April 1 , 2010: In This Issue. . .
TCEQ Advisory Group Seeks to Clarify Rules Governing Tax Exemptions for “Pollution Control” Equipment
An advisory group to the Texas Commission on Environmental Quality (TCEQ) has recommended that the agency revise its process for granting property tax exemptions for pollution control equipment to avoid tax relief for companies seeking to exempt equipment not truly intended for pollution control. Literally billions of dollars of equipment and property is at stake, as companies claim that installed property was only there to meet an environmental rule and regulation and therefore should not be subject to property taxes. The issue is timely because recently Valero argued that it should be able to take up to 70 percent of its property at its refineries making low-sulfur gasoline off the tax rolls since the property was used to take sulfur out of crude oil to meet EPA standards.
The Advisory Group – officially known as the Tax Relief for Pollution Control Property Advisory Committee – was created as a result of the enactment of legislation in 2007 to advise the Commission on implementation of the original constitutional amendment known as Proposition Two setting up the exemption and later legislation that added new pieces of equipment to the list of property that could be considered tax-exempt.
The 13-member advisory committee is composed of representatives from a number of interested stakeholders, including local tax collectors, urban counties, school districts, oil and gas companies, the electronics industries, the coal industry and the Lone Star Chapter of the Sierra Club.
In making its recommendations, the Advisory Council advised TCEQ on an 11-0 vote that language be added to the rule that states that the portion of the property under consideration can not be “used, constructed, acquired or installed solely to produce a good or service,” and instead must be “wholly or partly used, constructed, acquired or installed to meet or exceed an adopted environmental rule or regulation that requires the prevention, control, monitoring or reduction of air, water or land pollution that results from the actions of the applicant in the production of a good or service and not solely from the use or characteristics of the good or service produced or provided.”
TCEQ will now propose updating its rules in April, and will take the Advisory Committee recommendation into consideration, with final approval of a new rule expected in late summer. The new rules will not be applied retroactively, meaning that entities that already received tax breaks under the old rules will not have to give them back.
A multitude of issues led legislators and interest groups as diverse as the Lone Star Chapter of the Sierra Club and the Council on Urban Counties, along with the staff of the Legislative Budget Board, to recommend that changes be implemented to the statutes and rules covering how pollution control property could be declared exempt.
The Valero situation has dramatized the issues. Valero’s
requested tax break would be a departure from what was intended
by the exemption because while the units removing sulfur
do help make a cleaner product, they do not lead to an environmental
benefit at the plant site, but rather wherever the gasoline
is actually used. In fact, they actually increase emissions
at the plant site itself. In addition, because you can not sell gasoline in the US without removing the sulfur below certain levels, the purpose of the property is to meet characteristics of the product, and not to control pollution directly. While the TCEQ staff had already denied the Valero petition, Valero has appealed that decision, and the TCEQ Commissioners have remanded the initial denial back to staff for further consideration.
In addition to the Valero case, after the passage of new legislation in 2007, a list of new equipment used primarily in the coal combustion and natural gas electricity markets was added to the list of items that must be considered, with TCEQ still determining whether it met the law. Dozens of companies that operate combined cycle natural gas plants had sought to take at least a portion of the value of heat recovery units – which recover waste heat and reuse it to produce additional electricity – off the tax rolls. However, rather than one simple calculation of the portion of the heat recovery unit intended to help meet emission controls, the TCEQ received more than a dozen different calculations all using different methodologies.
While the Advisory Committee did take action on the issue of environmental benefit and production equipment, determining which methodology the TCEQ should use for equipment that has both productive and pollution control functions will be taken up at a Committee meeting on April 12. Other issues related to rules will be discussed at that time.