On November 4, 2020, Shell Oil Company announced the closure of its refinery in Convent, Louisiana, a situation that is far from isolated. As reported in the Wall Street Journal article, “Pandemic Pushes Fuel Makers in Richer Countries to the Brink,” 11 refineries from the U.S. to Japan have announced intentions to close. Several years of sinking oil prices, price disputes, and overproduction among OPEC+ nations, the move toward renewable energy sources, and the economic downturn associated with the COVID-19 pandemic are causing nearly unprecedented, simultaneous strains on the entire oil and gas industry. According to the research firm IHS Markit, and reported in the Houston Chronicle, more than three million barrels per day of refining capacity will be shut down as a result of the pandemic alone. A rationalization of production that was expected to be spread across the next decade has now occurred in the space of less than a year.
The closure of a major industrial facility, which is often one of the largest employers and taxpayers in a local jurisdiction, has far-reaching impacts on the owner of the closed facility, owners of surviving businesses, individuals in the local community, and state and local governmental authorities. A closure of this type will result in the loss of millions of dollars in tax revenues and present significant challenges to local tax recipient bodies. And for continuing industrial facilities and other businesses in the jurisdiction, the closure of a major industrial facility could mean increased scrutiny by local tax authorities as they attempt to make up for the financial shortfall.
The apparent opposing positions of local tax recipient bodies (maintain or increase tax revenues) and local operating businesses (preserve cash flow) present unique challenges and opportunities. Among other challenges, owners of operating businesses must be aware of efforts by local governmental authorities to recoup potential revenue losses from facility closures and should develop proactive strategies to balance their business needs with the financial needs of the communities in which they operate.
This article focuses on strategies businesses should implement to effectively manage their local property tax responsibilities and opportunities. While beyond the scope of this article, similar efforts should be implemented with respect to other state and local taxes, e.g., income, franchise, sales/use.
As Industrial Facilities are Lost, Focus Turns to Remaining Industrial Facilities and Other Businesses
For decades, several states, including the authors’ home state of Louisiana, have viewed refineries and other large industrial facilities as proverbial golden geese. In return for certain economic development incentives, such facilities provided well-paying jobs to hundreds of thousands of individuals. These individuals in turn spent their hard-earned wages in the local community. In addition, local property and sales taxes paid by owners of such facilities went directly to local communities, as well as a portion of state-level taxes allocated to local governments by the legislature. Through economic ups and downs, this arrangement more or less worked – until now.
Today, the oil and gas industry is consolidating and, in some cases, simply closing down. Some closures are not temporary. Many are permanent, in part because consolidated or relocated operations are likely to be more efficient for the long term, but also because it may be technically very difficult to initiate a restart of an industrial facility. In some instances, a shuttled facility may never restart. More likely, the owner may sell the facility to a buyer that may dismantle and sell the “scrap” from the facility. In a best-case scenario, a new owner could repurpose the facility for a different type of manufacturing.
The fair market value of a shuttled facility will be significantly lower than the fair market value of an operating facility. As part of its closing strategy, the owner should take proactive steps to work with the local property tax assessor to make the necessary adjustments to the fair market value of the property remaining at the shuttled facility to reflect the obvious obsolescence. The owner also should be prepared to retain valuation consultants to support requested valuation adjustments, as well as take steps to review its books and remove property that is no longer in existence or located at the shuttled facility.
While valuation negotiations with an assessor may not be comfortable, they are a necessary part of a company’s facility-closing strategy. The goal is to reach an agreement as to the fair market value of the closed facility. These efforts, if properly executed, will result in a much-needed reduction of the property taxes ultimately due by the owner.
At the same time, when a large industrial facility closes and proper adjustments are made to the value of the closed facility, the local tax recipient bodies – schools, law enforcement, public health, cultural and other services and infrastructure authorities – will see their funding sources diminished, sometimes significantly. In addition, as the local workforce dwindles, the money spent by the local workers also will diminish.
The local tax recipient bodies will have little or no choice but to seek replacement funding sources. There are several ways for local tax recipient bodies to fund their operations, but the proverbial “low hanging fruit” is increased tax collections. For local property taxes, the most likely ways to increase property tax collections are to raise the local property tax millage rates, increase the assessed values of operational properties while holding existing local millage rates steady or both. All local authorities have an interest in protecting their revenue streams, but it all starts with the local assessor.
This leads us to the most important takeaway in this article. In local jurisdictions where a large industrial facility closes, the owners of continuing businesses must implement proactive, strategic plans to work with local governmental leadership to protect the company’s interests, while taking into account the revenue needs of local tax recipient bodies. This begins with communications with the local assessor to resist any unwarranted increases in the fair market values of the operational properties to increase resulting tax revenues, which would be borne by the continuing businesses.
The effort cannot stop with the local assessor. Owners of operational industrial facilities also must meet with other key local leadership to discuss ways to keep local property tax millage rates at appropriate levels. Businesses and governmental leaders should work together to address the seemingly competing interests of operating businesses and local tax recipient bodies.
Against efforts by local officials to offset potential revenue losses, owners of continuing businesses must develop effective strategies that fairly reduce their tax burdens without threatening the mutually beneficial relationship with the communities in which they operate.
Looking Ahead: Strategies for Tax Fairness
A facility owner’s response to this rapidly changing environment must have both short-term and long-term components. Before the ink is dry on checks for payment of 2020 property taxes, owners should implement a property tax “health check” for 2021 and beyond. The process starts with preparing and filing the 2021 property tax rendition form. Shortly thereafter, negotiations with local property tax assessors will begin.
Continuing businesses must make extra efforts to assert and defend taxpayer-initiated valuation adjustments to take into account obsolescence factors. These businesses also must defend against unwarranted and unfair increases in the assessed values of operating properties. This process will continue beyond 2021 until the U.S. and global economies stabilize. These efforts, if properly prepared and pursued, will reap benefits of lower local property taxes and improved cash flow.
Among other steps, owners should:
- Proactively manage relationships with local tax assessors and collectors, local tax recipient bodies and other key governmental leaders. This requires a government relations “health check.” Companies should take proactive steps to develop and maintain positive interactions with local governmental officials that underscore their commitments to finding mutually beneficial solutions to the challenges that lie ahead. Businesses also should take extraordinary efforts to fully understand the budgets and budgetary processes for all local tax recipient bodies.
- Manage books and inventories closely. More than ever, owners of large industrial facilities must become more aware of their assets, expenditures and property valuations. Books and records should be scrubbed of any assets that are no longer at the facility. Businesses also must develop a clear plan to identify and properly value remaining assets. This component of the plan should include resources for outside valuation and legal professionals. With clear, mutually understood data, businesses can present their cases for valuation adjustments to reflect the current economic environment clearly and persuasively to local governmental leaders.
- Seek experienced valuation consultants and tax counsel. Property tax issues, including procedural issues, generally are complex, and they stand to become even more complicated as governments at every level take action in response to the economic downturn. Property tax procedures in many jurisdictions often present the proverbial “traps for the unwary.” Knowledgeable guidance will be critical to creating and executing an effective tax strategy in the months and years ahead.
- Constantly evaluate short-term and long-term implications of state and local business and tax credits and incentives. In many jurisdictions, large industrial facilities benefit from state and local tax credits and incentives. Now is the time for a credits and incentives “health check.” Businesses need to review current credit and incentive arrangements to determine if all terms and conditions and reporting requirements are up-to-date and achievable. If not, businesses need to work with state and local economic development leadership as early as possible to address any potential claw backs or reductions of existing credits and incentives. It may be necessary for continuing, but struggling, businesses to renegotiate the terms of existing arrangements. Continuing businesses also should take proactive approaches to determine if their current credits and incentives packages can be revised or extended and if new credits and incentives are available. Also, long before existing credits and incentives expire, businesses should work with local governmental leadership to address the impact the expiration will have on both the business and the local tax recipient bodies.
To revise our avian analogy from golden geese to canaries in coal mines, what is happening today in the oil and gas industry is simply a precursor of broader challenges to come for local, regional and national economies. The world is changing – sometimes by design and sometimes apparently randomly – but the businesses that succeed will be those that take action in the face of rising challenges. Now more than ever, strategic, effective tax planning is a key tool in this effort. To do nothing, or very little, simply is not an option.