaxed. That’s unfair to producers in Louisiana and allows foreign companies to use our offshore waters and coastal wetlands without charge.

The processing fee will produce $5.5 billion each year. Even after eliminating the state income tax and the severance tax, Louisiana will gain an additional $1.7 billion in revenue every year. Foster will devote $1 billion a year to restoring coastal wetlands, damaged in part by mineral extraction and the thousands of miles of canals dug in our marshes to aid offshore exploration and production.

The remainder of the new funding obtained through the Campbell plan will be devoted to highway construction, improving our schools and other critical needs.

As Campbell notes, our State Treasury has long relied “on severence taxes and mineral royalties” as a steady source of revenue, but unfortunately, Louisiana is limited on what, where, and who we can tax for using our state’s infrastructure to refine and produce oil and gas. Campbell explains the current structure (bold mine):

The state receives royalty payments for production from State-owned lands and water bottoms, but receives severance-tax revenue from all oil and gas production on any property within state boundaries. The state offshore boundary extends three miles from the coastline, beyond which is federal territory. The only revenue the state receives for production in federal waters is 27 percent of the revenue for the 3-mile-wide band of water that extends from 3 miles to 6 miles from the state coastline, which is the first 3 miles of federal waters. Beyond that, the state receives no revenue from the vast production in the federal offshore area.

Essentially, oil and gas companies can bypass paying any Louisiana severence taxes by focusing their production in “federal offshore areas,” despite the fact that these companies utilize Louisiana’s expansive infrastructure to refine and process oil that was technically drilled just far enough away from the Louisiana coast in order to avoid taxation.

Currently, Louisiana natural-gas production is a meager 23 percent of its 1970 level, and Louisiana oil production is 14 percent of its 1970 peak. During this same period, imports of foreign oil and gas and from federal offshore waters increased dramatically (ibid).

The significant decline in-state oil and gas production has resulted in dramatic decreases in revenue for Louisiana, while foreign oil and gas continues to “flood” the market without having to pay equitable taxes for production. Essentially, the system is rigged in favor of foreign oil and gas companies. It seems to encourage these companies to set up massive oil rigs a few miles outside of our coast in order to drill for our natural resources without ever having to pay the same severence taxes that other companies, located nearby, are required to pay. (And we have not even considered the environmental impacts).

As Campbell points out, the current structure imposes a high severence tax on oil production (second only to Alaska), which primarily targets “struggling in-state producers,” while completely ignoring the vast quantities of oil and gas imported into our State by foreign companies. He writes (bold mine):

Importing oil and gas from outside Louisiana relies upon the people, infrastructure, and resources of the state to process it so that the rest of the country benefits from its availability to fuel their automobiles and heat their homes and businesses.

Louisiana production is only 4.5 percent of the oil processed in the state. The remainder is 24.9 percent OCS, 12 percent imported from other states, and 58.6 percent foreign oil. For natural gas processed in the state, the source is 24.3 percent Louisiana production, 46.3 percent OCS, 27 percent imported from other states, and 2.4 percent foreign imports.

Campbell’s solution seems quite simple and intuitive (bold mine):

…replacing a 12.5-percent-of-value oil severance tax and a 6.2-percent-of-value natural-gas severance tax – both paid only by Louisiana producers — with a 6-percent-of-value processing fee on all oil and gas produced or processed in the state, would reduce taxes for Louisiana producers while raising $4.8 billion annually in new revenue.

Critics have argued that the imposition of such a tax would cause oil and gas companies to divert off-shore production away from Louisiana, but Campbell contends that ultimately such a massive diversion makes little financial or economic sense for these companies. If oil were to be diverted, “the 434 million barrels of crude oil currently coming into Louisiana” would “fill up to capacity every refinery in the entire eastern half of the United States (bold mine).” The national shortage of natural gas processing and refining facilities, along with the public opposition for the construction of new facilities, likely means that “few communities would allow such development outside of Louisiana.”

Campbell already has a detailed plan that addresses how his proposed processing fee would be administered; “The fee would only apply to refined petroleum products (typically fuels) that are imported into the state and are further processed, but not to petrochemicals.”

Other critics believe Campbell’s plan may face some Constitutional challenges, particularly relating to the Supremacy clause and the Commerce clause of the United States Constitution. The Commerce clause or Article 1, Section 8, Clause 3 of the U.S. Constitution states: “The Congress shall have Power …To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” On its face, it appears as if a new 6% tax leveled against “all oil and gas produced, processed, refined or distributed in Louisiana” should not conflict with the Commerce clause, which was designed to allow the Congress to regulate commerce with foreign nations. If critics believe the Commerce clause would prohibit Louisiana from taxing commercial activity within its own State, then wouldn’t the Commerce clause also prevent states like Alabama from levying taxes against their new Hyundai plant without the expressed approval of Congress, considering Hyundai is a Korean automobile company? Others have suggested the Campbell plan could violate the Supremacy clause of the Constitution, but most likely, this argument is based on an erroneous interpretation of the Commerce clause.

Louisiana citizens should have the right to expect foreign oil and gas companies who drill off of our evaporating coastline and who refine and process oil in our State, utilizing the infrastructure that our taxdollars paid for, to contribute an equitable amount in taxes back to our State.

For far too many years, we have sat idly by as foreign oil and gas companies have exploited loopholes in the arbitrarily defined borders of state and federal off-shore waters in order to avoid paying the same taxes that hard-working Louisiana-based industries have had to pay.

And how has this ever helped the State Louisiana? Keep reading.

— Every 38 minutes, Louisiana loses the size of one football field in coastal marshland, endangering more than seventy species of rare migratory birds. 95% of all marine species spend “all or part of their lifecycle in Louisiana wetlands.” Yet a staggering “25% of all oil and gas consumed in the United States travels through Louisiana wetlands.” (Source: CABL Fact Sheet, 2007).

— Louisiana ranks fourth worst in the American South and eleventh worst in the nation in environmental quality (ibid).

And if you think those big foreign oil and gas companies who drill in federal offshore waters and refine, process, and deliver their product using Louisiana taxpayer-built infrastructure (while the State receives no revenue from this enterprise) are somehow positively contributing to the Louisiana economy, consider this:

– Louisiana was ranked as the worst state in the nation in which to do business by Forbes Magazine, even though our “tax climate” was ranked 30th in the nation (ibid).

– Louisiana is ranked as the second worst state in the nation in terms of our overall poverty rate and the rate of children living in poverty (ibid).

– The Corporation for Enterprise Development gave Louisiana an “F” in business performance, a “C” in business vitality, and another “F” in development capacity.

No one can deny that Louisiana’s oil and gas industry provides thousands of jobs and is a vital part of Louisiana’s economy, but unfortunately, most of the wealth generated by this industry does not stay in Louisiana.

During the 20th century, a handful of forward-thinking and bold “risk takers” took a chance on developing Louisiana’s oil and gas industry, blanketing the State with over 20,000 oil wells and creating a mega-billion dollar industry that, according to some estimates, employs approximately 57,000 people either directly or indirectly. The industry was initially built in Louisiana by Louisianans, and it affected nearly every parish in the State. However, in-state production continues to fall, and industry projections are a cause for concern. The following charts were prepared by the Louisiana Department of Natural Resources:

After reaching a spike in 1970, Louisiana State gas production has spiraled downward, and forecasts for the next twenty years indicate this trend is likely to continue.

The same trend appears in this graph illustrating Louisiana State oil production; after reaching its zenith in 1970, production levels continue to plummet, and experts believe this trend is also likely to continue.

The logical question is: How can Louisiana continue to deliver 25% of the nation’s oil and gas if the State’s production is dwindling?

The answer may not be too surprising: Deepwater Energy Production.

According to the LA 1 Coalition, “a non-profit group working to improve a critical US energy corridor,” deepwater oil production rose 840% and deepwater gas production rose 1600% between the years 1992-2002.

For 50 years, oil and natural gas have been produced from the OCS underlying the Gulf of Mexico. This production represents more than 83 percent of total OCS oil production and more than 99 percent of all OCS natural gas production. The Louisiana OCS territory is the most extensively developed and matured OCS territory in the U.S. Louisiana OCS territory has produced 88.1% of the 12.8 billion barrels of crude oil and 82.9% of the 139 trillion cubic feet of natural gas extracted from all OCS territories from the beginning of time through the end of 2000.

But where does the money end up?

In 2001, the Minerals Management Service collected over $7.5 billion in oil and gas revenues from federal offshore leases. Of the $7.5 billion, $5 billion came from offshore Louisiana. 80% of oil and 87% of gas from this nation’s offshore waters comes from offshore Louisiana.

On federal lands within a state, the state shares 50% of the revenues. In 2005, Wyoming received over $878 million in revenues.

Outside of 6 miles offshore, Louisiana receives no share of revenue. In 2005, Louisiana received only $32 million, less than of one percent of the federal revenues generated off of its coast.

In 2005, the total revenue collected by MMS from OCS was $5,705,953,872. Offshore Louisiana provided 74.2% of that total.

These discrepancies are nearly impossible to justify, but thankfully, due to the hard work of Senator Mary Landrieu, 8.3 million acres have been opened up for new oil and gas exploration and 37.5% of the new revenue generated by this production will be shared by Louisiana, Texas, Mississippi, and Alabama. These funds will be earmarked for “coastal wetlands restoration, hurricane protection, levee and flood control projects.” The bill also allocates an additional 12.5% “to the state side of the Land and Conservation Fund, which funds the acquisition of parks and green spaces across the country,” which was aimed to quell criticism from environmental groups, some of whom believed that the revenue generated from Louisiana off-shore drilling “belongs to all Americans.” Carl Pope, executive director of the Sierra Club, acknowledges the coastal degredation caused by off-shore drilling in Louisiana, but questions how opening up millions of new acres for exploration could mitigate this problem. Mr. Pope makes a valid point; however, Landrieu understood the political reality and the need for compromise.

Although this is a bold step in the right direction and Senator Landrieu should be commended for her work, it still does not address the millions of acres presently being explored and drilled in the Louisiana OCS territory.

In 1949, Louisiana had a chance to receive their fair share of off-shore drilling revenues. President Harry Truman offered Louisiana Govenor Earl K. Long 37.5% of all oil and gas royalties collected from drilling off of the Louisiana coast. Governor Long demanded all of the royalties, and Louisiana ended up with nothing. Thankfully, Senator Landrieu heeded the advice of former Senator John Breaux and didn’t get too “greedy.” Because of her work, Louisiana is likely to receive upwards of $650 million a year in new revenue for coastal restoration and hurricane protection.

It is somewhat ironic that in a state responsible for delivering a quarter of the nation’s oil and gas, arguably the world’s most profitable enterprise, Louisiana still suffers from a struggling public education system, a failing health care system, and a network of substandard roads and highways.

It is also baffling when an “environmentalist” from a prosperous state like California argues against Louisiana receiving a fair share of the oil and gas royalties (or a processing fee on oil and gas) generated off of the Louisiana coast. No one denies America must decrease its depedence on oil, but we are not going to solve this crisis by punishing the people of Louisiana.

And this is something Foster Campbell seems to understand. No other gubernatorial candidate has even tackled this problem.

Some have accused Foster Campbell of being a “single issue” candidate, but once you begin unpacking this “single issue,” you discover that this issue touches nearly every aspect of life in Louisiana. Campbell is confident that by instituting a processing fee, Louisiana will generate more than enough new revenue to justify repealing the state income tax, which will directly and positively affect the bottom line for every single citizen of Louisiana. And due to this additional revenue in the state treasury, Louisiana will be better equipped to address problems in health care, education, and infrastructure.

His plan is bold, no doubt, and it is also incredibly complicated. But personally, I prefer a candidate who is willing to seek bold change and tackle complicated problems. I prefer a candidate who refuses to speak in vague hyperbole, and I prefer a candidate who does not champion their own cult of personality.