|Refinery Tax Dispute Heats Up
March 13, 2006
As the Contra Costa Times editorialized against massive proposed property tax reductions for local refineries (see story below), the City of Richmond took the unprecedented step of notifying Chevron that its now routine request to use the alternative “maximum tax payable” will not be automatically accepted by the City for FY 2006-2007 (see attached PDF file). City of Richmond Finance Director Jim Goins has notified Chevron that the company must provide sufficient information to Richmond to convince him that it is in the City’s best financial interest to agree to the “maximum tax payable,” commonly called the “cap,’ rather than to have Chevron pay the same 10% utility user tax that all other Richmond residents pay.
This has been a bone of contention for many years. Chevron claims that they would rather pay a higher “cap” than to risk making information available that may compromise their business secrets. Information about what taxpayers pay and how that amount is computed is, however, protected in any event by state law.
Others claim that the “cap” is a special benefit to Chevron not available to other residents and speculate that the special exemption has cost the City millions over the last two decades.
Four refiners, Chevron in Richmond, Shell in Martinez, ConocoPhillips in Rodeo and Valero in Benicia, are appealing their assessments. Determining a fair property tax assessment is far from easy, but what the oil firms are seeking appears to be substantially lower than what is reasonable.
Chevron has appealed to lower its assessed value from $2.64 billion to $800 million. That would cut its property tax bill by 70 percent, from $28.6 million to just $8.6 million. Shell wants its tax bill reduced by 63 percent, from $18.2 million to $6.7 million. ConocoPhillips and Valero are seeking tax cuts of 35 percent and 38 percent respectively.
Unlike residential real estate, assessing business property, especially refineries, is far from simple. Under Proposition 13, homes are assessed for their selling price at the time of sale. Then assessments can rise 2 percent a year regardless of the homes' true market value.
When assessing refineries, assessors need to calculate a refinery's current and future income to determine the market value of the facility.
That is a daunting task because of wide fluctuations in gasoline prices and the ability of oil firms to shuffle revenue and profits among a series of transactions and related operations.
Adding to the assessment fog is a loophole that is available to most businesses, including refineries. When state lawmakers wrote the law that implemented Proposition 13, they gave businesses a huge break. The law allows for separate assessments of permanently installed business machines and equipment, known as fixtures.
Under state law, fixtures can be depreciated as they age and lose value because of wear and tear. About 80 percent of a refinery's property value is tied up in fixtures. That allows the refinery to reduce the value of its fixtures at a faster rate than the 2 percent annual increase in the value of land and buildings.
Because the fixtures account for most of a refinery's value, property tax assessments can actually decline over the years.
By allowing fixtures to depreciate, along with the fact that businesses change hands less often than homes, the overall percentage of property tax paid by homeowners has been steadily rising.
With a huge increase in oil companies' profits in the past two years, there is little public (read political) sympathy for refineries that seek lower assessments, while homeowners pay more and more.
There also is the threat to enact Rule 474, which would end refineries' ability to depreciate fixtures. This is a political reality that should give oil companies pause to seek such large decreases in property tax assessments.
It is difficult for us to believe that Chevron would sell its Richmond refinery for the $800 million it claims it is worth. Nor would Shell likely sell its refinery for the $650 million it says is a fair assessment.
It is understandable that Contra Costa County Assessor Gus Kramer has blasted the refinery owners as "shameless" for seeking massive reductions in their tax bills. Property taxes are a relatively small percentage of oil firms' income, but a worrisome loss for local governments.
The four refiners need to sit down with the assessors from Contra Costa and Solano counties and come to a reasonable agreement on refinery assessments.
We believe a fair solution should result in assessments far closer to current assessed valuations than what the refineries seek.
Oil companies would be wise to reach an agreement that does not lead to imposition of Rule 474, which could spread to other businesses as well. But if refiners insist on cutting their tax bills by up to 70 percent, then assessors and legislators would be motivated to enact Rule 474 and disallow depreciation of fixtures.