Taxation of Crude Oil Pipelines in Nebraska:
A Comparison of Current Taxation of Crude Oil Pipelines in Nebraska with TransCanada’s Claims of Tax Revenue from the Keystone XL Pipeline
TransCanada has made numerous claims for the amount of property taxes that the Keystone XL Pipeline will pay. Similarly, the FEIS for the project also estimates property tax payments. However, the amounts claimed by TransCanada and the FEIS seem to be gross overestimates compared to the tax records included by pipelines in their Federal Energy Regulatory Commission (FERC) Form 6 annual reports, as well as a press report from South Dakota showing far lower revenue from the first Keystone Pipeline.[1]
Nebraska Taxes on Existing Crude Oil Pipelines
Two existing crude oil pipelines cross Nebraska: the Platte Pipeline owned by Kinder Morgan and TransCanada’s first crude oil pipeline, the Keystone Pipeline (Keystone 1). These companies are required to report taxes paid in all the states their pipelines cross to FERC, as part of their Form 6 Annual tariff reports. These reports also contain the number of miles of pipeline in each state and the total value of the pipeline and related equipment. From these records it is possible to estimate the effective tax rate by assuming that the value of the pipeline in each state is proportional to the length of the pipeline in that state relative to the total length of the pipeline. Although this methodology is not exact, it should provide a reasonable estimate of the effective average property tax rate in a state.
Platte Pipeline Taxes Paid
The Platte Pipeline is a decades-old 20 inch crude oil pipeline that roughly parallels the Platte River. As such, it has a long tax history that should indicate the effective tax rate on crude oil pipelines in different states. Tax data for the past five years is presented here.
2006State / Total Tax Paid / Miles in State / % Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / $490,686 / 407 / 43% / $1,205.62 / $81,972,070 / 0.005986 / 5.9860
Illinois / $3,644 / 2 / 0% / $1,822.00 / $402,811 / 0.009046 / 9.0464
Kansas / $73,846 / 98 / 10% / $753.53 / $19,737,747 / 0.003741 / 3.7414
Missouri / $316,593 / 270 / 29% / $1,172.57 / $54,379,506 / 0.005822 / 5.8219
Wyoming / $228,745 / 170 / 18% / $1,345.56 / $34,238,948 / 0.006681 / 6.6808
Total/
Average / $1,113,514 / 947 / 100% / $1,259.86 / $190,731,082 / 0.006255 / 6.2553
2007
State / Total Tax Paid / Miles in State / % Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / $447,055 / 407 / 43% / $1,098.42 / $79,346,547 / 0.005634 / 5.6342
Illinois / $3,990 / 2 / 0% / $1,995.00 / $389,909 / 0.010233 / 10.2331
Kansas / $184,222 / 98 / 10% / $1,879.82 / $19,105,557 / 0.009642 / 9.6423
Missouri / $359,846 / 270 / 29% / $1,332.76 / $52,637,758 / 0.006836 / 6.8363
Wyoming / $174,880 / 170 / 18% / $1,028.71 / $33,142,292 / 0.005277 / 5.2766
Total/
Average / $1,169,993 / 947 / 100% / $1,466.94 / $184,622,063 / 0.007524 / 7.5245
2008
State / Total Tax Paid / Miles in State / % Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / $381,296 / 407 / 43% / $936.85 / $76,860,260 / 0.004961 / 4.9609
Illinois / $4,326 / 2 / 0% / $2,163.00 / $377,692 / 0.011454 / 11.4538
Kansas / $136,510 / 98 / 10% / $1,392.96 / $18,506,893 / 0.007376 / 7.3762
Missouri / $312,770 / 270 / 29% / $1,158.41 / $50,988,379 / 0.006134 / 6.1341
Wyoming / $130,175 / 170 / 18% / $765.74 / $32,103,794 / 0.004055 / 4.0548
Total/
Average / $965,077 / 947 / 100% / $1,283.39 / $178,837,018 / 0.006796 / 6.7960
2009
State / Total Tax Paid / Miles in State / % Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / $327,148 / 407 / 43% / $803.80 / $73,789,539 / 0.004434 / 4.4335
Illinois / $6,478 / 2 / 0% / $3,239.00 / $362,602 / 0.017865 / 17.8653
Kansas / $144,080 / 98 / 10% / $1,470.20 / $17,767,506 / 0.008109 / 8.1092
Missouri / $309,900 / 270 / 29% / $1,147.78 / $48,951,291 / 0.006331 / 6.3308
Wyoming / $165,779 / 170 / 18% / $975.17 / $30,821,183 / 0.005379 / 5.3787
Total/
Average / $953,385 / 947 / 100% / $1,527.19 / $171,692,121 / 0.008424 / 8.4235
2010
State / Total Tax Paid / Miles in State / % Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / $270,525 / 407 / 43% / $664.68 / $71,374,374 / 0.003790 / 3.7902
Illinois / $6,679 / 2 / 0% / $3,339.50 / $350,734 / 0.019043 / 19.0429
Kansas / $165,334 / 98 / 10% / $1,687.08 / $17,185,967 / 0.009620 / 9.6203
Missouri / $348,174 / 270 / 29% / $1,289.53 / $47,349,093 / 0.007353 / 7.3533
Wyoming / $183,504 / 170 / 18% / $1,079.44 / $29,812,392 / 0.006155 / 6.1553
Total/
Average / $974,216 / 947 / 100% / $1,612.05 / $166,072,560 / 0.009192 / 9.1924
One important observation from this data is that whereas Nebraska taxed this pipeline at approximately the same rate as neighboring states in 2006, Nebraska’s tax rate has been dropping steadily, such that now the current tax rate in Nebraska is far less than neighboring states.
During this period, the total tax revenue to Nebraska from the pipeline dropped from a high of $490,686 in 2006 to $270,525 in 2010. This decrease in the tax rate means that Nebraska is now collecting $220,161 less in taxes from this pipeline than it did in 2006.
The average tax rate paid by the Platte Pipeline between 2006 and 2010 in each of the states through which it passes is shown in the following table.
Average Tax Rate(Mill) / Average Tax Per Mile ($)
Nebraska / 4.9610 / $941.87
Illinois / 13.5283 / $2,511.70
Kansas / 7.6979 / $1,436.72
Missouri / 6.4953 / $1,220.21
Wyoming / 5.5093 / $1,038.92
Average / 7.6383 / $1,429.88
Average of Neighbors
(NE, KS, MO, WY) / 6.1658 / $1,159.43
The foregoing provides a rough estimate of the effective tax rate on crude oil pipelines in each of these states.
Keystone 1 Taxes Paid
TransCanada essentially completed construction of the Keystone 1 Pipeline in 2009, but did not start regular commercial operation until June 2010. TransCanada assigned its pipeline a net asset value[2] of $4,957,912,415 as of December 31, 2010 and paid a total of $12,687,895 in state taxes.
State / Total TaxPaid / Miles in State / % of Miles in State / Tax Per Mile / Approximate Value of Pipeline in State / Effective Tax Rate / Effective Tax Rate in Mills
Nebraska / 14,245 / 215 / 12% / $66 / 576,220,968 / 0.000025 / 0.02
Illinois / 1,496 / 57 / 3% / $26 / 152,497,549 / 0.000010 / 0.01
Kansas / 3,484,602 / 99 / 5% / $35,305 / 265,329,655 / 0.013133 / 13.13
Missouri / 4,965,988 / 274 / 15% / $18,124 / 734,346,722 / 0.006762 / 6.76
North Dakota / 2,838,340 / 218 / 12% / $13,032 / 584,261,261 / 0.004858 / 4.86
South Dakota / 1,384,720 / 220 / 12% / $6,297 / 589,621,456 / 0.002348 / 2.35
Total / 12,689,391 / 1083 / 2,902,277,612
Although the data for the Keystone 1 Pipeline is incomplete, the tax rates in Missouri, North Dakota and South Dakota are in the range of the tax rates estimated for the Platte Pipeline. That Kansas is substantially higher may result from inclusion of the Keystone Extension Pipeline in its asset estimates. As discussed below, these effective tax rates are much less than used in the FEIS’s for the Keystone 1 and Keystone XL pipeline, and also much less than suggested by TransCanada’s public claims.
The following chart shows the substantial difference between the taxes paid in Nebraska and Illinois relative to those paid in other states. It appears likely that either TransCanada made a mistake in reporting its taxes or that these state’s tax codes allowed TransCanada to not include most of its pipeline as a taxable 2010 asset.
TransCanada’s Tax Predictions Are Unreliable
Assuming that the effective tax rates paid by TransCanada in 2010 continue into the future, it appears that all of TransCanada’s claims about the amount of future tax revenue are grossly overstated, as are the tax estimates contained in the Keystone 1 FEIS and the Keystone XL FEIS. For example, TransCanada itself stated and is widely reported to have claimed that the Keystone 1 Pipeline would generate $5.5 million in taxes in Nebraska, $6.5 million in South Dakota, and $5 million in North Dakota, all in the first year of operation. Examples of these references include:
· On July 16, 2007, TransCanada publicly stated in a forum hosted by the Seward Women’s Club that the Keystone 1 pipeline would generate $5.5 million in tax revenues in Nebraska in its first year of operation.[3]
· In November 2007, TransCanada ran television advertisements in South Dakota that claimed, “Rural counties and schools will receive nearly seven million dollars a year in property tax revenue” from the Keystone 1 Pipeline.[4]
· In its application to the South Dakota Public Utilities Commission for the Keystone 1 Pipeline, and in pre-filed testimony during the Commission’s hearing, Robert Jones, the vice president of the Keystone project claimed that the Keystone 1 Pipeline would “generate approximately $6.5 million in tax revenues to the state in the first year after construction.”[5]
· On September 30, 2007, the Bismarck Tribune reported that TransCanada estimated that the Keystone 1 Pipeline would pay more than $5 million a year in property taxes in North Dakota.[6]
Although the phrase “first year of operation” is unclear, what is clear is that TransCanada’s 2010 Form 6 report to FERC states that it paid $14,245 in Nebraska, $2,838,340 in North Dakota, and $1,384,720 in South Dakota, all of which are substantially below TransCanada’s predictions. It is possible that since operations started mid-year that the property tax is prorated based on the date the asset came into service, but property taxes are not typically prorated and instead are taxed on an annual basis.
The tax estimates included in the FEIS for the Keystone 1 Pipeline also appear to be grossly overestimated. Table 3.10.1-6 (p. 3.10-19 to 20) in the FEIS provides tax estimates for each county[7] in each state crossed by the pipeline, and the following chart compares these estimates to the taxes reported on TransCanada’s FERC Form 6:
State / Estimated Property Taxes / Taxes Reported on FERC Form 6 in 2010 / % OverNebraska / $5,206,202 / $14,245 / n/a[8]
Kansas / $4,487,087 / $3,484,602 / 28%
Missouri / $8,736,001 / $4,965,988 / 76%
North Dakota / $5,296,423 / $2,838,340 / 87%
South Dakota / $6,497,301 / $1,384,720 / 369%
It is not clear why the accuracy of the FEIS estimates appear to vary so much between states, but it is possible that TransCanada took advantage of state-specific tax benefits to avoid paying substantial amounts of property taxes in 2010.
TransCanada’s tax estimates for the Keystone XL Pipeline also appear to be overblown. Examples of TransCanada’s public claims include:
· In its application to the South Dakota Public Utilities Commission for the Keystone XL Pipeline, and in pre-filed testimony during the Commission’s hearing, Robert Jones, the vice president of the Keystone project claimed, “if the pipeline had been placed into service on January 1, 2008, Keystone would have paid approximately $10.3 million in ad valorem property taxes in the 9 counties and 13 school districts transited by the pipeline.”[9]
· On July 16, 2008, the Flathead Beacon reported that Governor Schweitzer of Montana said that the Montana portion would cost $1 billion to build and generate $60 million annually in property taxes.[10]
· On September 22, 2008, the Billings Gazette, and on September 27th, 2008, the Montana Standard (Butte, Montana), reported that Gov. Brian Schweitzer said in July 2008 that the Keystone XL Pipeline will generate $57.6 million a year in property taxes in Montana, including up to $14 million each in Fallon, McCone and Valley counties.
Tables3.10.2-2 and 3.10.2-3 in the FEIS for the Keystone XL Pipeline includes the following tax rate and revenue estimates by state, and eventhough the FEIS does not include an estimate for the value of the pipeline in each state, this is estimated used the FEIS effective tax rate and estimated property taxes:
State / Effective Tax Rate / Estimated Property Tax for Proposed Project ($) / Calculated Asset ValueMontana / 1.94% / $62,957,795 / $3,245,247,165
South Dakota / 1.44% / $15,405,396 / $1,069,819,166
Nebraska / 1.77% / $21,895,015 / $1,234,972,598
In contrast, if the observed tax rate imposed on the Platte Pipeline (4.9610 mills or 0.4961%) is used instead of the FEIS rate of 1.77%, and the asset value calculated from the FEIS is assumed, then the likely total property tax assessment in Nebraska would be $6,126,699. In light of the effective tax rate on oil pipelines in Nebraska, the FEIS estimate of $21.9 million paid in Nebraska property taxes seems farfetched.
If a total state property tax revenue of $6,126,699 is assumed and the proportions assigned to Nebraska counties by FEIS Table 3.10.2-3 are correct, then the first year per county property tax estimates become: