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Thursday, June 24, 2010
Gulf states fear long-term fiscal effects of oil disaster
By Stephen C. Fehr, Stateline Staff Writer PEW Foundation
 
 
Photo courtesy of Petty Officer 3rd Class
Patrick Kelley, the U.S. Coast Guard
A worker contracted by BP collects oil that spilled at Elmer's Island, just west of Grand Isle, La. The oil spill is jeopardizing the future of the tourism, fishing and deep-water oil drilling industries. Louisiana, Mississippi, Alabama and Florida do not have the money to offset the revenue losses and are counting on BP to rescue them.
Peter Ricchiuti of New Orleans and a friend ordered oyster po’ boy sandwiches for lunch last Friday, a routine choice for them but a precious one at the moment, because oysters are dropping off local menus every day due to the damage from the massive oil spill in the Gulf of Mexico. “We weren’t sure how much longer we’d have them,” says Ricchiuti, a Tulane University finance professor.
  
The availability of Louisiana’s renowned seafood is only one of the uncertainties surrounding the spill, which threatens to slow an already sluggish economic recovery in the Gulf Coast states. Among the other unanswered questions: What will the spill cost state and local governments? How will tourism, fishing and the environment be affected? Will BP’s promised $20 billion fund for oil spill costs be enough to cover the damage?
Tuesday’s ruling by a federal judge in New Orleans blocking President Obama’s six-month moratorium on deep-water oil drilling only added to the confusion. Drilling companies would now appear to be legally authorized to resume deep-water operations, a key part of the Gulf Coast economy. But the Obama administration is readying a new order against deep-water drilling and says it will appeal Tuesday’s ruling. For now, at least, BP says only that it will "step back" from the issue as it examines the rig explosion.
If the moratorium and spill continue indefinitely, thousands of people could be out of work, businesses could shutter and millions of dollars in tax revenue could be drained from state and local governments in Louisiana, Mississippi, Alabama and Florida. The full effect on tourism, fishing and the environment is not clear because the oil is still washing into beaches and wetlands.
Beleaguered budget officials in the four states, who badly overestimated revenue in the last two years as the national economic downturn deepened, now are facing the unexpected challenge of forecasting tax collections in the midst of a fickle environmental calamity that could last several years. “This is a giant layer cake of uncertainty about what the ultimate impact will be,” says David Butler of the University of Southern Mississippi.
Accurate estimates of lost revenue are crucial so state officials can send the bill to BP, which has pledged to reimburse state and local governments, individuals and businesses for clean-up, commercial losses, personal injury, lost wages and drops in tax revenue stemming from the disaster. Alabama revenue officials, among others, are trying mightily to document the costs, which include salaries and expenses of state workers involved in the cleanup. “Nothing of this magnitude has been done before,” says veteran Alabama finance chief Bill Newton.
Government and local school officials fear that BP will renege on its promise to reimburse them for lost tax revenue, in which case taxpayers could have to make up the difference through higher taxes or additional spending cuts after three years of severe budget reduction. Mississippi Governor Haley Barbour says it is not enough for BP to repay a business for lost income; the oil company must also send a check to the state for lost tax revenue.
“If BP pays a hotel under $100,000 in lost income, they would be liable to the state for the taxes that would be charged for $100,000 worth of occupancy at that hotel,” Barbour says. “That would be subject to the state's sales tax and the hotel and motel taxes collected on the coast. The taxpayers are clearly entitled to recover those losses.”
Alabama school superintendent Joe Morton was the first school chief on the Gulf Coast to announce plans to charge BP for losses to the state education trust fund, which consists of 10 separate taxes that pay for everything from pre-K education to medical school. Other Gulf state school officials may follow his lead.  “We cannot allow the oil spill to also undermine our public schools by reducing the very tax receipts that pay our teachers’ salaries,” Morton said at a June 10 news conference.
Some people inside and outside government question whether the $20 billion BP says it has set aside in the claims fund will be enough to cover the losses, especially if BP continues to experience financial trouble stemming from the spill. The damage estimates are quickly adding up; Florida’s 23 Gulf Coast counties could lose up to 200,000 tourism-related jobs and nearly $11 billion in tourist spending, according to one preliminary analysis
BP claims director Darryl Willis said Tuesday that the company does not have a limit on damage claims. “We’ll do this until it’s finished,” he said, according to the Associated Press. BP so far has cut 37,000 checks for $118 million. Another $600 million in claims have been filed to date. “Anyone who feels like they have been damaged or hurt or harmed has every right to file a claim," Willis said.
Separate from the $20 billion fund, BP has pledged to give $360 million to Louisiana to build barrier island berms to stop the flow. BP also doled out $65 million to Mississippi and Alabama and $75 million for Florida for clean-up and tourism promotion.

Florida’s revenue structure is especially vulnerable to the disaster because the state has no personal state income tax. It relies on sales tax collections, especially from tourism, for $7 of every $10 of general revenue. With the longest coastline on the Gulf, Florida would stand to lose millions of dollars in revenue if oil spoils its beaches. Revenue has already dropped 11.5 percent in the last year, Florida lost about 150,000 jobs and the state could have a shortfall of as much as $4.7 billion in the coming budget year that starts July 1.

Louisiana will be especially at risk if the courts ultimately uphold the suspension on permits for drilling new deep-water wells announced by President Obama on May 27.  One in three jobs in coastal Louisiana is related to the oil and natural gas industry; many of the workers earn between $40,000 and $100,000 a year. State officials estimate the ban could cost the state more than 10,000 jobs within a few months. About 14 percent of Louisiana’s budget comes from oil and gas industry taxes, licenses and fees. “The moratorium has the potential to be more damaging than the spill,” says Ricchiuti of Tulane.
Analysts at Raymond James & Associates, a Florida-based financial services company, said in a recent report that an extended drilling ban eventually could deal the same blow to the Gulf economy as the demise of the auto plants and steel mills has done in the upper Midwest. They predicted about 50,000 jobs would be at stake.

The energy and fishing industries coexist in Louisiana, where the decline in commercial and recreational fishing will have a ripple effect throughout Gulf communities that sell boats, bait, tackle, ice, gasoline and other supplies as well as seafood itself. Fourth-generation Louisiana oysterman John Tesvich recently laid off 60 workers at his oyster processing company, AmeriPure, which supplies about 160,000 pounds of oysters a week to grocery stores and restaurants across the country.
The Louisiana Legislature recently plugged a $580 million shortfall in the current year budget by cutting health care and higher education and laying off hundreds of state employees. A drop in oil and fishing revenues would not help the state’s finances in the fiscal year that starts July 1, which is why BP’s repayment of lost tax collections is essential.
Still, fishing and tourism account for less than 10 percent of Louisiana’s economy. New Orleans, for example, attracts about 8 million visitors a year, while the saltwater recreational fishing industry draws about 400,000 a year. James A. Richardson, a Louisiana State University economist who is on the state panel that estimates revenues, says he does not believe that short term tax collections will suffer significantly.
The long term revenue outlook could be more devastating, Richardson says, if leaking oil continues reaching the state’s marshes and the Gulf shipping lanes and if drilling companies depart the Gulf because of the moratorium. “The issue is over time,” he says. “Once the leak is plugged, how long will the fishing beds take to recover? I am not sure there is a good answer to that question today.”


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