<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:23815.wais]
TO PREVENT CERTAIN DISCRIMINATORY TAXATION OF INTERSTATE NATURAL GAS
PIPELINE PROPERTY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
H.R. 1369
__________
OCTOBER 6, 2005
__________
Serial No. 109-64
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin JERROLD NADLER, New York
RANDY J. FORBES, Virginia DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
James Daley, Full Committee Counsel
Brenda Hankins, Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
----------
OCTOBER 6, 2005
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Commercial and Administrative Law........................... 3
WITNESSES
Mr. Mark C. Schroeder, Vice President and General Counsel,
CenterPoint Energy, Inc., Gas Pipeline Group
Oral Testimony................................................. 4
Prepared Statement............................................. 5
Dr. Veronique de Rugy, Ph.D., Research Scholar, American
Enterprise Institute for Public Policy Research
Oral Testimony................................................. 11
Prepared Statement............................................. 12
Mr. Harley T. Duncan, Executive Director, Federation of Tax
Administrators
Oral Testimony................................................. 16
Prepared Statement............................................. 18
Mr. Laurence E. Garrett, Senior Counsel, El Paso Corporation, and
on behalf of the Interstate Natural Gas Association of America
Oral Testimony................................................. 28
Prepared Statement............................................. 29
APPENDIX
Material Submitted for the Hearing Record
Response to Post-Hearing Questions from Veronique de Rugy, Ph.D.,
Research Scholar, American Enterprise Institute for Public
Policy Research................................................ 46
Response to Post-Hearing Questions from Harley T. Duncan,
Executive Director, Federation of Tax Administrators........... 48
Response to Post-Hearing Questions from Laurence E. Garrett,
Senior Counsel, El Paso Corporation, and on behalf of the
Interstate Natural Gas Association of America.................. 101
TO PREVENT CERTAIN DISCRIMINATORY TAXATION OF INTERSTATE NATURAL GAS
PIPELINE PROPERTY
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THURSDAY, OCTOBER 6, 2005
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:08 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Chairman of the Subcommittee) presiding.
Mr. Cannon. It looks like our witnesses are all here.
Good afternoon, ladies and gentlemen. This hearing of the
Subcommittee on Commercial and Administrative Law will now come
to order.
And before we start in with the substance of the hearing, I
want to take a point of personal privilege, and recognize the
counsel, the chief counsel, of the Commercial and
Administrative Law Subcommittee, Ray Smietanka. My
understanding is that today marks the 30th year of your service
with this Committee.
Mr. Smietanka. That's correct, 30. October 6, 1975.
[Applause.]
Mr. Cannon. We appreciate the wisdom that Ray brings to the
Committee. I appreciate the fact, and particularly the fact,
that he works well with minority counsel so we get things
moving on issues that are important. So thank you, Ray. We
appreciate that.
Today, we are going to consider H.R. 1369, a bill I
introduced earlier this year, cosponsored by a great Texas
delegation including Messrs. Carter, Smith, and Gohmert. This
bill is intended to prevent certain discriminatory taxation of
interstate natural gas pipeline property.
H.R. 1369 has two purposes: to prevent States from imposing
a higher ad valorem tax burden on interstate natural gas
pipeline property than that placed on local industrial and
commercial property in the same assessment area; and to grant
concurrent jurisdiction to the U.S. district court and State
courts, to prevent imposition of taxes over this limit.
The issue of discriminatory taxation has been dealt with
before by Congress when it enacted laws to prevent this type of
discriminatory taxation against industries involved in other
interstate commerce; specifically, the railroads, the airlines,
the bus and trucking industries.
The natural gas pipeline industry has been the target of
these discriminatory taxing practices by States for years, but
the industry is not the only victim here. These taxes are a
cost of doing business, therefore included in the pipeline's
rate base, and are ultimately paid by consumers. States which
impose such high taxes are in essence exporting their tax
burden to people outside their State.
All consumers of natural gas, whether they are using it to
heat their homes in the winter or for agricultural production,
are victims. These taxes increase their gas bills to help pay
for benefits in States where they do not live, and may not even
visit.
It is not hard to determine who these people are. They are
the citizens of--people in my State, as well as those in States
like North Carolina, Maryland, Texas, and Michigan. But even
residents of States that assess these discriminatory taxes are
victims, because all consumers are paying higher prices for
natural gas. This in turn increases the cost for products
produced by natural gas, including electricity, plastics,
nylon, and even insect repellents.
To provide relief, H.R. 1369 allows the United States
district courts to determine whether certain States' taxes
unreasonably burden and discriminate against interstate
commerce. Currently, Federal courts cannot grant relief in such
cases if the plaintiff can obtain a plain, speedy, and
efficient remedy in the State courts. However, what is
currently determined to be plain, speedy, and efficient when
contesting an assessment can take years and require large
amounts of resources.
I want to emphasize that H.R. 1369 would not relieve
interstate natural gas pipelines of their obligation to pay
their fair share of taxes. But it will allow them the
opportunity to go to Federal court to challenge the practices
of the States which single out gas pipelines for substantially
higher tax assessments than are applied to comparable
industrial and commercial properties.
Providing concurrent jurisdiction to the Federal courts,
which Congress has the authority to do under section 5 of the
14th amendment, is essential; since efforts to obtain relief
through State courts have historically, as the record will
show, been a futile exercise.
We in Congress are required to balance our responsibility
under the Constitution to protect interstate commerce from
unwarranted interference, including unfair, burdensome and
discriminatory taxation, while respecting the States' power to
raise revenue to fund vital services in their States.
Last winter, the price for heating oils increased to an
all-time high, and it's expected to continue to rise this
winter. As fall advances, there is growing public anxiety over
the cost of natural gas. All avenues of reducing the costs of
natural gas should be reviewed.
I look forward to the testimony of the panel. I ask
unanimous consent that Members have five legislative days to
submit written statements for inclusion in today's record.
And I now yield to Mr. Watt, the Ranking Member of the
Subcommittee, for an opening statement.
Mr. Watt. Thank you, Mr. Chairman. And I will be very
brief. I want to just thank the witnesses for being here. To be
honest with you, I don't know a lot about H.R. 1369, but the
real benefit of having hearings is to allow us to hear the
various aspects related to this bill, concerns if there are
any, benefits, merits and demerits. So I'm always anxious to
have a hearing about a bill, so I can learn something about it.
So I appreciate your being here, and I appreciate your
enlightening us.
Since I have to leave in about an hour for another
appointment, I'll abbreviate my comments and get on with what
we're here to do. And I yield back, Mr. Chairman.
Mr. Cannon. I thank the gentleman. Let me introduce our
witnesses.
Our first witness is Mr. Mark Schroeder, the Division Vice
President and General Counsel for CenterPoint Energy's pipeline
and field services group. Mr. Schroeder served as Deputy
General Counsel of the U.S. Department of Energy, where he was
responsible for natural gas, environmental, and legislative
matters, among others.
During his career, he has served as General Counsel for
Northern Natural Gas, and as Vice President of Regulatory
Affairs for two different energy companies. Mr. Schroeder has
appeared before numerous congressional Committees presenting
testimony on issues affecting the natural gas industry, energy
regulation, and the environment.
Mr. Schroeder is a graduate of Louisiana State University,
with degrees in accounting and law. He was the managing editor
of the Louisiana Law Review. He is a member of the bars of
Louisiana and the District of Columbia.
Mr. Schroeder, thank you for your appearance today, and we
look forward to your testimony.
We have also with us Ms. Veronique de Rugy, our next
witness. Dr. de Rugy is a Research Fellow at the American
Enterprise Institute. She has served as a fiscal policy analyst
at the Cato Institute, a post-doctoral fellow at George Mason
University Department of Economics, and a research fellow with
the Atlas Economic Research Foundation. She has also served on
the board of directors of the Center for Freedom and Prosperity
since 2000.
Ms. de Rugy has written extensively on the dangers of EU
and OECD tax harmonization proposals, is the author of numerous
op-eds and academic papers, and is the co-author of ``Action ou
Taxation'' published in Switzerland in 1996. Presumably, Ms. de
Rugy speaks French.
Ms. de Rugy earned her bachelor's degree and master's
degree in economics from the University of Paris in Dauphine,
and her doctorate in economics from the Sorbonne.
Ms. de Rugy, welcome, and thank you for coming today. We
look forward to your testimony.
Our next witness is Harley Duncan, Executive Director of
the Federation of Tax Administrators. Prior to his current
position, Mr. Duncan served as the Secretary of the Kansas
Department of Revenue, and the Assistant Director of the Kansas
Division of the Budget.
Mr. Duncan is a member of the State Tax Notes Editorial
Advisory Board, the Georgetown University State and Local Tax
Conference Advisory Board, as well as many others.
Mr. Duncan earned his bachelor's degree from South Dakota
State University, and his master's in public affairs from the
University of Texas at Austin.
Mr. Duncan, welcome, and we appreciate your testimony.
Our final witness is Laurence Garrett, Senior Counsel for
the El Paso Corporation Western Pipeline Group. Prior to
working for El Paso, Mr. Garrett was the Senior General Tax
Attorney for the Burlington Northern and Santa Fe Railway
Company. He is admitted to practice in the courts of Kansas,
Illinois, Colorado, and Texas.
Mr. Garrett earned a bachelor's degree in business
administration and economics from Washburn University, where he
also earned his law degree. He earned a master's of law in
taxation from the University of Missouri School of Law, and a
master's of law in natural resources and environmental law from
the University of Denver.
Mr. Garrett, thank you for your appearance here today.
I extend to each of you my warm regards and appreciation
for your willingness to participate in today's hearing. In
light of the fact that your written statements will be included
in the record, I request that you limit your remarks to 5
minutes. And we have a little light there that will go yellow
when you have a minute remaining, and then red. You don't need
to stop immediately, but given the constraints on time with Mr.
Watt, and also mine and others, I may just have to give you
some notice that you should wrap up.
And you should feel free to summarize your testimony, or
highlight any salient points or portions. You'll note that we
have the lighting system. We just talked about that.
After all the witnesses have presented their remarks, the
Subcommittee Members, in the order that they arrive, will be
permitted to ask questions of the witnesses, subject to the 5-
minute limit.
And pursuant to the directive of the Chairman of the
Judiciary Committee, I ask the witnesses, please stand and
raise your right hand to take the oath.
[Witnesses sworn.]
Mr. Cannon. Let the record reflect that each of the
witnesses has answered in the affirmative.
Mr. Schroeder, would you now proceed with your testimony.
Thank you.
TESTIMONY OF MARK C. SCHROEDER, VICE PRESIDENT AND GENERAL
COUNSEL, CENTERPOINT ENERGY, INC., GAS PIPELINE GROUP
Mr. Schroeder. Thank you, Mr. Chairman, Ranking Member, and
Members of the Committee. Thank you for the opportunity to
appear here before you today. My name is Mark Schroeder. I am
the General Counsel for the Gas Pipeline Group for CenterPoint
Energy, Incorporated.
CenterPoint Energy serves markets in the Middle West and
South, including Texas, Louisiana, Arkansas, Oklahoma,
Missouri, Tennessee, and Illinois, among others; as well as
connecting significant mid-continent gas supplies to other
pipelines destined for the Upper Midwest and the Northeast.
I have submitted written testimony, which I ask be made
part of the record of this hearing. And I will keep my remarks
now to just a few brief ones.
I appear here today to ask this Subcommittee's support for
H.R. 1369. H.R. 1369 provides that interstate natural gas
pipelines should not be subject to discriminatory taxation. The
bill provides the bases upon which such taxes are to be
evaluated, and provides a Federal forum for the adjudication of
disputes regarding those taxes.
The bill affords the interstate natural gas pipeline
industry essentially the same protections that Congress has
already extended to other transportation industries operating
in interstate commerce which are similarly characterized by
large, immobile capital investments, including railroads,
airlines, and trucking.
Let me be clear on this last point. The natural gas--
interstate natural gas pipeline industry is a transportation
business. Interstate pipelines do not own, or have an interest
in, the commodity of natural gas. Therefore, we do not have a
vested interest in seeing the price of the commodity increased.
And we are particularly cost conscious in this environment in
which we are competing to retain these markets.
As the prepared testimony of the pipeline industry
witnesses amply demonstrates, the discrimination in taxation of
natural gas pipelines is real and quantifiable, and the State
judicial processes have not met the test of providing plain,
speedy, and efficient relief.
In the testimony, there are some examples which are
intended to be purely illustrative, and they are not directed
at the behavior or regulatory scheme of any one State.
The discriminatory taxation of interstate pipelines burdens
gas consumers, producers, and can alter the competitive
landscape. The non-discriminatory assessment of taxes, with
prompt resolution of questions regarding discrimination, is not
asking too much.
In this period of high energy prices, H.R. 1369 is
especially timely, and we urge its passage. Thank you.
[The prepared statement of Mr. Schroeder follows:]
Prepared Statement of Mark C. Schroeder
INTRODUCTION
Mr. Chairman, Mr. Ranking Member and Members of the Committee:
My name is Mark C. Schroeder. I am the General Counsel for
CenterPoint Energy, Inc.'s Gas Pipeline Group. CenterPoint Energy is
based in Houston, Texas. Through two interstate pipeline company
subsidiaries, CenterPoint Energy Gas Transmission Company and
CenterPoint Energy--Mississippi River Transmission Corporation, the gas
pipeline group transports natural gas in interstate commerce for
delivery to local distribution companies, industrial end users, and
power generation facilities in Arkansas, Illinois, Louisiana, Missouri,
Oklahoma, Tennessee, and Texas.
Thank you for the opportunity to appear before you today to discuss
an issue of great importance to the interstate natural gas pipeline
industry and to consumers of natural gas, particularly those consumers
who receive their natural gas by interstate natural gas pipeline.
I appear here today in support of H. R. 1369. If enacted into law,
H. R. 1369 would protect interstate natural gas pipelines from
discriminatory tax treatment by states and other taxing jurisdictions.
The imposition of discriminatory taxes on interstate natural gas
pipelines adversely affects many natural gas consumers, who bear the
cost of these additional tax burdens as part of the price paid for the
transportation of natural gas.
The need for this legislation is illustrated by the historic
discrimination against interstate commerce pursued by a number of
states. CenterPoint's assets most affected by such discriminatory
taxation are located in the State of Louisiana. For that reason, I
offer our experience in Louisiana by way of example, to illustrate the
problems faced by our industry. These problems are not exclusive to
Louisiana; it is just one state that plays a pivotal role in the
distribution of natural gas throughout the United States.
In Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68 L.Ed.2d
576 (1981) the United States Supreme Court determined that a ``first
use'' tax imposed by the state of Louisiana on natural gas flowing
through the state was unconstitutional because it specifically
discriminated against interstate commerce. The first use tax was
imposed on a variety of events, including events related to the
transportation of natural gas through Louisiana before it was delivered
to in-state and out-of-state consumers. In an effort to shield
Louisiana consumers from the tax, the law provided various tax credits
and exclusions to Louisiana taxpayers so that Louisiana consumers could
effectively avoid the burden of the first use tax. In evaluating the
validity of the First Use Tax, the United States Supreme Court stated:
In this case, the Louisiana First-Use Tax unquestionably
discriminates against interstate commerce in favor of local
interests as the necessary result of various tax credits and
exclusions. No further hearings are necessary to sustain this
conclusion. Under the specific provision of the First-Use Tax,
OCS gas used for certain purposes within Louisiana is exempted
from the Tax. OCS gas consumed in Louisiana for (1) producing
oil, natural gas, or sulphur; (2) processing natural gas for
the extraction of liquefiable hydrocarbons; or (3)
manufacturing fertilizer and anhydrous ammonia, is exempt from
the First-Use Tax. Sec. 1303 A. Competitive users in other
States are burdened with the Tax. Other Louisiana statutes,
enacted as part of the First-Use Tax package, provide important
tax credits favoring local interests. Under the Severance Tax
Credit, an owner paying the First-Use Tax on OCS gas receives
an equivalent tax credit on any state severance tax owed in
connection with production in Louisiana. Sec. 47:647 (West
Supp.1981). On its face, this credit favors those who both own
OCS gas and engage in Louisiana production. The obvious
economic effect of this Severance Tax Credit is to encourage
natural gas owners involved in the production of OCS gas to
invest in mineral exploration and development within Louisiana
rather than to invest in further OCS development or in
production in other States. Finally, under the Louisiana
statutes, any utility producing electricity with OCS gas, any
natural gas distributor dealing in OCS gas, or any direct
purchaser of OCS gas for consumption by the purchaser in
Louisiana may recoup any increase in the cost of gas
attributable to the First-Use Tax through credits against
various taxes or a combination of taxes otherwise owed to the
State of Louisiana. Sec. 47:11 B (West Supp.1981). Louisiana
consumers of OCS gas are thus substantially protected against
the impact of the First-Use Tax and have the benefit of untaxed
OCS gas which because it is not subject to either a severance
tax or the First-Use Tax may be cheaper than locally produced
gas. OCS gas moving out of the State, however, is burdened with
the First-Use Tax.
* * *
Accordingly, we grant plaintiffs' exception that the First-Use
Tax is unconstitutional under the Commerce Clause because it
unfairly discriminates against purchasers of gas moving through
Louisiana in interstate commerce.
451 U.S. at 756, 101 S.C.t. at 2134 (footnotes omitted).
It seems odd that the industry must come to Congress to seek
additional protection against interstate commerce discrimination. After
all, one of the oldest settled principles of constitutional law is that
the Commerce Clause of the United States Constitution prohibits the
States from imposing discriminatory taxes or burdens on activities that
are conducted in interstate commerce. That is, state taxes should not
exact a greater burden from interstate activities than the burden
imposed on intrastate activities.
Unfortunately, having the constitutional protection from
discrimination does not alleviate the procedural hurdles that block the
timely resolution in state courts of challenges to the validity of
state tax schemes. Attempts to address discrimination at the state
level have been thwarted by the refusal of federal courts to consider
the issues and by procedural road blocks in the state courts. Existing
federal law discourages the federal courts from considering state tax
challenges. In addition to banning the discriminatory taxation of
interstate natural gas pipelines, H.R. 1369 provides for the resolution
of disputes concerning discriminatory taxation of interstate natural
gas pipeline properties by the federal courts, which will result in
faster and more objective disposition of these cases.
THE CENTERPOINT COMPANIES' EXPERIENCE.
While other interstate gas pipelines are subject to discriminatory
taxation elsewhere, the CenterPoint companies experience has been
principally their involvement in litigation in the State of Louisiana
since 2000 concerning an issue of discriminatory taxation in that
state. Simply put, the scheme for the imposition of ad valorem property
taxes in the state of Louisiana requires all interstate natural gas
pipeline companies to pay property taxes to Louisiana's local
governments based upon 25% of the fair market value of the pipeline
company attributable to Louisiana while competing intrastate pipeline
companies are allowed to pay property taxes to local governments based
upon an assessed value of 15% of fair market value. This differential
in assessed values results in the imposition of higher property taxes
for interstate natural gas pipelines than for intrastate gas pipelines,
resulting in higher costs for natural gas for consumers who must rely
on interstate natural gas pipelines for the delivery of their natural
gas.
CenterPoint made its decision to challenge the Louisiana scheme
after reviewing Louisiana's prior efforts to impose discriminatory
taxes on the natural gas industry and on consumers of natural gas.
CenterPoint's involvement in the issue in Louisiana came after other
interstate natural gas pipeline companies had taken steps to challenge
the Louisiana system.
THE ANR SAGA/PROCEDURAL QUAGMIRES DELAY FINAL DISPOSITION OF INTERSTATE
DISCRIMINATION ISSUES
In 1994, a group of interstate natural gas pipelines with
operations in the State of Louisiana, including the ANR companies,
initiated litigation in Louisiana challenging the discriminatory
property taxes imposed on interstate natural gas pipelines. The ANR
group's efforts have been difficult at best. A review of the reported
decisions concerning the ANR group's efforts shows that a myriad of
procedural roadblocks have been used to delay and effectively prevent
the ultimate resolution of the interstate commerce issues.
When ANR initiated its proceedings, Louisiana statutes required
such disputes to be initiated at the administrative level before the
Louisiana Tax Commission. For tax years 1994 through 1999, ANR
protested assessments determined by the Louisiana Tax Commission based
upon 25% of the fair market value of the Louisiana portion of its
pipeline. Additionally, ANR paid the taxes demanded by the Tax
Collectors for the local taxing jurisdiction under protest. After
lengthy procedural delays, the Louisiana Tax Commission dismissed ANR's
protests. ANR appealed the actions of the Commission to Louisiana State
district court and the district court determined that ANR's claims had
prescribed (expired due to limitations imposed by statute) under
Louisiana law. The Louisiana First Circuit Court of Appeal, in a case
commonly referred to as ``ANR 1'' [ANR Pipeline Co. v. Louisiana Tax
Commission, (La. App. 1 Cir. , 774 So.2d 1261(2000))], the Louisiana
First Circuit Court of Appeal reversed the district court finding that
ANR's claims did not prescribe while it exhausted its administrative
remedies.
This was just the beginning for ANR, though. A review of the
reported decisions reveal no less than five reported ANR decisions
spanning over five years. The tortured history of the ANR cases tells a
story of a quagmire of procedural issues and conflicting judicial
determinations.
In the second ANR decision (ANR Pipeline Co. v. Louisiana Tax
Commission, 2001 CA 2594 (and consolidated cases) (La. App. 1st Cir. 3/
20/2005), writ granted, 2002-1479 (La. 3/21/03), 840 So.2d 527
(affirmed and remanded), the state appellate court addressed a district
court decision dismissing ANR's claims. The district court had found
that ANR's claims were premature and that ANR had failed to exhaust
administrative remedies as a result of by-passing the Louisiana Tax
Commission. In a decision handed down on March 20, 2002, the Louisiana
First Circuit Court of Appeal reversed and remanded the cases back to
the district court for further proceedings. This decision was further
reviewed by the Louisiana Supreme Court, which sustained the portion of
the Louisiana First Circuit Court of Appeals' decision that ANR's
proceedings were not premature and ordered the First Circuit to review
the district courts granting of exceptions of no cause of action. In
conformance with the Louisiana Supreme Court's directive, the Louisiana
First Circuit of Appeal determined that ANR had stated a cause of
action and remanded the case to the district court for further
proceedings.
In the third ANR decision (ANR Pipeline Co. v. Louisiana Tax
Commission, 2002--0576 (La. App. 1 Cir. 6/21/2002), the First Circuit
Court of Appeal affirmed the district court's determination that the
Louisiana Tax Commission should not conduct administrative hearings
until the courts had ruled on the constitutionality of the Louisiana
property tax scheme. The Louisiana Tax Commission was ordered to stay
all administrative proceedings until a final ruling on the
constitutional issues was determined by the courts. The need for this
ruling resulted from an effort by the Louisiana Tax Commission to
conduct proceedings and issue decisions concerning the imposition of
property taxes on interstate natural gas pipelines prior to a
determination by the courts concerning the validity of Louisiana's
property tax system as it related to the imposition of property taxes
on interstate natural gas pipelines.
After almost ten years of procedural battles, ANR's cases finally
came to trial on January 10, 2005, which trial concluded on January 18,
2005. On March 10, 2005 the trial court issued its written reasons for
judgment. The court found that the Louisiana Tax Commission had
intentionally discriminated against the ANR taxpayers in violation of
the Louisiana Constitution and the Equal Protection Clause of the
United States Constitution because it had allowed other taxpayers that
should have been assessed by the Louisiana Tax Commission at 25% of
fair market value to be assessed by the local assessors at 15% of fair
market value. The court did not reach the core issue of discrimination
against interstate commerce, effectively putting the taxpayers'
challenge based on discrimination against interstate commerce back to
square one. Curiously, the court eschewed reaching a decision on the
core constitutional Commerce Clause issue of discrimination against
interstate commerce. The court determined that it would be
inappropriate to reach the Commerce Clause issue because the Louisiana
property tax scheme had been found to be infirm on other grounds.
Nevertheless, the court did decide the case on U.S. Constitutional
Equal Protection grounds and on uniformity grounds based on Louisiana
Constitutional provisions, and found the Louisiana tax scheme flawed
when examined under those constitutional provisions.
The district court further fashioned a remedy that required the ANR
pipelines to be locally assessed at 15% of fair market value for the
years of the intentional discrimination. The Louisiana Constitution
requires that interstate pipeline properties be centrally assessed by
the Louisiana Tax Commission. Contrary to the Louisiana Constitution,
the court, seemingly without any basis in the text of Louisiana's State
constitution or statutes, moved the assessment of ANR's property from
central assessment by the Louisiana Tax Commission to individual
assessments from multiple assessors at the parish level. This, of
course, raises the likelihood of multiple disputes concerning the fair
market values of the ANR assets in each parish for each of the years in
dispute. The Louisiana First Circuit Court of Appeal affirmed the
determination of the district court. Thus, after years of procedural
battles ANR ``won'' on subsidiary issues that did not deal with the
core issue of discrimination against interstate commerce, and ANR is
now forced to deal with individual assessors in each parish for each
year at issue to determine the fair market value of the pipeline
segment in each parish and to take individual appeals from any adverse
determinations of the assessors.
Like ANR, we believe that this ``remedy'' is not supported under
Louisiana law and erects new roadblocks to the eventual determination
that the Louisiana property tax system as it affects interstate
pipelines is unconstitutional and impermissibly burdens the citizens of
other states.
THE CENTERPOINT SAGA/A DIFFERENT APPROACH BUT STILL NO RELIEF
In an effort to avoid the procedural nightmare experienced by ANR,
the CenterPoint companies chose to seek an administrative hearing
before the Louisiana Tax Commission, subject to review by the Louisiana
courts. At that hearing, CenterPoint and other interstate natural gas
pipeline companies presented three days of testimony, including expert
witness testimony, concerning (i) the large volumes of natural gas that
flow through the state of Louisiana from production on the Outer-
Continental shelf, (ii) the extreme competition related to the
marketplace for natural gas, and (iii) the impact of Louisiana's
discriminatory tax scheme on the market place, the interstate natural
gas companies, and non-Louisiana consumers of natural gas.
The Centerpoint companies showed that in 1999 alone, the United
States generated 19.6 trillion cubic feet (``tcf'') of marketed natural
gas production. Fifty eight percent of that production originated from
Texas (31%) and Louisiana (27%). Texas marketed production of natural
gas in 1999 was 6.117 tcf, with roughly 23% (1.426 tcf) of the Texas
production transported into and/or through Louisiana. Louisiana's 1999
production was 5.313 tcf, and 5.283 tcf was exported out of Louisiana
into the interstate market. In 1999 about 19% of the national marketed
production of natural gas in this country was transported from or
through Louisiana before reaching end users. Thus, in 1999 Louisiana's
discriminatory tax system affected approximately 19% of the national
marketed production of the nation. I can provide the committee with
more current numbers, but the reason I use the 1999 numbers is that is
the evidence that the CenterPoint companies and others introduced
during the litigation concerning Louisiana's property tax scheme.
The Louisiana Tax Commission and the other defendants in the case
did not put on any expert testimony concerning the natural gas market
place and the discrimination caused by the property tax scheme in
Louisiana. Rather, a staff person for the Louisiana Tax Commission was
called to testify concerning the various methodologies used to value
interstate natural gas pipelines and intrastate natural gas pipelines.
On December 10, 2001, the Louisiana Tax Commission issued a decision
rejecting the contentions of the interstate natural gas pipelines that
the Louisiana property tax scheme discriminated against interstate
natural gas pipeline companies. The decision rendered by the Louisiana
Tax Commission was allegedly supported by a study conducted by a staff
member of the Louisiana Tax Commission. That study was apparently
conducted after the trial and was never properly introduced into
evidence or provided to the interstate natural gas pipeline companies
for review, evaluation and cross-examination.
The CenterPoint companies appealed the decision of the Louisiana
Tax Commission to the 19th Judicial District Court for the Parish of
East Baton Rouge. Under Louisiana law, that appeal was on the record
created before the Louisiana Tax Commission. The appeals were filed by
the CenterPoint companies on January 8, 2002. In connection with the
appeals, the CenterPoint Companies objected to the references to the
staff report in the decision of the Louisiana Tax Commission. After
numerous procedural delays, the district court judge reviewing the
Louisiana Tax Commission decision ordered the Louisiana Tax Commission
to reconsider its decision without reference to the staff report that
had never been properly introduced into evidence in the case. The judge
remanded the entire case back to the Louisiana Tax Commission for
further consideration, which further delayed the resolution of the
central issues raised in the litigation.
It was not until November and December of 2004 that the Louisiana
Tax Commission dealt with the issues on remand. The Commission once
again ruled against the interstate natural gas pipeline companies,
without reference to the staff report. The CenterPoint companies and
others were again required to file appeals to the 19th Judicial
District Court. Almost three and one half years after the trial before
the Louisiana Tax Commission and after filing for review by the 19th
Judicial District Court, the CenterPoint companies have been successful
in getting a briefing and oral argument schedule concerning the
substantive issues before the 19th Judicial District Court. The 19th
Judicial District Court is scheduled to hear oral argument on the
CenterPoint cases on October 17. Notwithstanding the October 17th
hearing, the attempt to get a final determination on the substantive
legal issues may be undermined by additional procedural objections
raised by the Louisiana Tax Commission. Lengthy delays and costly
proceedings will occur once the 19th Judicial District Court Judge
renders her decision. Appeals will be taken to the Louisiana First
Circuit Court of Appeals and ultimate review will be requested by the
Louisiana Supreme Court. CenterPoint's attorneys estimate that the
additional delays before ultimate review by the Louisiana Supreme Court
could be up to four years.
The point of the foregoing lengthy recitation of the ANR and
CenterPoint cases in Louisiana is not to re-litigate the issues, which
continue to wind their way through the Louisiana courts. Nor is it
intended to suggest that these issues arise in Louisiana alone. Rather,
the point is that state judicial processes have been used to thwart
timely relief for taxpayers.
ABSENT STATUTORY GUIDANCE, THE FEDERAL COURTS ARE RELUCTANT TO
INTERVENE
Concerned that it would have great difficulty getting a quick and
proper decision from the Louisiana Tax Commission and the Louisiana
courts, the CenterPoint companies attempted in July of 2001 to get the
federal district court in Baton Rouge, Louisiana to review the case.
Federal law bars the federal courts from becoming involved in state and
local tax cases unless state law does not provide a plain, speedy, and
efficient remedy. When the CenterPoint companies filed in federal court
CenterPoint knew that it would have to support its arguments that
Louisiana did not provide a plain, speedy, and efficient remedy for
dealing with U.S. Constitutional issues such as the interstate commerce
discrimination issues raised by the companies.
In its petition, Centerpoint and other companies contended that
Louisiana lacked a plain, speedy, and efficient remedy because of (i)
uncertainty as to the procedure for appeals from the Louisiana Tax
Commission in light of statutory changes adverse to the pipeline
companies that had been supported by the Tax Commission, (ii) questions
raised by ANR concerning the jurisdiction of the Commission to preside
over constitutional challenges, (iii) bias inherent in the statutorily
required procedure including: (a) the statutory requirement that the
Louisiana Tax Commission act as both an adversary to Centerpoint and as
a judge of the issues brought to it by Centerpoint, (b) the suggestion
that the Commission would use it own attorneys (who were already
engaged to oppose ANR on the issues) as quasi-judicial hearing
officers, (c) the fact that at that time Louisiana law gave the
Commission a financial stake in an outcome adverse to taxpayers under
these circumstances, (d) the fact that the Commission was already
involved in litigation adverse to the ANR group of companies in
litigation raising the same issues.
On July 30, 2001, the Louisiana Tax Commission filed a motion to
dismiss the federal proceeding. Notwithstanding requests to schedule
the motion to dismiss filed by the Louisiana Tax Commission for hearing
so that the CenterPoint companies could show that Louisiana lacked a
plain, speedy, and efficient remedy, no hearing was ever scheduled by
the federal court. After more than a year of waiting for the federal
court to schedule a hearing so that a trial on the core issues could be
scheduled, the CenterPoint companies gave up on pursuing the federal
case and the case was dismissed so that the CenterPoint companies could
focus on the case filed in the Louisiana district court.
Both the ANR group of pipelines and the CenterPoint group of
pipelines continue to be years away from an ultimate determination that
the Louisiana property tax system discriminates against interstate
natural gas pipeline companies.
PRECEDENT FOR FEDERAL INTERVENTION IN STATE PROPERTY TAX MATTERS
Louisiana is but one of the states engaged in discrimination
against interstate natural gas pipeline companies by imposing
additional tax burdens on interstate pipeline companies that inflates
the cost of natural gas to consumers in other states. With the
escalating cost of natural gas on the one hand, and the procedural
delays and vested interests of the states imposing discriminatory taxes
on the other, it is imperative that a federal policy concerning such
discrimination be enacted by Congress.
In 1979, Congress determined that there was a need to protect the
railroads from discriminatory taxation. In recognition of that need
among others, Congress enacted the Railroad Revitalization and
Regulatory Reform Act, commonly referred to as the ``4R Act''. Under
part of the 4R Act, states are prohibited from discriminating in the
assessment of railroad property and in the imposition of taxes on
railroads. Since the enactment of the 4R Act, the railroads have been
able to successfully overcome discriminatory taxes imposed by the
states and their political subdivisions. In fact, after the passage of
the 4R Act, the Louisville & Nashville Railroad Company and others were
successful in having the federal district court in Louisiana recognize
that the Louisiana property tax scheme illegally discriminated against
interstate railroads. Louisville & Nashville Railroad Company, et al.
v. Louisiana Tax Commission, 498 F. Supp. 418 (M.D. La. 1980). Since
that decision, the Louisiana Tax Commission has assessed railroads at
15% of fair market value. The 4R Act precluded the need for protracted
litigation in state courts and provided for a rational remedy--central
assessment by the Louisiana Tax Commission at 15% of fair market value.
In the Airport and Airway Improvement Act of 1982, Congress enacted
similar protections for the airline industry. Because of that Act the
Louisiana Tax Commission centrally assesses airline property at 15% of
fair market value.
H.R. 1369 is modeled after the protections provided to the railroad
and airline industries in order to keep states from imposing
discriminatory tax burdens. Like those pieces of legislation, H.R. 1369
would protect the interstate natural gas pipeline industry and natural
gas consumers from discriminatory taxes by preventing states and other
taxing jurisdictions from discriminatory property tax assessments and
from the imposition of discriminatory taxes. H.R. 1369 would also
promote the rapid disposition of disputes concerning discriminatory
taxes by allowing the federal district courts to decide those cases.
It is an old axiom that ``justice delayed is justice denied''. Our
industry, on behalf of our customers, seeks timely access to an
impartial decision-maker. That is all H.R. 1369 provides. Accordingly,
the CenterPoint companies urge this Committee to support H.R. 1369.
I am available to answer any questions the Committee Members may
have, and thank you again for the opportunity to appear before you
today.
Mr. Cannon. Thank you, Mr. Schroeder.
Dr. de Rugy? Is that correct, ``de Rugy?''
Ms. de Rugy. Yes. It's better than most people. [Laughter.]
Mr. Cannon. Well, that's very kind of you. We appreciate
it, and we look forward to your testimony.
TESTIMONY OF VERONIQUE DE RUGY, PH.D., RESEARCH SCHOLAR,
AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH
Ms. de Rugy. Thank you, Mr. Chairman and Members of the
Committee. I appreciate the opportunity to be here today to
talk about discriminatory taxation of natural gas pipeline. My
name is Veronique de Rugy. I am an economist, so I would like
to focus on the consequences of the tax treatment received by
pipeline.
To ensure that we do not get lost in the details of such a
specific question, it is useful to ground our analysis in
fundamental economic principles. Economists are notorious for
their propensity to see all sides of an issue and never reach a
definitive conclusion. President Harry Truman reportedly
demanded a one-handed economist, because economists, he said,
were always telling him, ``On the one hand, this; on the other
hand, this.''
But on some fundamental ideas, economists are in absolute
agreement. Among these principles we have--among these, we have
the principle that taxes distort behavior. A tax raises the
marginal costs of a product or activity, thereby discouraging
people from choosing it.
The apple grower may decide that he may not be able to
recoup the costs of taking care of an additional tree, so he
won't plant it. And if the production of apple is taxed at a
higher rate than that of the oranges, he may decide to stop
producing apple altogether, and produce oranges instead.
The size of the distortion may vary, but it exists
nonetheless. For instance, a tax on medicine would lead to few
distortions; while a tax on movie tickets or a restaurant would
lead to much distortion because there are more substitutes.
Sick people often find themselves in a situation where they
must get a given drug at any cost. But we find definitely easy
way and different source of entertainment.
Natural gas pipelines are more similar to medicine. For
instance, by their very nature they are very unresponsive to
tax treatment. Once pipelines are built, their owner cannot
easily move their operation to other States if they are unhappy
with the tax treatment in a given State. The problem is
exacerbated for interstate pipelines. Re-routing a pipeline to
avoid an entire State would be exceedingly difficult.
From the State's perspective, imposing discriminatory taxes
on natural gas pipelines and other immobile goods makes
economic sense. To put it bluntly, the States can effectively
hold the pipeline investment hostage and extract a high tax
payment in return at a lower cost.
States also have an incentive to impose higher taxes on
out-of-State companies than on their intrastate ones. However,
this approach remains economically destructive. First, because
some of the high taxes on pipelines can be passed through to
consumers, natural gas consumers around the country will end up
paying the bill, a higher bill. States that impose such high
taxes are in a sense exporting their tax burden to consuming
States.
Second, the higher cost of gas services, including those
resulting from discriminatory taxes, falls on consumers without
regard to their income.
Finally, the uncertainty of the tax treatment due to the
absence of protection against discrimination, along with high
taxes, will discourage investment in pipeline. This in turn
will increase the price of gas.
In the aftermath of two hurricanes causing massive
destruction, most of the country is focused on the price of gas
at the pump. However, reports indicate that natural gas
production has been slower to recover than that of crude oil.
Lost production attributed to these storms has been reported to
be 226.6 billion cubic feet. This been borne out by natural gas
prices. While oil prices have begun to retreat, natural gas
prices have continued to increase. They have doubled since
June, and are now almost triple what they were a year ago.
As important as gas is to our economy--62 percent of
American homes use natural gas--we cannot afford to burden our
interstate pipelines with high taxes and risk weakening the
pipeline infrastructure. If this legislation reduces the tax
burden imposed on pipeline industry, it could go a very long
way toward promoting new infrastructure investment. This would
increase competition between pipeline operators and lead to low
energy prices in the longer run. But ultimately, we should not
forget who are the real beneficiary of this legislation:
consumers.
Thank you, Mr. Chairman and Member of the Committee.
[The prepared statement of Ms. de Rugy follows:]
Prepared Statement of Veronique de Rugy
INTRODUCTION
We are confronted today with a very specific question: should
states be allowed to tax the property of interstate natural gas
pipelines differently than other forms of property? To ensure that we
do not get lost in the details of such a specific question, it is
useful to ground our analysis in fundamental economic principles.
Economists are infamous for their propensity to see all sides of an
issue and never reach a definitive conclusion--President Harry Truman
reportedly demanded a one-handed economist because economists were
always telling him, ``On the one hand . . . on the other hand. . .
.''--but on some fundamental ideas they are in absolute agreement.
Among these is the principle that taxes distort behavior. The size of
the distortion may vary, but it exists nonetheless. In the case of gas
pipelines, the relative immobility of the capital may seem to make the
distortionary effect small, but over the long run, high taxes will
discourage investment in pipelines. This in turn will increase the
price of gas. As important as natural gas is to our economy, we cannot
afford to burden our interstate pipelines with high taxes and risk
weakening the pipeline infrastructure.
If this legislation HR 1369 to prevent certain discriminatory
taxation of natural gas pipeline property reduces taxes paid by the
pipeline industry and reduces the uncertainty faced by pipeline owners
then it could go a long way toward promoting new infrastructure
investments. This would increase competition between pipeline operators
and lead to low energy prices in the longer run.
1. THE ECONOMICS OF TAXATION
Economics tells us that people make decisions by comparing marginal
costs and marginal benefits. A consumer will buy an apple if the
enjoyment she'll get from it is greater than its price. An apple grower
will plant another tree if he'll be able to sell its apples for more
than it costs him to take care of the additional tree.
When the government imposes taxes, it distorts these decisions. A
tax raises the marginal cost of a product or activity, thereby
discouraging people from choosing it. The consumer may find that the
apple is no longer worth the price she would have to pay for it--she
may buy an orange instead. The apple grower may determine that he will
not be able to recoup the cost of taking care of an additional tree--so
he won't plant it. By choosing what and how much to tax, the government
influences people's behavior; in effect, the government interferes with
market decisions about the allocation of resources in the economy.
In a free market, individuals direct resources to their most highly
valued uses. Consumers and producers spend their money on the products
and activities that will give them the most ``bang for their buck.''
Taxing these things pushes people away from the most highly valued
products and activities and towards the next-best ones. In this way,
the tax-induced distortions in behavior tend to make the market
inefficient.
2. THE HOLD UP PROBLEM
However, some taxes distort less than others because they cause
smaller changes in behavior. A tax on goods for which the supply is
unresponsive to tax rates would induce fewer distortions than one on
goods for which supply is highly responsive to tax rates. For instance,
a tax on medicine or the air we breathe would lead to few distortions,
while a tax on movie tickets or restaurants would lead to much
distortion because there are more substitutes. Sick people often find
themselves in a situation where they must get a given drug--at any
cost--and we cannot easily switch to breathing a different gas, but we
can easily find new sources of entertainment.
Natural gas pipelines are more similar to medicine and oxygen: by
their nature, they are very unresponsive to tax treatment. Investment
in a pipeline is irreversible. Once pipelines are built, their owners
cannot easily move their operations to other states if they are unhappy
with the tax rates in a given state. The problem is exacerbated for
interstate pipelines--rerouting a pipeline to avoid an entire state
would be exceedingly difficult.
As economists Benjamin Klein, Robert G. Crawford, and Armen A.
Alchian explained in an influential paper, a party that contracts to
make a relationship-specific or irreversible investment becomes
susceptible to a ``hold-up problem.'' \1\ Say party A makes a
specialized investment to fulfill a contract with party B. Once the
investment has been made, A is stuck with the deal; he invested in such
a specialized asset that it has little value in any use other than what
he contracted with B. Knowing this, B can opportunistically renegotiate
a lower payment to A.
---------------------------------------------------------------------------
\1\ Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian
(1978). ``Vertical Integration, Appropriable Rents, and the Competitive
Contracting Process,'' Journal of Law and Economics 21(2): 297-326.
---------------------------------------------------------------------------
Although Klein, Crawford, and Alchian focused on how firms
vertically integrate or sign long-term contracts to avoid hold-up after
investment occurs, an analogy can be drawn to pipelines. Once the
natural gas pipelines have already been built across several states,
the pipeline owner is locked in and the bargaining power is in the
hands of the state. The state has the power to demand a larger share of
the profits or to impose some form of discriminatory tax, since the
pipeline owner is now deeply invested in the state. In theory, the
state could even demand all of the profits, because the pipeline
owner's alternative is to lose the investment entirely.
Their lack of mobility means that pipeline owners cannot easily
react to an increase in their tax burden. To put it bluntly, the state
can effectively hold the pipeline investments hostage and extract high
tax payments in return. Considering that a state's objective is to
maximize its tax revenues, imposing discriminatory taxes on natural gas
pipelines and other immobile goods makes economic sense.
In addition, States legislators will try to impose taxes at the
lowest cost for themselves. The best way to do that is to impose higher
taxes on out-of-state companies rather than on intra-state enterprises.
This approach exports the costs associated with higher taxation to
outside jurisdictions, while allowing legislators to side step the
political repercussions of taxing their own constituents. Given the
interstate nature of pipelines, they are a prime target for this type
of state taxation.
3. DISCRIMINATORY TREATMENT OF NATURAL GAS PIPELINE PROPERTY
In practice, this is exactly what states are doing. As explained in
the previous section, pipeline property, by its very nature, is a
target of choice for state legislators wanting to maximize tax
revenues. Under the current federal law, there is no provision to
prohibit discriminatory treatment of property belonging to interstate
natural gas pipeline companies. As a result, states subject capital
that cannot move--the pipelines--to a higher tax than other forms of
capital.
According to experts in the industry, 17 states have tax laws that
discriminate against natural gas pipelines. They do this in a variety
of ways. For instance, some states distinguish pipelines from other
businesses for the purpose of imposing a higher property tax rate on
interstate companies. Other states manipulate their treatment of
personal and real pipeline property, excluding personal property from
taxation generally but including pipeline personal property. Still
other states assess pipeline property at a different ratio than other
commercial property. Industry experts estimate that the cumulative
effect of these discriminatory tax policies is to increase the property
tax bills of natural gas pipeline companies by more than 40 percent: in
2004, natural gas pipeline companies paid $445 million in property tax,
while they would have paid only $256 million if state tax laws treated
pipeline companies the same as they treat other businesses.
In the past, Congress has passed legislation prohibiting
discriminatory treatment of property belonging to other industries
operating in interstate commerce, such as rail, motor carrier, and air
carrier transportation. These laws prohibit discriminatory tax
treatment similar to what the interstate natural gas pipeline industry
currently faces. In 1976, Congress passed the Railroad Revitalization
and Regulatory Reform Act (later repealed by ICC Termination Act of
1995). A portion of the act relevant to the topic at hand provided that
states may tax railroad property at a rate not exceeding the rate
applicable to other property in the State. Also a state may not assess
rail transportation property (49 U.S.C. Sec. 11501), motor carrier
transportation property (49 U.S.C. Sec. 14502), or air carrier
transportation property (49 U.S.C. Sec. 40116) at a value that has a
higher ratio to the true market value of the property than that of
other commercial and industrial property in the same jurisdiction.
In other words, States can no longer discriminate against the
commercial property of these protected interstate transporters as
compared to how that State treats its own intrastate commercial and
industrial property.
It should be noted that these policies were enacted over the
states' strenuous objections.\2\ States never find it in their short
term interest to lose the power to extract a significant rent from
captive capital.
---------------------------------------------------------------------------
\2\ Michael S. Greve (2002), ``Business, The States And
Federalism's Political Economy,'' Harvard Journal of law and Public
Policy, Summer, p. 895-929.
---------------------------------------------------------------------------
Finally, the discrimination does not stop there. Under current law,
pipelines also face a larger burden when it comes to challenging state
tax discrimination. As it stands, interstate natural gas pipeline
companies have no recourse in the federal court system to seek relief
from discriminatory tax practices with respect to property assessments.
Unlike other major interstate enterprises, such as rail, motor, and air
carriers, interstate natural gas pipeline companies must typically
pursue relief from discriminatory tax practices through state level
appeal processes. This is an extremely difficult burden to carry.
4. THE NOT SO HIDDEN COST OF DISCRIMINATORY TAXES
On second look, however, tax discrimination remains a very poor
calculation on the part of the state. Although it would be exceedingly
costly for the companies to reroute their pipelines, taxation will
alter their behavior in other ways. The higher cost of owning a
pipeline means they will invest less in new pipelines and spend less on
maintaining their existing equipment.
Furthermore, as Nobel Prize laureates Finn E. Kydland and Edward C.
Prescott have demonstrated, if companies expect that states may raise
their taxes in the future, they will invest less today.\3\ As explained
earlier, pipeline companies, unlike companies in other interstate
industries, are not protected by federal guarantees against tax
discrimination. The companies may reasonably fear that states will
raise their taxes, and this uncertainty dampens their motivation to
invest today.
---------------------------------------------------------------------------
\3\ Kydland, Finn E. and Edward C. Prescott (1977). ``Rules Rather
than Discretion: The Inconsistency of Optimal Plans,'' Journal of
Political Economy 85(3): 473-492.
---------------------------------------------------------------------------
Moreover, the work of MacDonald and Siegel suggests that when
investments are irreversible, uncertainty concerning possible future
tax changes may have massive disincentive effects on future
investment.\4\ Firms only chose to ``nail down'' large capital projects
when they have confidence concerning the likely future paths of the key
economic variables affecting their profitability. This suggests that a
policy that reduces uncertainty surrounding future tax variables at the
state level may have profound effects on investment.
---------------------------------------------------------------------------
\4\ Robert MacDonald abd Daniel Siegel (1986), ``The Value of
Waiting to Invest,'' Quarterly Journal of Economics, Vol. 101, N. 4,
November, p. 707-728.
---------------------------------------------------------------------------
The lack of new investments in the pipeline industry along with the
lack of maintenance investment for already existing pipelines could
have very costly consequences. According to a Republican Policy
Committee paper published in November 2004, U.S. industry overall
depends on natural gas for 27 percent of its primary energy
consumption. Because of such a strong reliance on natural gas, U.S.
consumption continues to rise despite escalating prices. The United
States is expected to consume nearly 30 trillion cubic feet (Tcf) of
natural gas per year by 2020--a 38 percent increase over current
consumption levels.
To meet this strong demand, the industry estimates that $61 billion
in natural gas infrastructure investment will be needed over the next
15 years. This includes investment in pipelines, storage facilities,
and liquefied natural gas terminals. However, as mentioned earlier
state discriminatory taxation of natural gas pipeline property
discourages the pipeline industry from investing in infrastructure.
What happens if no new natural gas infrastructure is built? Quite
simply, delays in pipeline and natural gas terminal construction will
reduce the amount of natural gas available to consumers and thereby
increase the price that they must pay. This likely will cause further
job losses in industrial sectors that depend on affordable supplies of
natural gas, such as chemical and fertilizer manufacturing. Because an
increasing amount of electricity is generated by natural gas,
electricity prices will be higher for virtually all consumers.
The Interstate Natural Gas Association of America Foundation
completed an economic analysis that quantifies some of the consumer
costs associated with delays in constructing new pipeline and natural
gas import capacity.\5\ The study published in July 2005 found
startling results: a two-year delay in building natural gas
infrastructure (both pipelines and LNG terminals) would cost U.S.
natural gas consumers in excess of $200 billion by 2020.\6\ The state
of California, alone, would experience increased natural gas costs of
almost $30 billion over that period. And, of course, should the end
result be that certain facilities are never constructed, the economic
effect would be even more severe.
---------------------------------------------------------------------------
\5\ For more information see http://www.ingaa.org/Documents/
Foundation%20Studies/F-2005-
01%20(Avoiding%20and%20Resolving%20Conflicts).pdf
\6\ Ibid, p. 1.
---------------------------------------------------------------------------
The bottom line is that natural gas infrastructure delays and
cancellations have consequences. Every consumer will pay higher prices
for natural gas, electricity and the goods produced using natural gas
if we do not act to ensure that natural gas industry has the
appropriate incentives to increase adequate pipeline capacity in time
to keep supplies affordable.
Of course other current government policies discourage the market
from investing in infrastructure. According to the RSC, regulatory
impediments to investment include jurisdictional confusion, which
delays infrastructure construction; and ``open access'' and rate
regulations, which distort rates of return on investment along to the
tax impediments already mentioned.\7\ Other tax issues include too-
lengthy depreciation periods. Congress should allow the market to work.
It should clarify administrative jurisdiction; it should terminate open
access requirements and introduce market pricing of natural gas
infrastructure services; and it should reduce depreciation periods or
permit immediate expensing for tax purposes on capital investment.
---------------------------------------------------------------------------
\7\ Republican Study Committee (2004), ``How Congress should help
meet the Nation's Natural gas supply needs,'' November 16.
---------------------------------------------------------------------------
CONCLUSION
In this area of higher energy prices exacerbated by hurricanes
Katrina and Rita, it is all the more important to find a way to
decrease energy prices. An important component of this bill is the
provision of relief through the federal court system. It provides a
statutory grant of jurisdiction which affords interstate natural gas
pipeline companies the same relief avenues currently available to other
major interstate commerce industries. By giving a judicial avenue to
pipelines to contest their tax treatment, it reduces significantly the
hold up problem they faced for years and reduces their uncertainty.
If this legislation HR 1369 to prevent certain discriminatory
taxation of natural gas pipeline property reduces taxes paid by the
pipeline industry and reduces the uncertainty faced by pipeline owners
then it could go a long way toward promoting new infrastructure
investments. This would increase competition between pipeline operators
and lead to low energy prices in the longer run.
Mr. Cannon. Thank you, Dr. de Rugy.
Mr. Duncan, you are now recognized for 5 minutes.
TESTIMONY OF HARLEY T. DUNCAN, HARLEY T. DUNCAN, EXECUTIVE
DIRECTOR, FEDERATION OF TAX ADMINISTRATORS
Mr. Duncan. Thank you very much, Mr. Chairman, Mr. Watt,
Members of the Subcommittee. Thank you for the opportunity to
appear before you on H.R. 1369. My name is Harley Duncan, and
I'm the Executive Director of the Federation of Tax
Administrators, which is an association of the principal tax
administration agencies in the 50 States, the District of
Columbia, and New York City. I appear in opposition to H.R.
1369.
If H.R. 1369 is passed, it will disrupt the property tax
systems in a number of States. In so doing, it will overturn
the decisions made by voters and elected officials at the State
and local level, reduce the revenues that are now flowing to
localities and school districts in the affected States, or
shift the tax burden to other taxpayers.
Moreover, the primary justification presented for H.R. 1369
is that Congress some 30 years ago established similar
restrictions on the taxation of railroad property. That seems
scant justification for an act as far-reaching as H.R. 1369. It
should not, however, be unexpected that the pipeline industry
would seek the intervention of Congress, given that the
Congress has acted in the case of railroads.
There are three central points I'd like to make today. The
first is that H.R. 1369 will disrupt the property tax systems
in a number of States. The clearest and most immediate impact
is going to be in approximately 9 or 10 States that use a
classified property tax system in which pipeline property as
well as certain other properties are included in a class that
is assessed at a higher ratio to fair market value than other
commercial and industrial property.
What is important to note in considering these classified
property tax system States, however, is that the adoption of
the system in each State has generally involved a vote of the
electorate in that State to amend the constitution, as well as
individual actions of State legislatures to establish the
classified system. In other words, it's followed the duly
established procedures under law for amending the constitution
and establishing the system.
While you've heard that classified systems probably aren't
held in great favor by the economists, some States use them as
a tool to help balance out other features of their tax system,
and to help control the incidence of the property tax burden
across income groups and various types of property. And in
others, the classification system has been used to prevent
significant shifts in property tax burden as there have been
other changes enacted in the property tax system.
H.R. 1369 would insert the will of Congress over these
decisions that have been made by the voters and the elected
officials, and disrupt those property tax systems. It would
also do so by only focusing on the property tax system and the
assessment ratio. You'll probably hear some testimony about one
State having a ratio for pipelines that's significantly higher
from other commercial and industrial property.
What you also need to consider, however, is that in a
number of States there are offsetting features in the property
tax code. In one in particular with the higher assessment ratio
on gas property, gas pipeline properties are not subject to the
corporate franchise tax. So you've got offsetting features. And
a bill that focuses only on property taxes and inserts
Congress' will is going to miss the fabric of the system as a
whole.
The second point I'd like to make is about the ``any other
tax'' provision in section 1(b)(4). While it seems innocuous
and straightforward, and in the 4-R Act context, it was
described as a backstop to prevent States from enacting new
taxes to replace the property tax practices that were
prohibited, it hass proved to be anything but.
In my testimony, I outline about 15 cases where the ``any
other tax'' provision was used to challenge any number of
provisions in State tax law that treated railroads differently
than other taxpayers. They range from taxes on the use of fuel
by railroads, fees assessed for the maintenance of railroad
crossings, the application of a corporate income tax to
railroads vis-a-vis other types of property.
And the point is not that they won in each of those cases,
but that the ``any other tax'' provision is not as innocuous as
it might seem, and it needs to be examined. Proponents of the
bill should, I would argue, be asked to identify what types of
taxes, what particular taxes they feel fall under the
provision, so that it can be examined. And it shouldn't be left
out there as a sword that can then be used to attack taxes
generally.
The final point, Mr. Chairman, is the Federal court
jurisdiction. As you note, if there is a plain, speedy, and
efficient remedy available at State law, the Federal courts
demur. If you can prove there isn't a plain, speedy, and
efficient remedy, you get to Federal court.
You will hear, and you have heard, that it's difficult to
deal with State tax cases and State administrative appeals. I
suspect any taxpayer and any State tax lawyer that has dealt
with tax cases would agree with that. But those are the
procedures that are there; they can be challenged; and they are
the ones that face everybody, whether you're an in-State
taxpayer or an interstate taxpayer.
And by establishing the Federal court jurisdiction, you
provide a special place in the system and a separate avenue for
the pipeline industry to challenge. And that is not going to
result in equal justice for that.
So for these three reasons, Mr. Chairman, simply because it
was done 30 years ago is not sufficient justification today.
Thank you.
[The prepared statement of Mr. Duncan follows:]
Prepared Statement of Harley T. Duncan
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Mr. Cannon. Thank you, Mr. Duncan. Let me just say that I
appreciate your comments on this point and your written
statements. And we are going to take a very close look at the
``any other tax'' provision, and undoubtedly limit it from
where the bill stands today. So I appreciate your input on
that. I'm sure there will be some questions on that point.
Mr. Garrett, you're recognized for 5 minutes.
TESTIMONY OF LAURENCE E. GARRETT, SENIOR COUNSEL, EL PASO
CORPORATION, AND ON BEHALF OF THE INTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA
Mr. Garrett. Thank you, Mr. Chairman, Ranking Member Watt.
It is indeed an honor for me to appear before this esteemed
Committee on behalf of the El Paso Corporation and the
Interstate Natural Gas Association of America, which is the
trade group for the natural gas pipeline industry.
I'd like to start out by first saying that this is a very,
very important bill to the industry. The addition of
discriminatory taxes that the pipelines currently bear,
unfortunately, are borne also by those very citizens and
consumers of natural gas that had nothing to do with the
imposition of that discriminatory tax.
In other words, the discriminatory taxes imposed by the
State of Kansas are borne by the consumers of natural gas in
New York City and Maryland, as well as the District. So those
States that do discriminate, in other words--and when I talk
about discrimination, I think the Committee needs to understand
what the pipeline industry is saying here. ``Discrimination''
means that you are taxing above what you tax other commercial
and industrial property.
The pipeline industry is not asking to be relieved of their
tax burden. They are only asking to remove the discrimination
and be taxed in the general group of commercial and industrial
taxpayers.
Now, there's a big reason for that. First of all, in that
group there is a substantial amount of legislative clout. There
are a lot of voters in that group. Pipelines don't vote.
Pipelines are out of State. Pipelines are permanently fixed.
They are high visibility targets for those States that think
they can increase a tax and export it to their neighbor State.
That is what this bill is designed to address, simply the
discriminatory tax. What it does not do, it does not limit the
States from imposing or raising their taxes. What they have to
do, though, is raise it on all the commercial and industrial
property, and not simply single out the pipelines.
With regard to my esteemed colleague, Harley Duncan, I've
known Harley for 25 years. He's probably the second guy I sued
out of law school, I think. He was the secretary of revenue for
the State of Kansas. My background is I litigated a lot of 4-R
Act cases, which this statute is patterned after.
Mr. Duncan talked about the disruption in the tax systems.
We didn't see that with the 4-R Act. I litigated that from 1980
up through 1999, when I left the industry. We didn't see the
disruption in the tax systems. Was there a shift in taxes? Very
small shift. And this pipeline shift would be even smaller. The
property the pipelines own is less than what the railroads had.
With regard to the ``any other tax'' measure, I encourage
this Committee to focus on this very carefully, because that's
a very important provision. I would analogize that piece of
this statute--and Harley is right, it's very, very critical. I
would analogize that to the bottom of the sack: Without that
piece in there, you have no bottom to the sack.
In other words, taxes tend to--State taxes tend to displace
air like a balloon. So when you squeeze on one end, you get a
puff out on the other. So that's what that ``any other tax'' is
designed--and when Mr. Duncan cites all those cases, the
Committee should ask themselves: Why are those cases there?
Well, the reason they are there, because there was
discrimination against the railroads.
With regard to the Federal jurisdiction, absolutely
critical to this bill. Absolutely critical. I have litigated in
Federal court with these 4-R Act cases. They are fast; they are
clean; everybody gets a resolution, relatively speaking,
quickly.
I have been involved in litigation in the State court
system. What happens there is that if you are able to prevail--
and I put a big ``if'' there--the cause of action is generally
always a constitutional cause of action: a commerce clause
violation, an equal protection violation. When the court does
determine that there has been a violation, and if you're lucky
to ever get that resolved in a matter of ten or 15 years, then
the problem comes: where is the refund?
Two things happen. The counties spend that money. It's
gone. It's not escrowed. And what is a company to do? Well,
usually, they have to eat it, or take a credit going forward,
or invoke some mechanism. They generally don't get their money
back.
The other point here is, with a Federal court, they are
more apt to apply Federal law. It's been my observation that
State courts, while they say that they're bound by Federal
law--and they are, and I think they try to follow Federal law--
the most important thing is their State law. And you are going
to have to have an extremely, extremely good case to win.
Now, in those instances where you do win, I promise you,
the very next year the legislature will take that relief away.
They will legislatively unwind what the court did.
So that's why you have to have the ``any other tax.''
That's why you have to have the Federal jurisdiction. It's
absolutely critical. And I'm open to any questions the
Committee may have.
[The prepared statement of Mr. Garrett follows:]
Prepared Statement of Laurence E. Garrett
INTRODUCTION
The following testimony is submitted on behalf of the El Paso
Corporation and the Interstate Natural Gas Association of America. El
Paso Corporation provides natural gas and related energy products in a
safe, efficient, dependable manner. El Paso owns North America's
largest natural gas pipeline system and one of North America's largest
independent natural gas producers.
The Interstate Natural Gas Association of America (INGAA) is a
trade organization that advocates regulatory and legislative positions
of importance to the natural gas pipeline industry in North America.
INGAA represents virtually all of the interstate natural gas
transmission pipeline companies operating in the U.S., as well as
comparable companies in Canada and Mexico. Its members transport over
95 percent of the nation's natural gas through a network of 180,000
miles of pipelines. The interstate natural gas pipeline industry has
two principal federal regulators: the Federal Energy Regulatory
Commission (FERC) is responsible for the economic regulation of
pipelines, while the U.S. Department of Transportation (DOT) Office of
Pipeline Safety oversees the industry's safety efforts.
BACKGROUND
Thank you Chairman Cannon and Ranking Member Watt for the
opportunity to testify today on HR 1369, legislation that, if enacted,
would finally put an end to the unfair discriminatory taxation of
interstate natural gas pipeline property that occurs in some States
today. My name is Larry Garrett, and I serve as Senior Counsel for the
El Paso Corporation Western Pipeline Group. I appreciate your interest
in this important issue.
Our founding fathers and the original framers of the Constitution
recognized that Congress should have the authority to ensure that
entities engaged in interstate commerce are not unfairly discriminated
against by individual States. With the robustness and fluid nature of
our modern economy even more dependent today on interstate commerce,
this protection is vital to ensure consumers in one State are not
unfairly affected by the actions of regulators in another State.
A generation ago, Congress in its wisdom demonstrated its
understanding of this fundamental principle. In 1976, Congress acted
upon this understanding by passing legislation, the Railroad
Revitalization and Regulatory Reform Act, to protect interstate rail
carriers, in part, from discriminatory tax practices by the states.
Moreover, Congress later enacted legislation granting motor carrier,
and air carrier transportation property these same protections from
taxes imposed by states in ways that unreasonably burden and
discriminate against interstate commerce. As a result of this wise
action, consumers of goods transported by rail, highway or the air in
one State are protected from the harmful effects that discriminatory
taxation in another State can have on the price and availability of
those goods and services. Unfortunately, consumers of natural gas
transported by interstate natural gas pipelines are not afforded this
protection. In fact, interstate natural gas pipelines are the only
major mode of interstate transportation that is not protected by
federal law. El Paso and the membership of INGAA feel very strongly
that now is the time for Congress to protect interstate natural gas
pipelines in the same manner as provided to the other vital modes of
interstate transportation.
Under current federal law, a State may not assess rail, motor or
air carrier transportation property (49 U.S.C. Sec. Sec. 11501, 14502
and 40116), respectively, at a value that has a higher ratio to the
true market value of the property than the ratio that the assessed
value of other commercial and industrial property in the same
assessment jurisdiction has to the true market value of the other
property. A State also may not levy an ad valorem property tax on the
transportation property at a tax rate that exceeds the tax rate
applicable to commercial and industrial property in the same assessment
jurisdiction.
In other words, thanks to Congress acting, States can no longer
discriminate against the commercial property of these protected
interstate transporters as compared to how that State treats its own
intrastate commercial and industrial property.
Unfortunately, interstate natural gas pipelines are a different
matter altogether. Since pipelines do not receive the same federal
protection given to other interstate transporters, some States have
been aggressive in their discriminatory taxation of such property.
Since local property taxes are calculated by multiplying tax
assessments times the tax rates, discriminatory taxation of interstate
pipelines usually arises in two ways:
<bullet> First, pipeline property may be assessed at a
substantially higher proportion of true market value than the
proportion of true market value at which other commercial and
industrial property is assessed. An example being that a State
may assess pipeline property for tax purposes at 100 percent of
value, and other property at only 40 percent of such value.
<bullet> Second, pipeline property may be subjected to a
higher tax rate than the tax rate that is applied for the same
purpose against other taxable property. An example of this type
of discrimination would be when a State subjects pipeline
property at a rate of $1 per $1,000 of assessed valuation, and
other property subject to the same tax purpose at a rate of
$0.50 per $1,000 of assessed valuation.
Either way, a pipeline can be forced to pay higher discriminatory
taxes than other taxpayers with similar property in the same taxing
district.
Under current law, pipelines also face a tilted playing field when
it comes to challenging state tax discrimination. Pipelines are limited
to challenging discriminatory taxes through the state administrative
and judicial systems. Resolution of these cases takes years. The only
avenue of challenge pipelines have is to prove that a State's
discriminatory taxation violates either the Equal Protection Clause or
the Commence Clause of the United States Constitution. This is an
extremely difficult burden to carry.
In those rare instances where a pipeline can successfully
demonstrate that a constitutional violation has occurred, state courts
are reluctant to provide a meaningful remedy and state legislatures
quickly eliminate any remedies that the courts may grant.
The problem is best illustrated by some actual cases. In 1994, an
interstate natural gas pipeline filed a protest with a State's tax
commission complaining that the personal property of interstate
pipelines was assessed under state law at twenty-five percent (25%) of
fair market value, while the personal property of intrastate natural
gas pipelines, with whom they competed, was assessed at fifteen percent
(15%) of fair market value. This resulted in an assessment of
interstate natural gas pipelines at a rate 167% higher that the
assessment of intrastate natural gas pipelines. Protests were filed
each year from 1994 through 2005.
In January 2005, the cases were finally consolidated and set for
trial before a state district court. The district court ultimately
found that the state's assessment practices violated the pipeline's
right to equal protection under the United States Constitution as well
as its right to equal protection under the State's Constitution.
After finding these constitutional violations, the court then
remanded the case back to the state tax commission to reassess the
interstate pipelines by having the local assessors find ``new'' fair
market values for the interstate pipelines and then assess the
pipelines at 15% of the ``new'' fair market value. The court ordered
the ``new'' fair market value to be calculated by a valuation
methodology that undisputedly was not designed to find fair market
value of a rate-regulated pipeline. The clear object was to give the
assessor an opportunity to eliminate any refund of discriminatory
taxes. The pipeline was relegated to litigating the fair market value
of the pipeline in 520 separate valuation hearings in as many as 36
different local jurisdictions, even though the pipeline's fair market
value was never an issue before the court. This can hardly be
characterized as a plain, speedy and efficient remedy.
In another State, interstate pipelines challenged a discriminatory
tax on their personal property. The pipelines prevailed in court only
to have the legislature change the definition of the pipelines'
property from personal to real. The purpose was to eliminate any relief
the pipelines obtained in court.
In yet another State, pipelines challenged the practice of
exempting the inventory of merchants and manufacturers, but taxing the
inventories of pipelines. The State Supreme Court agreed that the
inventories of pipelines should also be entitled to exemption. The next
year the legislature moved swiftly to eliminate pipeline inventories
from property tax exemption.
Plain and simple, the options available for interstate natural gas
pipelines to protect their right to engage in interstate commerce
without discrimination are toothless and hollow. They are the same
toothless options Congress realized the air, highway and rail carriers
had in the 70's and they are just as hollow today. It would be our
preference to work with the states in solving this problem. However,
some States, recognizing that interstate pipeline assets, by their
nature, are not mobile, single out pipeline property for discriminatory
tax treatment. Put another way: ``interstate pipelines aren't going
anywhere, so we might as well tax them''. In these instances, the only
remedy for interstate natural gas pipelines is for Congress to enact
federal protections to protect their interests.
It is also important to realize this discriminatory taxation is not
done in a vacuum. The consequences of each State's discrimination are
felt far beyond the pipeline companies themselves. Ultimately, the
pipeline and the consumer pay the bill for discriminatory taxation. Not
only are such taxes reflected in the pipeline costs of transportation
purchased by the consumer, but also the consumers of States which do
not discriminate are forced to share the cost of these burdensome
tolls. Furthermore, state tax policies that discriminate against
interstate natural gas pipelines have the unintended consequence of
determining where and if facilities are built. States that arbitrarily
discriminate against pipelines are less likely to see the needed
infrastructure built or expanded to provide energy services to sustain
and grow the economy. Interstate natural gas pipelines, as a result of
FERC Order 636, operate in a competitive marketplace with all of the
associated market pressures faced by other businesses. If a pipeline
project cannot be competitive in the market, such projects will not be
built. State tax policies do enter into the decision making process in
determining to proceed with major capital projects.
We strongly support the passage of H. R. 1369. We specifically
would like to point out a couple of the bill's most critically needed
aspects. First, Chairman Cannon's bill will eliminate the
discriminatory tax practices that negatively affect our national
pipeline system and burden the Nation's consumers of natural gas. It
will finally declare these types of taxation activities to be an
unreasonable and unjust discrimination against and an undue burden on
interstate commerce. Second, the legislation also wisely gives the
District Courts of the United States jurisdiction to grant mandatory or
prohibitive injunctive relief, interim equitable relief, and
declaratory judgments as may be necessary to remedy any acts in
violation of this bill. The jurisdiction provided for by this bill is
not made exclusive of the jurisdiction which any Federal or State court
may have. It is important to point out this provision to show that the
legislation will not infringe upon a State's right to adopt a flexible
taxation policy towards interstate pipelines. The simple truth is that
this bill will in no way alter the freedom of a State to tax its
taxpayers so long as interstate natural gas pipelines are accorded
equal tax treatment with other taxpayers.
In closing, the recent tragic events along the Gulf Coast have been
a blunt reminder to us all how fragile life can be. Hurricanes Katrina
and Rita have also reminded us all how these tragedies can interrupt
our energy supply and, in turn, detrimentally affect people all across
the country. This vulnerability is arguably most present in the natural
gas market. Considering a majority of the natural gas consumed in this
country is produced in only a few specific regions, the role of
interstate natural gas pipelines to ensure that the natural gas found
in those areas is accessible and reliably delivered to consumers in
other areas is a foundation to our economy and livelihood. Whether it
is used to generate electricity, heat our homes or serve as a feedstock
in the production of many products we use daily, the dependable and
affordable transportation of this fuel from one region to another is
critical to this country. I would urge you to recognize the injustice
we see today by affording the same protection to interstate natural gas
pipelines that you have already given to the other interstate
transporters of important products.
Thank you once again for the opportunity to provide testimony on
this important issue. I would be pleased to answer any questions you
might have.
Mr. Cannon. Thank you. We appreciate your testimony. And
now we're going to shift to questions. I'll take the first 5
minutes.
Dr. de Rugy, are these kinds of taxes, taxation of
pipelines in particular, do they tend to be progressive,
meaning that richer people pay more tax, or do they tend to be
regressive, meaning that poorer people end up paying a larger
burden?
Ms. de Rugy. You mean the tax on property?
Mr. Cannon. The property tax on pipelines.
Ms. de Rugy. Well, it actually depends on how it's assessed
and whether it's a progressive rate or a proportionate rate.
But as a general rule, the bigger the property, the more the
tax you pay.
Mr. Cannon. No, what I mean is, ultimately consumers are
going to pay. The taxes are going to be passed on.
Ms. de Rugy. Oh, consumers--yes, well, consumers----
Mr. Cannon. So when consumers pay the taxes----
Ms. de Rugy. It falls on every consumer, regardless of
their income. So they tend to be regressive.
Mr. Cannon. So it's regressive----
Ms. de Rugy. Yes.
Mr. Cannon. --and disproportionate----
Ms. de Rugy. Yes.
Mr. Cannon. --on poorer people.
Ms. de Rugy. Because the rate is proportional, you know,
and falls on everyone.
Mr. Cannon. And since 62 percent of people in America heat
their houses with gas----
Ms. de Rugy. Homes.
Mr. Cannon. --their homes with gas, I suspect that that is
across the board.
Ms. de Rugy. Yes.
Mr. Cannon. I mean, you don't have any statistics----
Ms. de Rugy. No, but I----
Mr. Cannon. --to suggest that poor people use electricity
or something else?
Ms. de Rugy. Well, I could try to look for it, if you would
like.
Mr. Cannon. No, I suspect it's pretty----
Ms. de Rugy. But I mean, it's regressive.
Mr. Cannon. I mean, typically, I think people are going to
be across the board. The decision to heat with electricity or
oil are different. And so I suspect that it really is quite a
regressive tax.
Ms. de Rugy. Yes.
Mr. Cannon. Mr. Schroeder, you explained the problems that
you've had with regard to tax assessments in Louisiana in the
testimony you submitted. With all the problems that State has
had over the last month, are you saying that you don't want to
pay taxes in the State?
Mr. Schroeder. No, sir. First, let me just say, you noted
from my biography my longstanding personal ties to Louisiana.
In fact, all my family, my siblings and my in-laws, are still
in Louisiana. So there's probably nobody here more acutely
aware of the problems in Louisiana.
Moreover, CenterPoint as a company and its employees have
gone above and beyond in terms of devoting significant
financial and human resources to the disaster in Louisiana, and
more recently now the disaster in Texas with Hurricane Rita.
We've spent long hours rendering service and restoring
service in New Orleans, with our employees devoting their time
over there. We completely provisioned one of the evacuee
centers in Houston--not the Astrodome, but the Houston
Convention Center, which was completely staffed and supported
by our company.
And more importantly, we have a very long-standing
presence, and will continue to do so in Louisiana. We're a
significant employer and a significant capital investor in that
State. And we have done, and will continue to do, more than our
share as a company to support Louisiana as it recovers from
this.
However, and we believe as a company, Louisiana is
certainly free to raise taxes: raise taxes on our company,
raise taxes on property, generally. They're certainly free to
petition Congress for funds to deal with the disaster. What we
don't believe is appropriate, though, is to allow them to
discriminate in the assessment of taxes and shift their tax
burden onto consumers outside the State.
And I also think it's important that we all recognize that
we ought not be making policy, longstanding policy, about who
bears these tax burdens and whether or not discrimination
against interstate commerce is or isn't appropriate, on the
basis of this particular disaster, or in light of this
particular disaster. It should be done in the context of what's
good for the Nation, what's good for all the consumers of
natural gas and all the rate payers that purchase our services
across the country.
Mr. Cannon. Thank you, Mr. Schroeder. Mr. Duncan, thank
you, in the first place, for your testimony, which I thought
was very, very coherent and concise and interesting and
insightful. And clearly, we have a situation of great
complexity. And one of the reasons I personally prefer not to
be mandating to States is because they have these complicated
balances that you talked about.
So given that you've got 9 or 10 States that have this
classified system of taxation, given that those balances are
very different in each of those States, would it be fair to say
that the effect, not of the general taxation policies within
those States, but as it relates to just pipelines and taxation
of gas pipelines, that the tendency in those States is to
benefit their voters with taxation revenues that come from
taxpayers in other States?
Mr. Duncan. I'm not sure that you can make a blanket
statement that the effort is to use pipeline revenues to
benefit voters in the State.
Mr. Cannon. Well, the point is not that that's the effort
of the taxing State. But, isn't it the effect that when a State
adds taxation to pipelines that go through the State, that
people in other States end up paying into a system that brings
revenue, taxation revenue, into the State that doesn't come
from in-State voting taxpayers?
Mr. Duncan. I'm not going to deny your essential point, but
it isn't as simple a matter as the tax on pipelines is all
taken out of State. First of all, some of the gas is used in
the State.
Second, there's a school of thought in the public finance
literature--I haven't looked at it in a while--that says that
the incidence of property taxes falls back, in part at least,
on the owners of capital--that is, the owners of the pipeline
and the shareholders--depending on the nature of the market
conditions.
Mr. Cannon. Right.
Mr. Duncan. And I'd be glad to get that for your staff.
Mr. Cannon. We would love to have that. But my
understanding from what you've just said is that you agree that
there is a tendency to shift that taxation outside the State to
other sources, either through the process you've just
described, or just through the higher rates that people pay in
other States. I mean, that's simple, but----
Mr. Duncan. Well, yet is it, but there's a lot of complex
economics that goes with it sometimes; it depends. But the fact
is that if one is taxing interstate activity, there are certain
times that the ultimate incidence is going to shift out of
State, and it may fall back, and it may fall onto others. Yes,
sometimes taxes are exported. Nevada would be the classic
example of trying to export tax.
Mr. Cannon. Thank you, Mr. Duncan.
Mr. Watt? The gentleman is recognized for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman. I acknowledged at the
outset that I don't know much about this bill, so I want to ask
a couple of very, very, very basic questions, so I can make
sure I understand what the bill does, or proposes to do.
I'm looking on page 3 of the bill, and it would make
illegal four different kinds of things. And the fourth one is
this ``other tax'' issue, which the Chairman says he's going to
look at. And we could spend all day speculating about what
those other taxes might be, so I'm not even going to deal with
that aspect.
The other three seem to fall into two categories. Number
one is levying or collecting a property tax at a rate, at a tax
rate, that exceeds the tax rate applicable to commercial and
industrial property in the same assessment jurisdiction. And
the first two, numbers one and two, talk about making an
assessment that is in some way discriminatory.
Basic question: Are there States that tax at a tax rate
that is higher for property that has a pipeline running through
it? The rate, itself; not the assessment. Are there States that
are doing that? Mr. Garrett, Mr. Schroeder, you all operate in
this business. Tell me what those States are, and if there are
any such States.
Mr. Garrett. You know, Ranking Member Watt, I am not aware
of any State that has done that.
Mr. Watt. Mr. Schroeder?
Mr. Schroeder. Well, in Louisiana, in particular, our
interstate natural gas pipeline property is taxed at a
different percentage rate of fair market value than intrastate
natural gas pipelines. That's the crux of our legal issue in
Louisiana today, is we pay a tax based on 25 percent of our
fair market value, as an interstate natural gas pipeline
company; while the very intrastate pipeline companies with
which we actually compete for business, in addition to taking
our gas out of State, are taxed at a 15 percent rate. So we
think that's a prima facie case----
Mr. Watt. Okay. So Louisiana actually taxes this property
at a different rate.
Mr. Schroeder. Yes.
Mr. Watt. Are there any other States? Mr. Garrett seems
to----
Mr. Garrett. If I could follow up on your question,
Congressman, are you asking about how much--the mill levy that
is applied?
Mr. Watt. Yes.
Mr. Garrett. Because usually, that's what we talk about
when we talk about rate.
Mr. Watt. Right.
Mr. Garrett. Not the level of assessment. The level of
assessment, I think, is as Mr. Schroeder pointed out. There is
difficulties there. They do charge at different levels of
assessment. In other words, the pipelines in Louisiana are
assessed interstate at 25 percent of fair market value. But to
that value, to that assessed value, then they apply the tax
rate.
Mr. Watt. All right. But the rate itself is an equal rate?
Mr. Garrett. [Nods head.]
Mr. Watt. Okay. So the question that we are dealing with
here is an assessment matter, by and large, except for
Louisiana. Is that my understanding? Mr. Duncan, would you be
able to enlighten me on that?
Mr. Duncan. I think, in terms of the tax rate of so many
dollars per hundred dollars of assessed valuation, the
distinction that--if there is one made in a State, it is
generally between residential and non-residential property.
The issue here is the assessment rate. Once you find the
value of the property, how much of it goes in the tax base? And
the concern of the pipelines is that in some States 30
percent--in the case of Louisiana, for example, 25 percent of
the total value of the pipeline constitutes the tax base for
interstate pipelines, and 15 percent of the value--determined
in a different manner, I might add--constitutes the tax base
for the intrastate pipelines.
The issue is primarily one of assessment ratios. But if you
didn't have the prohibition against assessment ratio and rate,
you could get to the same end. And I would give them that.
Mr. Watt. All right. So this is not about the assessed
value of a piece of property. I mean, how do you value a piece
of property that has a pipeline under it?
Mr. Schroeder. Well--and Mr. Garrett can correct me if I'm
wrong, because he's more of a specialist in this field than I
am--but in Louisiana, the Louisiana Tax Commission publishes
tables that provide for the uniform assessment of pipeline
property. So there is some uniformity there in terms of how
they value pipeline property on a statewide basis for
interstate natural gas pipelines, if that answers your
question.
So it's really--as Mr. Duncan and Mr. Garrett said, it's
the percentage of the fair market value that is subject to the
assessment that has been, in our experience, the most common or
egregious example of the discrimination.
Mr. Watt. So the actual assessment itself, the valuation of
a piece of property, is not the issue here?
Mr. Schroeder. It hasn't been our experience. It can be an
issue. It's conceivable that an assessor would not follow the
guidelines, I suppose. But that has not been our experience to
date.
Mr. Garrett. Sir, if I could give you an example, if you
take--let me correct the record just for a moment on Louisiana.
Louisiana like a lot of States assess and appraise interstate
pipelines on a central assessment basis. That means the State
does the actual appraisal. And how they do that is, they
usually follow a cost, a market, and an income approach to
value.
Mr. Watt. That's the way every piece of--isn't that the way
most States do every piece of commercial real estate?
Mr. Garrett. No, it isn't. And the prime example here is
Louisiana. The intrastate pipelines are not appraised on an
income basis. What they are appraised on is a replacement
cost----
Mr. Watt. Oh, okay.
Mr. Garrett. --less depreciation. In other words, their
pipe is valued like per mile of just simple pipe. And probably,
there's nothing wrong with that. They're not a regulated public
utility. In other words, their earning capacity is not limited
like a FERC-regulated interstate natural gas pipeline.
Mr. Watt. All right. I think I understand the issue a lot
more. And Mr. Duncan has another response that will help me
understand it more. But I won't ask another question. I'm just
trying to understand what the issue is here.
Mr. Duncan. I don't know if this will help you understand
or not. I'm glad to hear that the method of valuation is not an
issue. It was often said that method of valuation was not an
issue in the 4-R Act context, but there were cases brought
challenging that method of valuation. So if the method of
valuation is not an issue, that would be a good measure to set
aside in the bill, as well.
Mr. Garrett. I'd like to respond to that. The fair market
value, or the valuation, is the denominator to this equation.
The assessed value is the numerator. So if a State tampers with
the assessed value and the numerator, they can discriminate. Or
they can tamper with the fair market value in the denominator.
This is what the railroads went through in their
litigation. What happened is the railroads, the first case they
win is strictly on a discriminatory 20 percent of fair market
value versus 30. Well, then the States take the position they
can tinker and get that money back by raising the value.
And so fair market value, Ranking Member Watt, is a very,
very important part of this bill. It was a very, very important
part of the railroad bill.
Mr. Watt. Okay. Thank you.
Mr. Cannon. The gentleman yields back.
Mr. Chabot, I believe you were here next.
Mr. Chabot. I thank the gentleman.
Mr. Cannon. The gentleman is recognized. The gentleman from
Ohio is recognized for 5 minutes.
Mr. Chabot. Thank you. Dr. de Rugy, I'll start with you, if
I can. From what I gather, my home State of Ohio collects a
large amount of taxes from the natural gas pipelines. In fact,
if I'm understanding this chart correctly, I think we're the
second-highest State, around 40 million in 2004, after
Louisiana at about 46 million. And I think New York at 39 was
next. But we're way up there.
Could you tell how, arguably, this impacts the State's
economy and the consumers? And is it logical to assume that
this tax causes Ohio consumers to pay more for natural gas in
their heating bills, therefore, than they otherwise would?
Ms. de Rugy. You're asking in the present state?
Mr. Chabot. The way it is right now, yes.
Ms. de Rugy. I guess there are a lot of things that go into
the price of the tax. But it is possible, totally possible,
that it means that the consumer in Ohio are going to pay much,
much more for their gas than in other States.
I mean, there are different prices of gas, crude oil or
natural gas, across States. And it's a mix of the cost of
production and taxes, some of which can be transferred to other
States, but most of it can't. And it's going to have to be paid
by taxpayers in Ohio.
Mr. Chabot. All right. Okay. Thank you. Mr. Duncan, if I
could go to you next, Ohio has a large number of natural gas
pipelines in the State, it's my understanding. And I understand
the rate is high, as well. Could you tell us what burdens there
might be in the State of having so many pipelines? What is the
practical effects of that?
Mr. Duncan. Well, the State would provide a number of
services to pipelines and to pipeline owners. Most
particularly, you're going to have issues of safety, I suspect.
So that there's a regulatory burden--a regulatory and a safety
burden that would be most directly attributable to the pipeline
property, would be my guess.
Mr. Chabot. Okay.
Mr. Duncan. You also have the period--I mean, the
disruption to any public rights-of-way, if they have to go into
repair. You also have the issue of easements on the private
rights--private lands, as well.
Mr. Chabot. Okay. Mr. Garrett, and also Mr. Schroeder, what
drawbacks are there for consumers when States charge
discriminatory taxes? And how could this affect the pipeline
infrastructure, as well? Either one that would like to go
first.
Mr. Garrett. Well, with respect to the consumers, the
property taxes of a pipeline are included in the rate base for
the pipeline. So consequently, the consumers are paying a piece
of that discrimination.
Now, unfortunately, every consumer that consumes gas
through that pipeline that's been discriminated against,
regardless of whether it's in the--Mr. Duncan was correct--
regardless of whether it's in the state of discrimination or
elsewhere, is paying a piece of that.
But also, the pipelines are paying a piece. And let me show
you why. It is, unlike years ago where a cost of service could
be passed down to the rate payer, that's not correct today.
That isn't what really in reality happens. You have a policy at
the FERC today that is encouraging competition.
And competition is a good thing. I mean, nobody denies
that. The problem of it is when your rates are regulated the
pipelines have to take a discount to ship gas, if you will. And
when they do take a discount, they're not earning their rate.
So in other words, that discriminatory piece of that tax, the
pipelines are paying a share of that, also.
Now, that takes away from the ability to move capital into
new areas. You want the gas out of the Rocky Mountain region to
the East here. That takes a lot of money, and that money comes
from pipelines.
And the difficulty here is when a pipeline makes a--when
they're dealing with a discriminatory tax, and you're going
into a State, you really have no brakes on. The risk
skyrockets. Because once you put that pipe in the ground, it's
hard to take it out. And when a State comes along and steps on
your neck afterwards, it creates undesirable results.
Management--and I've sat in management meetings where this
very issue has come up: ``What about this State?'', you know.
``Well, we don't want to--'' you know, ``It's so uncertain,
they don't have a tax-friendly policy, we have no Federal
protection, it's a high risk.'' So, yes, it does. It has a
terribly adverse effect at business.
Mr. Chabot. Thank you. Mr. Chairman, my time has expired,
but if Mr. Schroeder could respond very briefly?
Ms. de Rugy. Can I just----
Mr. Chabot. Yes.
Ms. de Rugy. If you want, we could send you some--there's
actually a large literature that shows that for investments
that are irreversible the uncertainty can be disastrous,
because then that will reduce the amount of investment that you
make either to maintain or to build or to add to the
investment.
Mr. Chabot. I think all the Committee would probably like
to receive that. Mr. Schroeder?
Mr. Schroeder. Just to agree first with Mr. Garrett and
reinforce, when we design our rates, we don't design them to
charge people in Louisiana, or just Arkansas, or just Oklahoma,
based on the costs and expenses associated with that particular
State's service. So you put all the property taxes in a bucket;
essentially, spread them out uniformly across all of our
consumers. And the result is that people in Arkansas and
Missouri are carrying some of the tax-raising burden that
Louisiana has imposed on our services.
There's also an important point that we haven't touched on
here, and that is the effect that this can have on producers,
as well. And today, in this high-price environment, certainly
producers are not ones that are going to engender a great deal
of sympathy, but these things go in cycles. And in periods when
gas prices are lower and producers are competing over markets,
they are all selling into a market at a largely uniform price.
For example, at a hub, that hub price might be $6; it may be
$10 today; a few years ago, it was $3.
If my pipeline traverses several States with higher
property taxes, if my transportation rate to get into that
marketplace where everybody is getting paid three or five or
six dollars, if my transportation rate is higher than my
competitors who are coming from other producing basins, the
producers that I deliver gas from into these other pipes will
receive a lower net-back. So there is also a penalty
potentially being paid by producers, as well.
I realize that in today's environment that's not a
particularly compelling argument. But we should remember that
these things do go in cycles, and that there are times when
producers feel the effect of that net-back, and it does run the
risk of inhibiting investment on their part.
Mr. Chabot. Thank you.
Mr. Cannon. The gentleman yields back.
Ms. Wasserman Schultz? The gentlelady is recognized for 5
minutes.
Ms. Wasserman Schultz. Thank you, Mr. Chairman. Actually, I
have two questions, and any of the panelists could choose to
answer it. The need for this legislation has been--the citation
that has been referred to in the need for this legislation has
been the 4-R Act of 1976. And at the time, my familiarity with
that act is that the U.S. railroads who benefitted from it were
in bankruptcy. And certainly, the pipelines are not in any such
situation.
So I'd like to understand why, when that act was adopted as
a form of relief for U.S. railroads, when there doesn't appear
to be any need for relief for pipelines, why it's necessary to
move forward with legislation.
Ms. de Rugy. Very quickly, I'll answer to that by saying
that, actually, in my testimony, my written testimony, I never
made any reference to that act, for that exact reason. The
reason why it would be important to get rid of that
discrimination has nothing--I mean, has nothing to do really
with the fact that other companies benefitted from that.
It's from an economic point of view it would be a very
important thing to do, independently of whether other companies
have benefitted from it. So I think that's why, you know,
comparing--saying, ``Well, you know, we did it because this
industry was in bankruptcy or was having problem,'' is just not
the argument.
Ms. Wasserman Schultz. Mr. Duncan, can you comment, please?
Mr. Duncan. I tend to--I mean, I agree with your point. It
was adopted in 1976. It was part of a major package looking at
regulations, some actual relief. It was the establishment of
Conrail, and this was a piece that was included as a way of
providing relief.
We hear today that it's discriminatory taxation. I have a
feeling that if we didn't have the 4-R Act, we'd hear a lot
less about the discriminatory taxation. Because the practice of
the States would be to treat a broad group of property that we
would traditionally call public utility, but that would include
pipelines and the railroads and the motor carriers and the air
carriers, in much the same fashion for property tax purposes.
So it's the intervention of Congress in 1976 that leads to the
discrimination that we're hearing about today.
Mr. Garrett. And if I may follow up on that, I wasn't
involved in the 4-R Act legislation, but I was involved in the
4-R Act litigation; so I had an opportunity to read a lot of
the legislative history there. And you're absolutely correct;
the railroads, certainly the eastern railroads, were in
financial straits. The western railroads were not. But the
objective was--is to eliminate this discrimination on
interstate commerce.
I would encourage the Members of the Committee just to
simply go back and look to see what their predecessors did.
With the railroad bill, with the motor carriers, and with the
airlines, there was a clear need to eliminate discrimination.
And I can refer the Committee Members to--S. 2289 is the
Committee report on the discriminatory State taxation of
interstate carriers. And it gives an excellent background of
what they were looking at. And one of the quotes out of there
is that ultimately the shipper and the consumer pay the bill
for discriminatory taxation. That's true with the pipelines;
that's true with the railroads; that's true with the airlines;
and it was true with the trucks.
That's what Congress wanted to eliminate, this
balkanization, this idea of a State imposing a discriminatory
tax on a good--like a tariff, if you will.
Ms. Wasserman Schultz. Yes, but my impression is not that
that was the purpose of that act. The understanding that I have
of the purpose of that act was for relief; not for relief from
discrimination, for financial relief.
Mr. Garrett. Well, it was relief from discrimination. And
if I may continue here, not only are such taxes reflected in
the transportation cost of goods purchased by the consumer--the
same here with the pipelines today--but also, the consumers of
States which do not discriminate are forced to share the costs
of these burdensome tolls.
You know, you can look at a pipeline. A pipeline is a
railroad underground. They do not own the cargo that they ship;
the railroads don't own the cargo that they ship. Both of them
are fixed assets that are very expensive, that are very
important to our national infrastructure. You just simply can't
pick them up and move when the taxing environment gets
unbearable. That's what Congress stepped in to protect.
Ms. Wasserman Schultz. Mr. Chairman, I have another
question, but my time has expired.
Mr. Cannon. Without objection, the gentlelady is recognized
for another minute.
Ms. Wasserman Schultz. Thank you very much. The only other
question I wanted to ask was on a different subject. I'm a
former State legislator for 12 years, and so I jealously guard
when we remove jurisdiction from the States and grant it to the
Federal Government. Kind of a home rule thing.
And you know, I just don't really see in the research and
the reading that I've done that there is an access to the
courts issue. I mean, if there is a discriminatory issue, then
the State and local courts seem available to pursue a remedy.
And I'm not sure why it needs to be--the jurisdiction needs
to be moved to the Federal level. It doesn't make sense, unless
there is some access to the courts issue that I'm not familiar
with.
Mr. Garrett. Well, there is an access to courts issue. One
is in the State system. And I might add, too, take Kansas, for
instance. Pipelines have a separate appeal procedure. They're
not allowed to pay their taxes under protest, and sue. What
they must do, if they have a complaint about their valuation or
assessment, they must bring an action to the State board of tax
appeals within 30 days of the assessment.
First of all, that time is very--you can hardly analyze
your case in 30 days; let alone, bring a cogent defense. The
system is extremely slow. I brought an action before the Kansas
State Board of Tax Appeals, started in--the case started in
1998. The Kansas Supreme Court finally heard it this year;
ruled in the--this was not a pipeline case, but it was a
gathering lines case--ruled in the pipeline's favor; the
companies still haven't received a refund. And Lord only knows
when we're going to get to that.
Ms. Wasserman Schultz. Mr. Chairman, would you let Mr.
Duncan just give an alternative?
Mr. Cannon. Absolutely.
Ms. Wasserman Schultz. Thank you so much.
Mr. Duncan. Thank you. You know, I hear these things about
State procedures and State cases. I mean, I've had State tax
attorneys that work for me make the same arguments: that it is
cumbersome; it is difficult; you can't get the records, and the
like.
I think the answer really is that we have a system that
State and local tax cases are brought at the State and local
level. There are procedures out there that affect everyone. If
the Federal court, in reviewing that, sees that it's not plain,
speedy, and efficient, they can take the case. And they have,
in fact, on occasion, taken the case.
But everybody is treated by the same rules, and they all
play by the same rules. I think, you know, is it cumbersome?
Sometimes it is. Sometimes you don't get the answer you want,
either. But we are all playing by the same rules. And the
Federal court can assert itself, if they think the remedy is
not there.
Mr. Cannon. The gentlelady yields back. And sometimes when
the rules even work it's hard to get paid, according to Mr.
Garrett. The gentlelady may be interested in a map of pipelines
that we have, the Committee staff has. Because I suspect that
you may want to support this bill, since I think the weight of
the testimony here is that taxpayers in Florida are subsidizing
revenues in Louisiana. And so from your historic perspective as
a legislator, that may be interesting.
The gentleman from North Carolina, and senior Member of the
Committee, is recognized for 5 minutes.
Mr. Coble. Thank you, Mr. Chairman. Mr. Chairman, I have
two meetings going on simultaneously. That's why I was late
getting here.
Mr. Duncan, you earlier said that Nevada was an ideal
example. I may be the only guy in the room who is not sure why
Nevada is an ideal example.
Mr. Duncan. It's simple. Nevada--and I can understand that
you wouldn't understand this. Nevada has most of its tax money
come from gambling and liquor and other things that are imposed
on tourists. So that's how it exports its tax burden. I'm
sorry.
Mr. Coble. Well, I figured it probably involved one of
those ``sinful'' activities. Thank you, Mr. Duncan.
Mr. Garrett, you point out in your testimony--in fact, my
colleagues may have touched on all these questions previously.
But you point out, Mr. Garrett, that the interstate and natural
gas pipelines are similar in nature to rail, air, and trucking
modes of transportation. And I don't disagree with that.
Comment a little more in detail about the similarities and
the differences that you see, A; and, B, why were the
interstate natural gas pipelines not afforded the same
protection that was extended to air, rail, and truck in the
'70's?
Mr. Garrett. Thank you, Congressman. First of all, the
similarity is--specifically with the railroad, the railroads
have an infrastructure; the differences being, of course, one
is above ground; the pipelines are below ground, they're
hidden. They both transport commodities in interstate commerce.
The difference between the railroad and the pipeline is,
the pipeline simply transports natural gas; where the railroads
transport all sorts of commodities. They are both captive. They
both are capital intensive. They both cross States that
discriminate.
The reason, I think, that it's--I can't give you an exact
answer why the relief wasn't given to the pipelines back in the
'70's, but here's probably at least my take on it. Back in the
'70's, the pipelines were simply a small segment of the energy
industry. In other words, the pipelines owned the interstate
transportation; they owned the gathering systems; they owned
the production; and sometimes they even owned the local
distribution companies. They literally owned the whole, entire
supply chain.
Today, since 1993, the Federal Energy Regulatory Commission
ordered the unbundling of all of those entities. So today, when
you have an interstate natural gas pipeline, that's all you
have. They cannot own production; they cannot own the gas in
the line, except that necessary to run the pipeline. That is
somebody else's commodity. So today they are identical to a
railroad.
Mr. Coble. I got you. Dr. de Rugy, what is the proper
balance, in your opinion, of whether this bill is an
infringement of States' rights, on the one hand, or a protector
of a State's right to protect its residents from higher or
excessive prices due to another State?
Ms. de Rugy. Thank you, Congressman. I think it's a very
good question. It really seems to me that this bill is actually
a good federalist policy. I'm a fervent defender of States'
rights. And this bill doesn't mean that the Federal Government
is going to impose on them how they should impose, which rate
they should impose on companies within their States. This is
not at all the point.
On the other hand, but this bill does--because this bill
doesn't impose a national way of imposing taxes on pipelines.
What it does, though, it protects all other States from a given
State discriminating against a given industry, and this State
exporting the costs on other States.
So actually, it is the perfect federalist solution, it
seems. I mean, and I think it is. Because, as I said, it just
balances those rights; without imposing a national policy which
then would go against States' rights; yet protecting one State
from suffering from the tax policy in another State. Actually,
it does seem to me like a good federalist policy.
Mr. Coble. We appreciate you all being with us. Mr.
Chairman, I yield back.
Mr. Cannon. Thank you. You know, I had a person on my staff
who loved to go to Las Vegas. And I could never understand why
anyone would want to go subsidize somebody else's tax system,
but he did. And it was his choice. The problem, of course,
we're dealing with here is where you don't have choice.
And Dr. de Rugy, you mentioned earlier that you had some
information on how uncertainty and exaggerating the risk leads
to a huge distortion in investments. If you could get that to
the Committee, I'd very much appreciate that, because that's a
big, big part of the issue that we have here.
[The information referred to is available in the Appendix.]
Mr. Cannon. I want to thank the panel for the very
thoughtful, insightful testimony. And we're going to work on
this some more, and appreciate that. And at this point, the
hearing is adjourned.
[Whereupon, at 3:15 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to Post-Hearing Questions from Veronique de Rugy, Ph.D.,
Research Scholar, American Enterprise Institute for Public Policy
Research
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Response to Post-Hearing Questions from Harley T. Duncan, Executive
Director, Federation of Tax Administrators
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Response to Post-Hearing Questions from Laurence E. Garrett, Senior
Counsel, El Paso Corporation, and on behalf of the Interstate Natural
Gas Association of America
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