TAX NEWS - JUNE 2010

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Oil Refining Industry Group Opposes Senate Increase In Oil Spill Liability Tax

A key oil-refining-industry organization is opposing a provision in a Senate bill that would quintuple a federal tax specifically used by agencies to clean up oil spills because it would increase fuel costs for consumers.

On Tuesday, the National Petrochemical and Refiners Association sent a letter to Senators Harry Reid (D., Nev.) and Mitch McConnell (R., Ky.) opposing a provision that would increase the Oil Spill Liability Trust Fund tax from 8 cents a gallon of crude oil to 41 cents a gallon. The bill passed by the U.S. House of Representatives on May 28 had increased the tax to 34 cents a gallon, which NPRA didn't oppose.

NPRA didn't oppose the tax 34-cent tax increase passed by the U.S. House of Representatives on May 28 to ensure that the fund was adequately financed to respond to future oil spills, said Charles Drevna, president of the refining-industry organization. This provision was passed as part of a broader jobs bill that extended unemployment benefits and various tax incentives.

"However, the Senate proposal to increase this tax even further to offset the cost of extending a tax break for Wall Street bankers and hedge fund managers at the expense of Main Street citizens must be stopped," Drevna said. The criticism points to growing size of the U.S. deficit and concerns about how the government is going to pay for major reforms, incentives and other legislation.

Congress is seeking to increase the oil spill liability tax to help cover the cost of the massive Gulf of Mexico oil spill. Refinery operators are responsible for paying the tax for every barrel of crude oil they process. This money is used to fund federal clean-up efforts spearheaded by the U.S. Coast Guard and the U.S. Environmental Protection agency, which then bill companies responsible for the accident.

The House and Senate proposals would break down to nearly a penny a gallon of gasoline or diesel produced. But some refining-industry insiders see this seemingly small cost addition as another hurdle as companies try to return to profitability this year. While trends have started to improve in recent months, the U.S. refining industry wrestles with refining margins pressured by weak demand and higher oil prices. Higher biofuel mandates and fuel-efficiency standards implemented over the next decade are expected to slow the pace of a recovery in U.S. demand for traditional petroleum-based refined products.

This oil liability tax increase comes "at a time when refiners can ill afford additional drains on the bottom line; it looks like something that could have very significant adverse impacts on the refining sector," said Craig Moyer, chair of the energy division at Manatt, Phelps & Phillips LLP, who works with independent refiners.

The tax increase is also "competitively disadvantaging domestic refiners compared to foreign refiners" who are not on the hook paying the crude oil tax for finished products imported into the U.S., Moyer noted. He said that even the 34-cent tax passed by the House is a concern.

The Oil Spill Liability Trust Fund originally launched in 1990 at five cents a barrel, but refinery operators were not required throughout the years to consistently pay the tax because of limits on the fund's size. The House bill proposes lifting that cap from $1 billion to $5 billion. So not only will refiners be required to pay more per barrel, but they will have to pay it more frequently as funds are drawn to aid in the Gulf cleanup, which is estimated at more than $14 billion.

Thus far, BP has been charged $150 million, and the company immediately repaid the first $70 million bill, said Jonathan Abramson, a damage-claims regional manager of the National Pollution Funds Center. Bills accrue interest after 30 days.

The oil liability tax fund is divided into two parts where some money is available for emergencies while the rest of it is held in a general fund that can only be accessed upon approval from Office of Management and Budget. Abramson said his agency has already drawn $100 million from the general fund and is currently asking for more.

"The amount of the tax really is not the major issue for us," Abramson said. "As managers of the fund we are mostly interested in how much money we can use from the fund for a major incident like this."
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