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Processing tax chance may cost LA development projects

Even though it’s about eight months away, the uncertainty concerning the outcome of Louisiana’s governor’s election may claim economic development prizes badly needed by the state.

Louisiana is in the running for the nation’s first new oil refinery in about three decades, a proposed joint venture between Kuwait and an American company, although it has not yet been decided whether the idea will be pursued and both Texas and New Mexico also are in the running should it happen. The state also is competing with Alabama for a steel manufacturing plant which could provide hundreds of million of dollars worth of jobs and revenues. Obviously, the German firm will decide on the location that will maximize its profits.

But placing Louisiana at a competitive disadvantage for the steel facility is energy prices, which are significantly higher than those likely to be charged at the site in Alabama. The supplier would be Entergy, which has higher costs because of older equipment. More modern equipment including oil-burning generators would reduce the cost of electricity production to a more-competitive position.

However, gubernatorial candidate Democrat Public Service Commissioner Foster Campbell has made a centerpiece, if not the only piece, of his campaign the idea to charge an oil processing tax of five percent on any oil coming into the state to be refined. He claims it would raise enough money, he asserts $4.1 billion, to allow the shedding of corporate and personal income taxes while adding only a nickel a gallon to consumer gas prices.

It’s a variant of a dubious plan Campbell has hawked for decades. Even accepting the implausibly-low five-cent claim, Campbell seems to forget that oil companies will raise prices to offset the tax and that oil is used in a variety of commodities plus other producers that use in their businesses, which means potentially significant price raises in many goods and services spread out through the economy. And, Campbell appears to have his head in the sand when it comes to the fact that there is some elasticity in the oil processing network that would allow shifting of processing to outside the state, or would encourage alternative competing energy sources to take business away from state refineries if their prices go up – ensuring that his quoted revenue figure may be significantly lower.

For an example, the possibility of this tax may convince Kuwait – which will not make final plans for a few years – to focus more on a strategy such as that of Saudi Arabia’s Aramco and Royal Dutch Shell to expand their Port Arthur, TX plant. If is concentrates on expanding in neighboring states not only could that avoid the tax but it could get the business that would flee Louisiana – and no new plant gets built here.

And the ramifications of this plan affect present economic development decisions. It will reduce incentives for Entergy from pursuing new oil-burning generators for fear of the increased energy prices they will have to charge for that fuel, forestalling any more-rapid decrease in energy prices and discouraging locating the steel plant in the state. Since the firm wants to decide within a month or so, it can’t wait to see whether the plan becomes reality and must factor in a penalty factor related to the possibility now.

As a commissioner, Campbell always has acted to ensure that in his view the utilities regulated by the PSC do their jobs fairly and squarely by the way of the consumer. Unfortunately, he errs in judgment on this issue. Even if he trails badly in the polls, his mere presence in the race over the next few months, and particularly if his numbers get better, if he continues to pursue this idea will serve as a negative influence on Louisiana’s economic development.

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