By Camilo Smith
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In 2006, Valero Energy congratulated itself on becoming North America's No. 1 oil refiner.
In its financial report summary reflecting on 2005, the company painted a picture of a scrappy underdog that fought its way to the top in large part through a shrewd, counterintuitive business model: Buying cheap, low-grade crude oil (called "sour crude") when demand for higher-grade oil ("sweet crude") was going up. This higher supply of crude widened sweet/sour margins. More than 60 percent of Valero's input of raw materials consisted of sour crude. This, combined with what Valero described in its 2004 report as buying refineries for "pennies on the dollar of replacement cost, and then investing in them to make them significantly more profitable," would make for a bright future.
Valero was also smart and determined enough to seek every available tax break from the states where its 13 U.S. refineries were located, including Texas, where it has six. The company's stable of lawyers also routinely contested its refineries' county appraisal values; Valero had a habit of suing the Harris County Appraisal District nearly every year. Apparently, the money spent on the lawyers was worth the potential overall savings.
In 2007, taxes were an especially important issue, because the company spent more than $1 billion to upgrade five Texas refineries to meet new U.S. Environmental Protection Agency standards for sulfur levels in diesel and gasoline. New and renovated equipment meant a higher appraised refinery value, meaning higher property taxes.
But Valero argued that these upgrades, in the form of equipment called hydrotreaters, qualified for a provision in the state tax code that granted businesses property tax exemptions on equipment installed solely to meet pollution-control regulations. The idea is essentially to not double-tax a business that has to incur great expense for equipment that meets a mandate but doesn't contribute to its bottom line.
After implementing the provision, generally known as Proposition 2, in 1993, the Legislature left the decision on whether a piece of equipment qualifies for the exemption up to the Texas Commission on Environmental Quality. In 2001, the commission's advisory board came up with a way to best deliver consistent rulings: The equipment in question needed to manage pollution "at the site" — language not included in the statute, but language the commission thought was fitting.
The advisory board even came up with a handy flowchart to illustrate the decision-making process: a rudimentary map of boxed text and arrows meant to cut through the crap and make the whole thing easy enough for a 12-year-old to understand. The commission's staff, executive director and three commissioners have relied largely on this chart to deliver consistent rulings for nine years.
Valero first applied for a tax exemption on its hydrotreaters in 2007. Using its handy-dandy flowchart, the office of TCEQ's executive director denied the application. Never one to give up easily, Valero appealed. The commissioners postponed hearing the argument until last January, when they did something that made county appraisers and school district administrators in Harris, Galveston, Jefferson, Moore and Nueces counties nearly pass out: Commission Chairman Bryan Shaw and Commissioner Buddy Garcia seemingly ignored the almighty flowchart and, instead of upholding the negative ruling, kicked Valero's application back to the executive director's office.
Shaw and Garcia seemed to buy Valero's argument that "at the site" should be interpreted broadly — that pollution abatement should be considered beyond just a property's fence line.
With that, according to county, city and school district officials, this relatively obscure appeal suddenly became a test case for all refineries across the state: If the "at the site" provision was interpreted in Valero's favor, it would open the floodgates for businesses to argue that they're reducing pollution somewhere and get a big break on property taxes.
It would set a dangerous precedent allowing billions of dollars to drop off tax rolls throughout Texas, they say. And officials in the taxing districts surrounding the refineries where Valero installed hydrotreaters say they would actually have to refund three years' worth of property taxes — an enormous lump sum that would drastically alter tax burdens.
Regular folks who didn't happen to have hydrotreaters sitting in their backyards would have to pay Valero's share of taxes, otherwise school buildings would fall into disrepair and have to be replaced with dirt-floor shacks. Cities would have to cut services; garbage would pile high on cracked sidewalks, open-air drug markets would sprout up because of the lack of police and there'd be no firefighters left to get cats out of trees.
Or at least that's how officials are making it sound. Valero says it only wants what state law already allows. You and your wallet are in the middle. Which is probably where the truth is.
Like a high school yearbook, every Valero report summary has a theme, and in 2006 (the year the 2005 summary was released) it was of course playing off its new position as No. 1: A hand, with index finger proudly extended toward the heavens, graced the cover. But looking inside, from a 2010 perspective, makes for some cringe-inducing moments, and not just for the cheesy hand-related puns ("a real hand up on the competition!").