[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
 TO PREVENT CERTAIN DISCRIMINATORY TAXATION OF INTERSTATE NATURAL GAS 
                           PIPELINE PROPERTY

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 1369

                               __________

                            OCTOBER 6, 2005

                               __________

                           Serial No. 109-64

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
RANDY J. FORBES, Virginia            DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel

                        Susan A. Jensen, Counsel

                  James Daley, Full Committee Counsel

                        Brenda Hankins, Counsel

                   Stephanie Moore, Minority Counsel


                            C O N T E N T S

                              ----------                              

                            OCTOBER 6, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Commercial and Administrative Law...........................     3

                               WITNESSES

Mr. Mark C. Schroeder, Vice President and General Counsel, 
  CenterPoint Energy, Inc., Gas Pipeline Group
  Oral Testimony.................................................     4
  Prepared Statement.............................................     5
Dr. Veronique de Rugy, Ph.D., Research Scholar, American 
  Enterprise Institute for Public Policy Research
  Oral Testimony.................................................    11
  Prepared Statement.............................................    12
Mr. Harley T. Duncan, Executive Director, Federation of Tax 
  Administrators
  Oral Testimony.................................................    16
  Prepared Statement.............................................    18
Mr. Laurence E. Garrett, Senior Counsel, El Paso Corporation, and 
  on behalf of the Interstate Natural Gas Association of America
  Oral Testimony.................................................    28
  Prepared Statement.............................................    29

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from Veronique de Rugy, Ph.D., 
  Research Scholar, American Enterprise Institute for Public 
  Policy Research................................................    46
Response to Post-Hearing Questions from Harley T. Duncan, 
  Executive Director, Federation of Tax Administrators...........    48
Response to Post-Hearing Questions from Laurence E. Garrett, 
  Senior Counsel, El Paso Corporation, and on behalf of the 
  Interstate Natural Gas Association of America..................   101


 TO PREVENT CERTAIN DISCRIMINATORY TAXATION OF INTERSTATE NATURAL GAS 
                           PIPELINE PROPERTY

                              ----------                              


                       THURSDAY, OCTOBER 6, 2005

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:08 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon (Chairman of the Subcommittee) presiding.
    Mr. Cannon. It looks like our witnesses are all here.
    Good afternoon, ladies and gentlemen. This hearing of the 
Subcommittee on Commercial and Administrative Law will now come 
to order.
    And before we start in with the substance of the hearing, I 
want to take a point of personal privilege, and recognize the 
counsel, the chief counsel, of the Commercial and 
Administrative Law Subcommittee, Ray Smietanka. My 
understanding is that today marks the 30th year of your service 
with this Committee.
    Mr. Smietanka. That's correct, 30. October 6, 1975. 
[Applause.]
    Mr. Cannon. We appreciate the wisdom that Ray brings to the 
Committee. I appreciate the fact, and particularly the fact, 
that he works well with minority counsel so we get things 
moving on issues that are important. So thank you, Ray. We 
appreciate that.
    Today, we are going to consider H.R. 1369, a bill I 
introduced earlier this year, cosponsored by a great Texas 
delegation including Messrs. Carter, Smith, and Gohmert. This 
bill is intended to prevent certain discriminatory taxation of 
interstate natural gas pipeline property.
    H.R. 1369 has two purposes: to prevent States from imposing 
a higher ad valorem tax burden on interstate natural gas 
pipeline property than that placed on local industrial and 
commercial property in the same assessment area; and to grant 
concurrent jurisdiction to the U.S. district court and State 
courts, to prevent imposition of taxes over this limit.
    The issue of discriminatory taxation has been dealt with 
before by Congress when it enacted laws to prevent this type of 
discriminatory taxation against industries involved in other 
interstate commerce; specifically, the railroads, the airlines, 
the bus and trucking industries.
    The natural gas pipeline industry has been the target of 
these discriminatory taxing practices by States for years, but 
the industry is not the only victim here. These taxes are a 
cost of doing business, therefore included in the pipeline's 
rate base, and are ultimately paid by consumers. States which 
impose such high taxes are in essence exporting their tax 
burden to people outside their State.
    All consumers of natural gas, whether they are using it to 
heat their homes in the winter or for agricultural production, 
are victims. These taxes increase their gas bills to help pay 
for benefits in States where they do not live, and may not even 
visit.
    It is not hard to determine who these people are. They are 
the citizens of--people in my State, as well as those in States 
like North Carolina, Maryland, Texas, and Michigan. But even 
residents of States that assess these discriminatory taxes are 
victims, because all consumers are paying higher prices for 
natural gas. This in turn increases the cost for products 
produced by natural gas, including electricity, plastics, 
nylon, and even insect repellents.
    To provide relief, H.R. 1369 allows the United States 
district courts to determine whether certain States' taxes 
unreasonably burden and discriminate against interstate 
commerce. Currently, Federal courts cannot grant relief in such 
cases if the plaintiff can obtain a plain, speedy, and 
efficient remedy in the State courts. However, what is 
currently determined to be plain, speedy, and efficient when 
contesting an assessment can take years and require large 
amounts of resources.
    I want to emphasize that H.R. 1369 would not relieve 
interstate natural gas pipelines of their obligation to pay 
their fair share of taxes. But it will allow them the 
opportunity to go to Federal court to challenge the practices 
of the States which single out gas pipelines for substantially 
higher tax assessments than are applied to comparable 
industrial and commercial properties.
    Providing concurrent jurisdiction to the Federal courts, 
which Congress has the authority to do under section 5 of the 
14th amendment, is essential; since efforts to obtain relief 
through State courts have historically, as the record will 
show, been a futile exercise.
    We in Congress are required to balance our responsibility 
under the Constitution to protect interstate commerce from 
unwarranted interference, including unfair, burdensome and 
discriminatory taxation, while respecting the States' power to 
raise revenue to fund vital services in their States.
    Last winter, the price for heating oils increased to an 
all-time high, and it's expected to continue to rise this 
winter. As fall advances, there is growing public anxiety over 
the cost of natural gas. All avenues of reducing the costs of 
natural gas should be reviewed.
    I look forward to the testimony of the panel. I ask 
unanimous consent that Members have five legislative days to 
submit written statements for inclusion in today's record.
    And I now yield to Mr. Watt, the Ranking Member of the 
Subcommittee, for an opening statement.
    Mr. Watt. Thank you, Mr. Chairman. And I will be very 
brief. I want to just thank the witnesses for being here. To be 
honest with you, I don't know a lot about H.R. 1369, but the 
real benefit of having hearings is to allow us to hear the 
various aspects related to this bill, concerns if there are 
any, benefits, merits and demerits. So I'm always anxious to 
have a hearing about a bill, so I can learn something about it. 
So I appreciate your being here, and I appreciate your 
enlightening us.
    Since I have to leave in about an hour for another 
appointment, I'll abbreviate my comments and get on with what 
we're here to do. And I yield back, Mr. Chairman.
    Mr. Cannon. I thank the gentleman. Let me introduce our 
witnesses.
    Our first witness is Mr. Mark Schroeder, the Division Vice 
President and General Counsel for CenterPoint Energy's pipeline 
and field services group. Mr. Schroeder served as Deputy 
General Counsel of the U.S. Department of Energy, where he was 
responsible for natural gas, environmental, and legislative 
matters, among others.
    During his career, he has served as General Counsel for 
Northern Natural Gas, and as Vice President of Regulatory 
Affairs for two different energy companies. Mr. Schroeder has 
appeared before numerous congressional Committees presenting 
testimony on issues affecting the natural gas industry, energy 
regulation, and the environment.
    Mr. Schroeder is a graduate of Louisiana State University, 
with degrees in accounting and law. He was the managing editor 
of the Louisiana Law Review. He is a member of the bars of 
Louisiana and the District of Columbia.
    Mr. Schroeder, thank you for your appearance today, and we 
look forward to your testimony.
    We have also with us Ms. Veronique de Rugy, our next 
witness. Dr. de Rugy is a Research Fellow at the American 
Enterprise Institute. She has served as a fiscal policy analyst 
at the Cato Institute, a post-doctoral fellow at George Mason 
University Department of Economics, and a research fellow with 
the Atlas Economic Research Foundation. She has also served on 
the board of directors of the Center for Freedom and Prosperity 
since 2000.
    Ms. de Rugy has written extensively on the dangers of EU 
and OECD tax harmonization proposals, is the author of numerous 
op-eds and academic papers, and is the co-author of ``Action ou 
Taxation'' published in Switzerland in 1996. Presumably, Ms. de 
Rugy speaks French.
    Ms. de Rugy earned her bachelor's degree and master's 
degree in economics from the University of Paris in Dauphine, 
and her doctorate in economics from the Sorbonne.
    Ms. de Rugy, welcome, and thank you for coming today. We 
look forward to your testimony.
    Our next witness is Harley Duncan, Executive Director of 
the Federation of Tax Administrators. Prior to his current 
position, Mr. Duncan served as the Secretary of the Kansas 
Department of Revenue, and the Assistant Director of the Kansas 
Division of the Budget.
    Mr. Duncan is a member of the State Tax Notes Editorial 
Advisory Board, the Georgetown University State and Local Tax 
Conference Advisory Board, as well as many others.
    Mr. Duncan earned his bachelor's degree from South Dakota 
State University, and his master's in public affairs from the 
University of Texas at Austin.
    Mr. Duncan, welcome, and we appreciate your testimony.
    Our final witness is Laurence Garrett, Senior Counsel for 
the El Paso Corporation Western Pipeline Group. Prior to 
working for El Paso, Mr. Garrett was the Senior General Tax 
Attorney for the Burlington Northern and Santa Fe Railway 
Company. He is admitted to practice in the courts of Kansas, 
Illinois, Colorado, and Texas.
    Mr. Garrett earned a bachelor's degree in business 
administration and economics from Washburn University, where he 
also earned his law degree. He earned a master's of law in 
taxation from the University of Missouri School of Law, and a 
master's of law in natural resources and environmental law from 
the University of Denver.
    Mr. Garrett, thank you for your appearance here today.
    I extend to each of you my warm regards and appreciation 
for your willingness to participate in today's hearing. In 
light of the fact that your written statements will be included 
in the record, I request that you limit your remarks to 5 
minutes. And we have a little light there that will go yellow 
when you have a minute remaining, and then red. You don't need 
to stop immediately, but given the constraints on time with Mr. 
Watt, and also mine and others, I may just have to give you 
some notice that you should wrap up.
    And you should feel free to summarize your testimony, or 
highlight any salient points or portions. You'll note that we 
have the lighting system. We just talked about that.
    After all the witnesses have presented their remarks, the 
Subcommittee Members, in the order that they arrive, will be 
permitted to ask questions of the witnesses, subject to the 5-
minute limit.
    And pursuant to the directive of the Chairman of the 
Judiciary Committee, I ask the witnesses, please stand and 
raise your right hand to take the oath.
    [Witnesses sworn.]
    Mr. Cannon. Let the record reflect that each of the 
witnesses has answered in the affirmative.
    Mr. Schroeder, would you now proceed with your testimony. 
Thank you.

  TESTIMONY OF MARK C. SCHROEDER, VICE PRESIDENT AND GENERAL 
     COUNSEL, CENTERPOINT ENERGY, INC., GAS PIPELINE GROUP

    Mr. Schroeder. Thank you, Mr. Chairman, Ranking Member, and 
Members of the Committee. Thank you for the opportunity to 
appear here before you today. My name is Mark Schroeder. I am 
the General Counsel for the Gas Pipeline Group for CenterPoint 
Energy, Incorporated.
    CenterPoint Energy serves markets in the Middle West and 
South, including Texas, Louisiana, Arkansas, Oklahoma, 
Missouri, Tennessee, and Illinois, among others; as well as 
connecting significant mid-continent gas supplies to other 
pipelines destined for the Upper Midwest and the Northeast.
    I have submitted written testimony, which I ask be made 
part of the record of this hearing. And I will keep my remarks 
now to just a few brief ones.
    I appear here today to ask this Subcommittee's support for 
H.R. 1369. H.R. 1369 provides that interstate natural gas 
pipelines should not be subject to discriminatory taxation. The 
bill provides the bases upon which such taxes are to be 
evaluated, and provides a Federal forum for the adjudication of 
disputes regarding those taxes.
    The bill affords the interstate natural gas pipeline 
industry essentially the same protections that Congress has 
already extended to other transportation industries operating 
in interstate commerce which are similarly characterized by 
large, immobile capital investments, including railroads, 
airlines, and trucking.
    Let me be clear on this last point. The natural gas--
interstate natural gas pipeline industry is a transportation 
business. Interstate pipelines do not own, or have an interest 
in, the commodity of natural gas. Therefore, we do not have a 
vested interest in seeing the price of the commodity increased. 
And we are particularly cost conscious in this environment in 
which we are competing to retain these markets.
    As the prepared testimony of the pipeline industry 
witnesses amply demonstrates, the discrimination in taxation of 
natural gas pipelines is real and quantifiable, and the State 
judicial processes have not met the test of providing plain, 
speedy, and efficient relief.
    In the testimony, there are some examples which are 
intended to be purely illustrative, and they are not directed 
at the behavior or regulatory scheme of any one State.
    The discriminatory taxation of interstate pipelines burdens 
gas consumers, producers, and can alter the competitive 
landscape. The non-discriminatory assessment of taxes, with 
prompt resolution of questions regarding discrimination, is not 
asking too much.
    In this period of high energy prices, H.R. 1369 is 
especially timely, and we urge its passage. Thank you.
    [The prepared statement of Mr. Schroeder follows:]

                Prepared Statement of Mark C. Schroeder

                              INTRODUCTION

    Mr. Chairman, Mr. Ranking Member and Members of the Committee:
    My name is Mark C. Schroeder. I am the General Counsel for 
CenterPoint Energy, Inc.'s Gas Pipeline Group. CenterPoint Energy is 
based in Houston, Texas. Through two interstate pipeline company 
subsidiaries, CenterPoint Energy Gas Transmission Company and 
CenterPoint Energy--Mississippi River Transmission Corporation, the gas 
pipeline group transports natural gas in interstate commerce for 
delivery to local distribution companies, industrial end users, and 
power generation facilities in Arkansas, Illinois, Louisiana, Missouri, 
Oklahoma, Tennessee, and Texas.
    Thank you for the opportunity to appear before you today to discuss 
an issue of great importance to the interstate natural gas pipeline 
industry and to consumers of natural gas, particularly those consumers 
who receive their natural gas by interstate natural gas pipeline.
    I appear here today in support of H. R. 1369. If enacted into law, 
H. R. 1369 would protect interstate natural gas pipelines from 
discriminatory tax treatment by states and other taxing jurisdictions. 
The imposition of discriminatory taxes on interstate natural gas 
pipelines adversely affects many natural gas consumers, who bear the 
cost of these additional tax burdens as part of the price paid for the 
transportation of natural gas.
    The need for this legislation is illustrated by the historic 
discrimination against interstate commerce pursued by a number of 
states. CenterPoint's assets most affected by such discriminatory 
taxation are located in the State of Louisiana. For that reason, I 
offer our experience in Louisiana by way of example, to illustrate the 
problems faced by our industry. These problems are not exclusive to 
Louisiana; it is just one state that plays a pivotal role in the 
distribution of natural gas throughout the United States.
    In Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68 L.Ed.2d 
576 (1981) the United States Supreme Court determined that a ``first 
use'' tax imposed by the state of Louisiana on natural gas flowing 
through the state was unconstitutional because it specifically 
discriminated against interstate commerce. The first use tax was 
imposed on a variety of events, including events related to the 
transportation of natural gas through Louisiana before it was delivered 
to in-state and out-of-state consumers. In an effort to shield 
Louisiana consumers from the tax, the law provided various tax credits 
and exclusions to Louisiana taxpayers so that Louisiana consumers could 
effectively avoid the burden of the first use tax. In evaluating the 
validity of the First Use Tax, the United States Supreme Court stated:

        In this case, the Louisiana First-Use Tax unquestionably 
        discriminates against interstate commerce in favor of local 
        interests as the necessary result of various tax credits and 
        exclusions. No further hearings are necessary to sustain this 
        conclusion. Under the specific provision of the First-Use Tax, 
        OCS gas used for certain purposes within Louisiana is exempted 
        from the Tax. OCS gas consumed in Louisiana for (1) producing 
        oil, natural gas, or sulphur; (2) processing natural gas for 
        the extraction of liquefiable hydrocarbons; or (3) 
        manufacturing fertilizer and anhydrous ammonia, is exempt from 
        the First-Use Tax. Sec. 1303 A. Competitive users in other 
        States are burdened with the Tax. Other Louisiana statutes, 
        enacted as part of the First-Use Tax package, provide important 
        tax credits favoring local interests. Under the Severance Tax 
        Credit, an owner paying the First-Use Tax on OCS gas receives 
        an equivalent tax credit on any state severance tax owed in 
        connection with production in Louisiana. Sec. 47:647 (West 
        Supp.1981). On its face, this credit favors those who both own 
        OCS gas and engage in Louisiana production. The obvious 
        economic effect of this Severance Tax Credit is to encourage 
        natural gas owners involved in the production of OCS gas to 
        invest in mineral exploration and development within Louisiana 
        rather than to invest in further OCS development or in 
        production in other States. Finally, under the Louisiana 
        statutes, any utility producing electricity with OCS gas, any 
        natural gas distributor dealing in OCS gas, or any direct 
        purchaser of OCS gas for consumption by the purchaser in 
        Louisiana may recoup any increase in the cost of gas 
        attributable to the First-Use Tax through credits against 
        various taxes or a combination of taxes otherwise owed to the 
        State of Louisiana. Sec. 47:11 B (West Supp.1981). Louisiana 
        consumers of OCS gas are thus substantially protected against 
        the impact of the First-Use Tax and have the benefit of untaxed 
        OCS gas which because it is not subject to either a severance 
        tax or the First-Use Tax may be cheaper than locally produced 
        gas. OCS gas moving out of the State, however, is burdened with 
        the First-Use Tax.

        *  *  *
        Accordingly, we grant plaintiffs' exception that the First-Use 
        Tax is unconstitutional under the Commerce Clause because it 
        unfairly discriminates against purchasers of gas moving through 
        Louisiana in interstate commerce.

    451 U.S. at 756, 101 S.C.t. at 2134 (footnotes omitted).
    It seems odd that the industry must come to Congress to seek 
additional protection against interstate commerce discrimination. After 
all, one of the oldest settled principles of constitutional law is that 
the Commerce Clause of the United States Constitution prohibits the 
States from imposing discriminatory taxes or burdens on activities that 
are conducted in interstate commerce. That is, state taxes should not 
exact a greater burden from interstate activities than the burden 
imposed on intrastate activities.
    Unfortunately, having the constitutional protection from 
discrimination does not alleviate the procedural hurdles that block the 
timely resolution in state courts of challenges to the validity of 
state tax schemes. Attempts to address discrimination at the state 
level have been thwarted by the refusal of federal courts to consider 
the issues and by procedural road blocks in the state courts. Existing 
federal law discourages the federal courts from considering state tax 
challenges. In addition to banning the discriminatory taxation of 
interstate natural gas pipelines, H.R. 1369 provides for the resolution 
of disputes concerning discriminatory taxation of interstate natural 
gas pipeline properties by the federal courts, which will result in 
faster and more objective disposition of these cases.

                 THE CENTERPOINT COMPANIES' EXPERIENCE.

    While other interstate gas pipelines are subject to discriminatory 
taxation elsewhere, the CenterPoint companies experience has been 
principally their involvement in litigation in the State of Louisiana 
since 2000 concerning an issue of discriminatory taxation in that 
state. Simply put, the scheme for the imposition of ad valorem property 
taxes in the state of Louisiana requires all interstate natural gas 
pipeline companies to pay property taxes to Louisiana's local 
governments based upon 25% of the fair market value of the pipeline 
company attributable to Louisiana while competing intrastate pipeline 
companies are allowed to pay property taxes to local governments based 
upon an assessed value of 15% of fair market value. This differential 
in assessed values results in the imposition of higher property taxes 
for interstate natural gas pipelines than for intrastate gas pipelines, 
resulting in higher costs for natural gas for consumers who must rely 
on interstate natural gas pipelines for the delivery of their natural 
gas.
    CenterPoint made its decision to challenge the Louisiana scheme 
after reviewing Louisiana's prior efforts to impose discriminatory 
taxes on the natural gas industry and on consumers of natural gas. 
CenterPoint's involvement in the issue in Louisiana came after other 
interstate natural gas pipeline companies had taken steps to challenge 
the Louisiana system.

THE ANR SAGA/PROCEDURAL QUAGMIRES DELAY FINAL DISPOSITION OF INTERSTATE 
                         DISCRIMINATION ISSUES

    In 1994, a group of interstate natural gas pipelines with 
operations in the State of Louisiana, including the ANR companies, 
initiated litigation in Louisiana challenging the discriminatory 
property taxes imposed on interstate natural gas pipelines. The ANR 
group's efforts have been difficult at best. A review of the reported 
decisions concerning the ANR group's efforts shows that a myriad of 
procedural roadblocks have been used to delay and effectively prevent 
the ultimate resolution of the interstate commerce issues.
    When ANR initiated its proceedings, Louisiana statutes required 
such disputes to be initiated at the administrative level before the 
Louisiana Tax Commission. For tax years 1994 through 1999, ANR 
protested assessments determined by the Louisiana Tax Commission based 
upon 25% of the fair market value of the Louisiana portion of its 
pipeline. Additionally, ANR paid the taxes demanded by the Tax 
Collectors for the local taxing jurisdiction under protest. After 
lengthy procedural delays, the Louisiana Tax Commission dismissed ANR's 
protests. ANR appealed the actions of the Commission to Louisiana State 
district court and the district court determined that ANR's claims had 
prescribed (expired due to limitations imposed by statute) under 
Louisiana law. The Louisiana First Circuit Court of Appeal, in a case 
commonly referred to as ``ANR 1'' [ANR Pipeline Co. v. Louisiana Tax 
Commission, (La. App. 1 Cir. , 774 So.2d 1261(2000))], the Louisiana 
First Circuit Court of Appeal reversed the district court finding that 
ANR's claims did not prescribe while it exhausted its administrative 
remedies.
    This was just the beginning for ANR, though. A review of the 
reported decisions reveal no less than five reported ANR decisions 
spanning over five years. The tortured history of the ANR cases tells a 
story of a quagmire of procedural issues and conflicting judicial 
determinations.
    In the second ANR decision (ANR Pipeline Co. v. Louisiana Tax 
Commission, 2001 CA 2594 (and consolidated cases) (La. App. 1st Cir. 3/
20/2005), writ granted, 2002-1479 (La. 3/21/03), 840 So.2d 527 
(affirmed and remanded), the state appellate court addressed a district 
court decision dismissing ANR's claims. The district court had found 
that ANR's claims were premature and that ANR had failed to exhaust 
administrative remedies as a result of by-passing the Louisiana Tax 
Commission. In a decision handed down on March 20, 2002, the Louisiana 
First Circuit Court of Appeal reversed and remanded the cases back to 
the district court for further proceedings. This decision was further 
reviewed by the Louisiana Supreme Court, which sustained the portion of 
the Louisiana First Circuit Court of Appeals' decision that ANR's 
proceedings were not premature and ordered the First Circuit to review 
the district courts granting of exceptions of no cause of action. In 
conformance with the Louisiana Supreme Court's directive, the Louisiana 
First Circuit of Appeal determined that ANR had stated a cause of 
action and remanded the case to the district court for further 
proceedings.
    In the third ANR decision (ANR Pipeline Co. v. Louisiana Tax 
Commission, 2002--0576 (La. App. 1 Cir. 6/21/2002), the First Circuit 
Court of Appeal affirmed the district court's determination that the 
Louisiana Tax Commission should not conduct administrative hearings 
until the courts had ruled on the constitutionality of the Louisiana 
property tax scheme. The Louisiana Tax Commission was ordered to stay 
all administrative proceedings until a final ruling on the 
constitutional issues was determined by the courts. The need for this 
ruling resulted from an effort by the Louisiana Tax Commission to 
conduct proceedings and issue decisions concerning the imposition of 
property taxes on interstate natural gas pipelines prior to a 
determination by the courts concerning the validity of Louisiana's 
property tax system as it related to the imposition of property taxes 
on interstate natural gas pipelines.
    After almost ten years of procedural battles, ANR's cases finally 
came to trial on January 10, 2005, which trial concluded on January 18, 
2005. On March 10, 2005 the trial court issued its written reasons for 
judgment. The court found that the Louisiana Tax Commission had 
intentionally discriminated against the ANR taxpayers in violation of 
the Louisiana Constitution and the Equal Protection Clause of the 
United States Constitution because it had allowed other taxpayers that 
should have been assessed by the Louisiana Tax Commission at 25% of 
fair market value to be assessed by the local assessors at 15% of fair 
market value. The court did not reach the core issue of discrimination 
against interstate commerce, effectively putting the taxpayers' 
challenge based on discrimination against interstate commerce back to 
square one. Curiously, the court eschewed reaching a decision on the 
core constitutional Commerce Clause issue of discrimination against 
interstate commerce. The court determined that it would be 
inappropriate to reach the Commerce Clause issue because the Louisiana 
property tax scheme had been found to be infirm on other grounds. 
Nevertheless, the court did decide the case on U.S. Constitutional 
Equal Protection grounds and on uniformity grounds based on Louisiana 
Constitutional provisions, and found the Louisiana tax scheme flawed 
when examined under those constitutional provisions.
    The district court further fashioned a remedy that required the ANR 
pipelines to be locally assessed at 15% of fair market value for the 
years of the intentional discrimination. The Louisiana Constitution 
requires that interstate pipeline properties be centrally assessed by 
the Louisiana Tax Commission. Contrary to the Louisiana Constitution, 
the court, seemingly without any basis in the text of Louisiana's State 
constitution or statutes, moved the assessment of ANR's property from 
central assessment by the Louisiana Tax Commission to individual 
assessments from multiple assessors at the parish level. This, of 
course, raises the likelihood of multiple disputes concerning the fair 
market values of the ANR assets in each parish for each of the years in 
dispute. The Louisiana First Circuit Court of Appeal affirmed the 
determination of the district court. Thus, after years of procedural 
battles ANR ``won'' on subsidiary issues that did not deal with the 
core issue of discrimination against interstate commerce, and ANR is 
now forced to deal with individual assessors in each parish for each 
year at issue to determine the fair market value of the pipeline 
segment in each parish and to take individual appeals from any adverse 
determinations of the assessors.
    Like ANR, we believe that this ``remedy'' is not supported under 
Louisiana law and erects new roadblocks to the eventual determination 
that the Louisiana property tax system as it affects interstate 
pipelines is unconstitutional and impermissibly burdens the citizens of 
other states.

     THE CENTERPOINT SAGA/A DIFFERENT APPROACH BUT STILL NO RELIEF

    In an effort to avoid the procedural nightmare experienced by ANR, 
the CenterPoint companies chose to seek an administrative hearing 
before the Louisiana Tax Commission, subject to review by the Louisiana 
courts. At that hearing, CenterPoint and other interstate natural gas 
pipeline companies presented three days of testimony, including expert 
witness testimony, concerning (i) the large volumes of natural gas that 
flow through the state of Louisiana from production on the Outer-
Continental shelf, (ii) the extreme competition related to the 
marketplace for natural gas, and (iii) the impact of Louisiana's 
discriminatory tax scheme on the market place, the interstate natural 
gas companies, and non-Louisiana consumers of natural gas.
    The Centerpoint companies showed that in 1999 alone, the United 
States generated 19.6 trillion cubic feet (``tcf'') of marketed natural 
gas production. Fifty eight percent of that production originated from 
Texas (31%) and Louisiana (27%). Texas marketed production of natural 
gas in 1999 was 6.117 tcf, with roughly 23% (1.426 tcf) of the Texas 
production transported into and/or through Louisiana. Louisiana's 1999 
production was 5.313 tcf, and 5.283 tcf was exported out of Louisiana 
into the interstate market. In 1999 about 19% of the national marketed 
production of natural gas in this country was transported from or 
through Louisiana before reaching end users. Thus, in 1999 Louisiana's 
discriminatory tax system affected approximately 19% of the national 
marketed production of the nation. I can provide the committee with 
more current numbers, but the reason I use the 1999 numbers is that is 
the evidence that the CenterPoint companies and others introduced 
during the litigation concerning Louisiana's property tax scheme.
    The Louisiana Tax Commission and the other defendants in the case 
did not put on any expert testimony concerning the natural gas market 
place and the discrimination caused by the property tax scheme in 
Louisiana. Rather, a staff person for the Louisiana Tax Commission was 
called to testify concerning the various methodologies used to value 
interstate natural gas pipelines and intrastate natural gas pipelines. 
On December 10, 2001, the Louisiana Tax Commission issued a decision 
rejecting the contentions of the interstate natural gas pipelines that 
the Louisiana property tax scheme discriminated against interstate 
natural gas pipeline companies. The decision rendered by the Louisiana 
Tax Commission was allegedly supported by a study conducted by a staff 
member of the Louisiana Tax Commission. That study was apparently 
conducted after the trial and was never properly introduced into 
evidence or provided to the interstate natural gas pipeline companies 
for review, evaluation and cross-examination.
    The CenterPoint companies appealed the decision of the Louisiana 
Tax Commission to the 19th Judicial District Court for the Parish of 
East Baton Rouge. Under Louisiana law, that appeal was on the record 
created before the Louisiana Tax Commission. The appeals were filed by 
the CenterPoint companies on January 8, 2002. In connection with the 
appeals, the CenterPoint Companies objected to the references to the 
staff report in the decision of the Louisiana Tax Commission. After 
numerous procedural delays, the district court judge reviewing the 
Louisiana Tax Commission decision ordered the Louisiana Tax Commission 
to reconsider its decision without reference to the staff report that 
had never been properly introduced into evidence in the case. The judge 
remanded the entire case back to the Louisiana Tax Commission for 
further consideration, which further delayed the resolution of the 
central issues raised in the litigation.
    It was not until November and December of 2004 that the Louisiana 
Tax Commission dealt with the issues on remand. The Commission once 
again ruled against the interstate natural gas pipeline companies, 
without reference to the staff report. The CenterPoint companies and 
others were again required to file appeals to the 19th Judicial 
District Court. Almost three and one half years after the trial before 
the Louisiana Tax Commission and after filing for review by the 19th 
Judicial District Court, the CenterPoint companies have been successful 
in getting a briefing and oral argument schedule concerning the 
substantive issues before the 19th Judicial District Court. The 19th 
Judicial District Court is scheduled to hear oral argument on the 
CenterPoint cases on October 17. Notwithstanding the October 17th 
hearing, the attempt to get a final determination on the substantive 
legal issues may be undermined by additional procedural objections 
raised by the Louisiana Tax Commission. Lengthy delays and costly 
proceedings will occur once the 19th Judicial District Court Judge 
renders her decision. Appeals will be taken to the Louisiana First 
Circuit Court of Appeals and ultimate review will be requested by the 
Louisiana Supreme Court. CenterPoint's attorneys estimate that the 
additional delays before ultimate review by the Louisiana Supreme Court 
could be up to four years.
    The point of the foregoing lengthy recitation of the ANR and 
CenterPoint cases in Louisiana is not to re-litigate the issues, which 
continue to wind their way through the Louisiana courts. Nor is it 
intended to suggest that these issues arise in Louisiana alone. Rather, 
the point is that state judicial processes have been used to thwart 
timely relief for taxpayers.

    ABSENT STATUTORY GUIDANCE, THE FEDERAL COURTS ARE RELUCTANT TO 
                               INTERVENE

    Concerned that it would have great difficulty getting a quick and 
proper decision from the Louisiana Tax Commission and the Louisiana 
courts, the CenterPoint companies attempted in July of 2001 to get the 
federal district court in Baton Rouge, Louisiana to review the case. 
Federal law bars the federal courts from becoming involved in state and 
local tax cases unless state law does not provide a plain, speedy, and 
efficient remedy. When the CenterPoint companies filed in federal court 
CenterPoint knew that it would have to support its arguments that 
Louisiana did not provide a plain, speedy, and efficient remedy for 
dealing with U.S. Constitutional issues such as the interstate commerce 
discrimination issues raised by the companies.
    In its petition, Centerpoint and other companies contended that 
Louisiana lacked a plain, speedy, and efficient remedy because of (i) 
uncertainty as to the procedure for appeals from the Louisiana Tax 
Commission in light of statutory changes adverse to the pipeline 
companies that had been supported by the Tax Commission, (ii) questions 
raised by ANR concerning the jurisdiction of the Commission to preside 
over constitutional challenges, (iii) bias inherent in the statutorily 
required procedure including: (a) the statutory requirement that the 
Louisiana Tax Commission act as both an adversary to Centerpoint and as 
a judge of the issues brought to it by Centerpoint, (b) the suggestion 
that the Commission would use it own attorneys (who were already 
engaged to oppose ANR on the issues) as quasi-judicial hearing 
officers, (c) the fact that at that time Louisiana law gave the 
Commission a financial stake in an outcome adverse to taxpayers under 
these circumstances, (d) the fact that the Commission was already 
involved in litigation adverse to the ANR group of companies in 
litigation raising the same issues.
    On July 30, 2001, the Louisiana Tax Commission filed a motion to 
dismiss the federal proceeding. Notwithstanding requests to schedule 
the motion to dismiss filed by the Louisiana Tax Commission for hearing 
so that the CenterPoint companies could show that Louisiana lacked a 
plain, speedy, and efficient remedy, no hearing was ever scheduled by 
the federal court. After more than a year of waiting for the federal 
court to schedule a hearing so that a trial on the core issues could be 
scheduled, the CenterPoint companies gave up on pursuing the federal 
case and the case was dismissed so that the CenterPoint companies could 
focus on the case filed in the Louisiana district court.
    Both the ANR group of pipelines and the CenterPoint group of 
pipelines continue to be years away from an ultimate determination that 
the Louisiana property tax system discriminates against interstate 
natural gas pipeline companies.

    PRECEDENT FOR FEDERAL INTERVENTION IN STATE PROPERTY TAX MATTERS

    Louisiana is but one of the states engaged in discrimination 
against interstate natural gas pipeline companies by imposing 
additional tax burdens on interstate pipeline companies that inflates 
the cost of natural gas to consumers in other states. With the 
escalating cost of natural gas on the one hand, and the procedural 
delays and vested interests of the states imposing discriminatory taxes 
on the other, it is imperative that a federal policy concerning such 
discrimination be enacted by Congress.
    In 1979, Congress determined that there was a need to protect the 
railroads from discriminatory taxation. In recognition of that need 
among others, Congress enacted the Railroad Revitalization and 
Regulatory Reform Act, commonly referred to as the ``4R Act''. Under 
part of the 4R Act, states are prohibited from discriminating in the 
assessment of railroad property and in the imposition of taxes on 
railroads. Since the enactment of the 4R Act, the railroads have been 
able to successfully overcome discriminatory taxes imposed by the 
states and their political subdivisions. In fact, after the passage of 
the 4R Act, the Louisville & Nashville Railroad Company and others were 
successful in having the federal district court in Louisiana recognize 
that the Louisiana property tax scheme illegally discriminated against 
interstate railroads. Louisville & Nashville Railroad Company, et al. 
v. Louisiana Tax Commission, 498 F. Supp. 418 (M.D. La. 1980). Since 
that decision, the Louisiana Tax Commission has assessed railroads at 
15% of fair market value. The 4R Act precluded the need for protracted 
litigation in state courts and provided for a rational remedy--central 
assessment by the Louisiana Tax Commission at 15% of fair market value.
    In the Airport and Airway Improvement Act of 1982, Congress enacted 
similar protections for the airline industry. Because of that Act the 
Louisiana Tax Commission centrally assesses airline property at 15% of 
fair market value.
    H.R. 1369 is modeled after the protections provided to the railroad 
and airline industries in order to keep states from imposing 
discriminatory tax burdens. Like those pieces of legislation, H.R. 1369 
would protect the interstate natural gas pipeline industry and natural 
gas consumers from discriminatory taxes by preventing states and other 
taxing jurisdictions from discriminatory property tax assessments and 
from the imposition of discriminatory taxes. H.R. 1369 would also 
promote the rapid disposition of disputes concerning discriminatory 
taxes by allowing the federal district courts to decide those cases.
    It is an old axiom that ``justice delayed is justice denied''. Our 
industry, on behalf of our customers, seeks timely access to an 
impartial decision-maker. That is all H.R. 1369 provides. Accordingly, 
the CenterPoint companies urge this Committee to support H.R. 1369.
    I am available to answer any questions the Committee Members may 
have, and thank you again for the opportunity to appear before you 
today.

    Mr. Cannon. Thank you, Mr. Schroeder.
    Dr. de Rugy? Is that correct, ``de Rugy?''
    Ms. de Rugy. Yes. It's better than most people. [Laughter.]
    Mr. Cannon. Well, that's very kind of you. We appreciate 
it, and we look forward to your testimony.

   TESTIMONY OF VERONIQUE DE RUGY, PH.D., RESEARCH SCHOLAR, 
    AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

    Ms. de Rugy. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to be here today to 
talk about discriminatory taxation of natural gas pipeline. My 
name is Veronique de Rugy. I am an economist, so I would like 
to focus on the consequences of the tax treatment received by 
pipeline.
    To ensure that we do not get lost in the details of such a 
specific question, it is useful to ground our analysis in 
fundamental economic principles. Economists are notorious for 
their propensity to see all sides of an issue and never reach a 
definitive conclusion. President Harry Truman reportedly 
demanded a one-handed economist, because economists, he said, 
were always telling him, ``On the one hand, this; on the other 
hand, this.''
    But on some fundamental ideas, economists are in absolute 
agreement. Among these principles we have--among these, we have 
the principle that taxes distort behavior. A tax raises the 
marginal costs of a product or activity, thereby discouraging 
people from choosing it.
    The apple grower may decide that he may not be able to 
recoup the costs of taking care of an additional tree, so he 
won't plant it. And if the production of apple is taxed at a 
higher rate than that of the oranges, he may decide to stop 
producing apple altogether, and produce oranges instead.
    The size of the distortion may vary, but it exists 
nonetheless. For instance, a tax on medicine would lead to few 
distortions; while a tax on movie tickets or a restaurant would 
lead to much distortion because there are more substitutes. 
Sick people often find themselves in a situation where they 
must get a given drug at any cost. But we find definitely easy 
way and different source of entertainment.
    Natural gas pipelines are more similar to medicine. For 
instance, by their very nature they are very unresponsive to 
tax treatment. Once pipelines are built, their owner cannot 
easily move their operation to other States if they are unhappy 
with the tax treatment in a given State. The problem is 
exacerbated for interstate pipelines. Re-routing a pipeline to 
avoid an entire State would be exceedingly difficult.
    From the State's perspective, imposing discriminatory taxes 
on natural gas pipelines and other immobile goods makes 
economic sense. To put it bluntly, the States can effectively 
hold the pipeline investment hostage and extract a high tax 
payment in return at a lower cost.
    States also have an incentive to impose higher taxes on 
out-of-State companies than on their intrastate ones. However, 
this approach remains economically destructive. First, because 
some of the high taxes on pipelines can be passed through to 
consumers, natural gas consumers around the country will end up 
paying the bill, a higher bill. States that impose such high 
taxes are in a sense exporting their tax burden to consuming 
States.
    Second, the higher cost of gas services, including those 
resulting from discriminatory taxes, falls on consumers without 
regard to their income.
    Finally, the uncertainty of the tax treatment due to the 
absence of protection against discrimination, along with high 
taxes, will discourage investment in pipeline. This in turn 
will increase the price of gas.
    In the aftermath of two hurricanes causing massive 
destruction, most of the country is focused on the price of gas 
at the pump. However, reports indicate that natural gas 
production has been slower to recover than that of crude oil. 
Lost production attributed to these storms has been reported to 
be 226.6 billion cubic feet. This been borne out by natural gas 
prices. While oil prices have begun to retreat, natural gas 
prices have continued to increase. They have doubled since 
June, and are now almost triple what they were a year ago.
    As important as gas is to our economy--62 percent of 
American homes use natural gas--we cannot afford to burden our 
interstate pipelines with high taxes and risk weakening the 
pipeline infrastructure. If this legislation reduces the tax 
burden imposed on pipeline industry, it could go a very long 
way toward promoting new infrastructure investment. This would 
increase competition between pipeline operators and lead to low 
energy prices in the longer run. But ultimately, we should not 
forget who are the real beneficiary of this legislation: 
consumers.
    Thank you, Mr. Chairman and Member of the Committee.
    [The prepared statement of Ms. de Rugy follows:]

                Prepared Statement of Veronique de Rugy

                              INTRODUCTION

    We are confronted today with a very specific question: should 
states be allowed to tax the property of interstate natural gas 
pipelines differently than other forms of property? To ensure that we 
do not get lost in the details of such a specific question, it is 
useful to ground our analysis in fundamental economic principles.
    Economists are infamous for their propensity to see all sides of an 
issue and never reach a definitive conclusion--President Harry Truman 
reportedly demanded a one-handed economist because economists were 
always telling him, ``On the one hand . . . on the other hand. . . 
.''--but on some fundamental ideas they are in absolute agreement. 
Among these is the principle that taxes distort behavior. The size of 
the distortion may vary, but it exists nonetheless. In the case of gas 
pipelines, the relative immobility of the capital may seem to make the 
distortionary effect small, but over the long run, high taxes will 
discourage investment in pipelines. This in turn will increase the 
price of gas. As important as natural gas is to our economy, we cannot 
afford to burden our interstate pipelines with high taxes and risk 
weakening the pipeline infrastructure.
    If this legislation HR 1369 to prevent certain discriminatory 
taxation of natural gas pipeline property reduces taxes paid by the 
pipeline industry and reduces the uncertainty faced by pipeline owners 
then it could go a long way toward promoting new infrastructure 
investments. This would increase competition between pipeline operators 
and lead to low energy prices in the longer run.

                      1. THE ECONOMICS OF TAXATION

    Economics tells us that people make decisions by comparing marginal 
costs and marginal benefits. A consumer will buy an apple if the 
enjoyment she'll get from it is greater than its price. An apple grower 
will plant another tree if he'll be able to sell its apples for more 
than it costs him to take care of the additional tree.
    When the government imposes taxes, it distorts these decisions. A 
tax raises the marginal cost of a product or activity, thereby 
discouraging people from choosing it. The consumer may find that the 
apple is no longer worth the price she would have to pay for it--she 
may buy an orange instead. The apple grower may determine that he will 
not be able to recoup the cost of taking care of an additional tree--so 
he won't plant it. By choosing what and how much to tax, the government 
influences people's behavior; in effect, the government interferes with 
market decisions about the allocation of resources in the economy.
    In a free market, individuals direct resources to their most highly 
valued uses. Consumers and producers spend their money on the products 
and activities that will give them the most ``bang for their buck.'' 
Taxing these things pushes people away from the most highly valued 
products and activities and towards the next-best ones. In this way, 
the tax-induced distortions in behavior tend to make the market 
inefficient.

                         2. THE HOLD UP PROBLEM

    However, some taxes distort less than others because they cause 
smaller changes in behavior. A tax on goods for which the supply is 
unresponsive to tax rates would induce fewer distortions than one on 
goods for which supply is highly responsive to tax rates. For instance, 
a tax on medicine or the air we breathe would lead to few distortions, 
while a tax on movie tickets or restaurants would lead to much 
distortion because there are more substitutes. Sick people often find 
themselves in a situation where they must get a given drug--at any 
cost--and we cannot easily switch to breathing a different gas, but we 
can easily find new sources of entertainment.
    Natural gas pipelines are more similar to medicine and oxygen: by 
their nature, they are very unresponsive to tax treatment. Investment 
in a pipeline is irreversible. Once pipelines are built, their owners 
cannot easily move their operations to other states if they are unhappy 
with the tax rates in a given state. The problem is exacerbated for 
interstate pipelines--rerouting a pipeline to avoid an entire state 
would be exceedingly difficult.
    As economists Benjamin Klein, Robert G. Crawford, and Armen A. 
Alchian explained in an influential paper, a party that contracts to 
make a relationship-specific or irreversible investment becomes 
susceptible to a ``hold-up problem.'' \1\ Say party A makes a 
specialized investment to fulfill a contract with party B. Once the 
investment has been made, A is stuck with the deal; he invested in such 
a specialized asset that it has little value in any use other than what 
he contracted with B. Knowing this, B can opportunistically renegotiate 
a lower payment to A.
---------------------------------------------------------------------------
    \1\ Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian 
(1978). ``Vertical Integration, Appropriable Rents, and the Competitive 
Contracting Process,'' Journal of Law and Economics 21(2): 297-326.
---------------------------------------------------------------------------
    Although Klein, Crawford, and Alchian focused on how firms 
vertically integrate or sign long-term contracts to avoid hold-up after 
investment occurs, an analogy can be drawn to pipelines. Once the 
natural gas pipelines have already been built across several states, 
the pipeline owner is locked in and the bargaining power is in the 
hands of the state. The state has the power to demand a larger share of 
the profits or to impose some form of discriminatory tax, since the 
pipeline owner is now deeply invested in the state. In theory, the 
state could even demand all of the profits, because the pipeline 
owner's alternative is to lose the investment entirely.
    Their lack of mobility means that pipeline owners cannot easily 
react to an increase in their tax burden. To put it bluntly, the state 
can effectively hold the pipeline investments hostage and extract high 
tax payments in return. Considering that a state's objective is to 
maximize its tax revenues, imposing discriminatory taxes on natural gas 
pipelines and other immobile goods makes economic sense.
    In addition, States legislators will try to impose taxes at the 
lowest cost for themselves. The best way to do that is to impose higher 
taxes on out-of-state companies rather than on intra-state enterprises. 
This approach exports the costs associated with higher taxation to 
outside jurisdictions, while allowing legislators to side step the 
political repercussions of taxing their own constituents. Given the 
interstate nature of pipelines, they are a prime target for this type 
of state taxation.

      3. DISCRIMINATORY TREATMENT OF NATURAL GAS PIPELINE PROPERTY

    In practice, this is exactly what states are doing. As explained in 
the previous section, pipeline property, by its very nature, is a 
target of choice for state legislators wanting to maximize tax 
revenues. Under the current federal law, there is no provision to 
prohibit discriminatory treatment of property belonging to interstate 
natural gas pipeline companies. As a result, states subject capital 
that cannot move--the pipelines--to a higher tax than other forms of 
capital.
    According to experts in the industry, 17 states have tax laws that 
discriminate against natural gas pipelines. They do this in a variety 
of ways. For instance, some states distinguish pipelines from other 
businesses for the purpose of imposing a higher property tax rate on 
interstate companies. Other states manipulate their treatment of 
personal and real pipeline property, excluding personal property from 
taxation generally but including pipeline personal property. Still 
other states assess pipeline property at a different ratio than other 
commercial property. Industry experts estimate that the cumulative 
effect of these discriminatory tax policies is to increase the property 
tax bills of natural gas pipeline companies by more than 40 percent: in 
2004, natural gas pipeline companies paid $445 million in property tax, 
while they would have paid only $256 million if state tax laws treated 
pipeline companies the same as they treat other businesses.
    In the past, Congress has passed legislation prohibiting 
discriminatory treatment of property belonging to other industries 
operating in interstate commerce, such as rail, motor carrier, and air 
carrier transportation. These laws prohibit discriminatory tax 
treatment similar to what the interstate natural gas pipeline industry 
currently faces. In 1976, Congress passed the Railroad Revitalization 
and Regulatory Reform Act (later repealed by ICC Termination Act of 
1995). A portion of the act relevant to the topic at hand provided that 
states may tax railroad property at a rate not exceeding the rate 
applicable to other property in the State. Also a state may not assess 
rail transportation property (49 U.S.C. Sec. 11501), motor carrier 
transportation property (49 U.S.C. Sec. 14502), or air carrier 
transportation property (49 U.S.C. Sec. 40116) at a value that has a 
higher ratio to the true market value of the property than that of 
other commercial and industrial property in the same jurisdiction.
    In other words, States can no longer discriminate against the 
commercial property of these protected interstate transporters as 
compared to how that State treats its own intrastate commercial and 
industrial property.
    It should be noted that these policies were enacted over the 
states' strenuous objections.\2\ States never find it in their short 
term interest to lose the power to extract a significant rent from 
captive capital.
---------------------------------------------------------------------------
    \2\ Michael S. Greve (2002), ``Business, The States And 
Federalism's Political Economy,'' Harvard Journal of law and Public 
Policy, Summer, p. 895-929.
---------------------------------------------------------------------------
    Finally, the discrimination does not stop there. Under current law, 
pipelines also face a larger burden when it comes to challenging state 
tax discrimination. As it stands, interstate natural gas pipeline 
companies have no recourse in the federal court system to seek relief 
from discriminatory tax practices with respect to property assessments. 
Unlike other major interstate enterprises, such as rail, motor, and air 
carriers, interstate natural gas pipeline companies must typically 
pursue relief from discriminatory tax practices through state level 
appeal processes. This is an extremely difficult burden to carry.

           4. THE NOT SO HIDDEN COST OF DISCRIMINATORY TAXES

    On second look, however, tax discrimination remains a very poor 
calculation on the part of the state. Although it would be exceedingly 
costly for the companies to reroute their pipelines, taxation will 
alter their behavior in other ways. The higher cost of owning a 
pipeline means they will invest less in new pipelines and spend less on 
maintaining their existing equipment.
    Furthermore, as Nobel Prize laureates Finn E. Kydland and Edward C. 
Prescott have demonstrated, if companies expect that states may raise 
their taxes in the future, they will invest less today.\3\ As explained 
earlier, pipeline companies, unlike companies in other interstate 
industries, are not protected by federal guarantees against tax 
discrimination. The companies may reasonably fear that states will 
raise their taxes, and this uncertainty dampens their motivation to 
invest today.
---------------------------------------------------------------------------
    \3\ Kydland, Finn E. and Edward C. Prescott (1977). ``Rules Rather 
than Discretion: The Inconsistency of Optimal Plans,'' Journal of 
Political Economy 85(3): 473-492.
---------------------------------------------------------------------------
    Moreover, the work of MacDonald and Siegel suggests that when 
investments are irreversible, uncertainty concerning possible future 
tax changes may have massive disincentive effects on future 
investment.\4\ Firms only chose to ``nail down'' large capital projects 
when they have confidence concerning the likely future paths of the key 
economic variables affecting their profitability. This suggests that a 
policy that reduces uncertainty surrounding future tax variables at the 
state level may have profound effects on investment.
---------------------------------------------------------------------------
    \4\ Robert MacDonald abd Daniel Siegel (1986), ``The Value of 
Waiting to Invest,'' Quarterly Journal of Economics, Vol. 101, N. 4, 
November, p. 707-728.
---------------------------------------------------------------------------
    The lack of new investments in the pipeline industry along with the 
lack of maintenance investment for already existing pipelines could 
have very costly consequences. According to a Republican Policy 
Committee paper published in November 2004, U.S. industry overall 
depends on natural gas for 27 percent of its primary energy 
consumption. Because of such a strong reliance on natural gas, U.S. 
consumption continues to rise despite escalating prices. The United 
States is expected to consume nearly 30 trillion cubic feet (Tcf) of 
natural gas per year by 2020--a 38 percent increase over current 
consumption levels.
    To meet this strong demand, the industry estimates that $61 billion 
in natural gas infrastructure investment will be needed over the next 
15 years. This includes investment in pipelines, storage facilities, 
and liquefied natural gas terminals. However, as mentioned earlier 
state discriminatory taxation of natural gas pipeline property 
discourages the pipeline industry from investing in infrastructure.
    What happens if no new natural gas infrastructure is built? Quite 
simply, delays in pipeline and natural gas terminal construction will 
reduce the amount of natural gas available to consumers and thereby 
increase the price that they must pay. This likely will cause further 
job losses in industrial sectors that depend on affordable supplies of 
natural gas, such as chemical and fertilizer manufacturing. Because an 
increasing amount of electricity is generated by natural gas, 
electricity prices will be higher for virtually all consumers.
    The Interstate Natural Gas Association of America Foundation 
completed an economic analysis that quantifies some of the consumer 
costs associated with delays in constructing new pipeline and natural 
gas import capacity.\5\ The study published in July 2005 found 
startling results: a two-year delay in building natural gas 
infrastructure (both pipelines and LNG terminals) would cost U.S. 
natural gas consumers in excess of $200 billion by 2020.\6\ The state 
of California, alone, would experience increased natural gas costs of 
almost $30 billion over that period. And, of course, should the end 
result be that certain facilities are never constructed, the economic 
effect would be even more severe.
---------------------------------------------------------------------------
    \5\ For more information see http://www.ingaa.org/Documents/
Foundation%20Studies/F-2005-
01%20(Avoiding%20and%20Resolving%20Conflicts).pdf
    \6\ Ibid, p. 1.
---------------------------------------------------------------------------
    The bottom line is that natural gas infrastructure delays and 
cancellations have consequences. Every consumer will pay higher prices 
for natural gas, electricity and the goods produced using natural gas 
if we do not act to ensure that natural gas industry has the 
appropriate incentives to increase adequate pipeline capacity in time 
to keep supplies affordable.
    Of course other current government policies discourage the market 
from investing in infrastructure. According to the RSC, regulatory 
impediments to investment include jurisdictional confusion, which 
delays infrastructure construction; and ``open access'' and rate 
regulations, which distort rates of return on investment along to the 
tax impediments already mentioned.\7\ Other tax issues include too-
lengthy depreciation periods. Congress should allow the market to work. 
It should clarify administrative jurisdiction; it should terminate open 
access requirements and introduce market pricing of natural gas 
infrastructure services; and it should reduce depreciation periods or 
permit immediate expensing for tax purposes on capital investment.
---------------------------------------------------------------------------
    \7\ Republican Study Committee (2004), ``How Congress should help 
meet the Nation's Natural gas supply needs,'' November 16.
---------------------------------------------------------------------------
                               CONCLUSION

    In this area of higher energy prices exacerbated by hurricanes 
Katrina and Rita, it is all the more important to find a way to 
decrease energy prices. An important component of this bill is the 
provision of relief through the federal court system. It provides a 
statutory grant of jurisdiction which affords interstate natural gas 
pipeline companies the same relief avenues currently available to other 
major interstate commerce industries. By giving a judicial avenue to 
pipelines to contest their tax treatment, it reduces significantly the 
hold up problem they faced for years and reduces their uncertainty.
    If this legislation HR 1369 to prevent certain discriminatory 
taxation of natural gas pipeline property reduces taxes paid by the 
pipeline industry and reduces the uncertainty faced by pipeline owners 
then it could go a long way toward promoting new infrastructure 
investments. This would increase competition between pipeline operators 
and lead to low energy prices in the longer run.

    Mr. Cannon. Thank you, Dr. de Rugy.
    Mr. Duncan, you are now recognized for 5 minutes.

  TESTIMONY OF HARLEY T. DUNCAN, HARLEY T. DUNCAN, EXECUTIVE 
           DIRECTOR, FEDERATION OF TAX ADMINISTRATORS

    Mr. Duncan. Thank you very much, Mr. Chairman, Mr. Watt, 
Members of the Subcommittee. Thank you for the opportunity to 
appear before you on H.R. 1369. My name is Harley Duncan, and 
I'm the Executive Director of the Federation of Tax 
Administrators, which is an association of the principal tax 
administration agencies in the 50 States, the District of 
Columbia, and New York City. I appear in opposition to H.R. 
1369.
    If H.R. 1369 is passed, it will disrupt the property tax 
systems in a number of States. In so doing, it will overturn 
the decisions made by voters and elected officials at the State 
and local level, reduce the revenues that are now flowing to 
localities and school districts in the affected States, or 
shift the tax burden to other taxpayers.
    Moreover, the primary justification presented for H.R. 1369 
is that Congress some 30 years ago established similar 
restrictions on the taxation of railroad property. That seems 
scant justification for an act as far-reaching as H.R. 1369. It 
should not, however, be unexpected that the pipeline industry 
would seek the intervention of Congress, given that the 
Congress has acted in the case of railroads.
    There are three central points I'd like to make today. The 
first is that H.R. 1369 will disrupt the property tax systems 
in a number of States. The clearest and most immediate impact 
is going to be in approximately 9 or 10 States that use a 
classified property tax system in which pipeline property as 
well as certain other properties are included in a class that 
is assessed at a higher ratio to fair market value than other 
commercial and industrial property.
    What is important to note in considering these classified 
property tax system States, however, is that the adoption of 
the system in each State has generally involved a vote of the 
electorate in that State to amend the constitution, as well as 
individual actions of State legislatures to establish the 
classified system. In other words, it's followed the duly 
established procedures under law for amending the constitution 
and establishing the system.
    While you've heard that classified systems probably aren't 
held in great favor by the economists, some States use them as 
a tool to help balance out other features of their tax system, 
and to help control the incidence of the property tax burden 
across income groups and various types of property. And in 
others, the classification system has been used to prevent 
significant shifts in property tax burden as there have been 
other changes enacted in the property tax system.
    H.R. 1369 would insert the will of Congress over these 
decisions that have been made by the voters and the elected 
officials, and disrupt those property tax systems. It would 
also do so by only focusing on the property tax system and the 
assessment ratio. You'll probably hear some testimony about one 
State having a ratio for pipelines that's significantly higher 
from other commercial and industrial property.
    What you also need to consider, however, is that in a 
number of States there are offsetting features in the property 
tax code. In one in particular with the higher assessment ratio 
on gas property, gas pipeline properties are not subject to the 
corporate franchise tax. So you've got offsetting features. And 
a bill that focuses only on property taxes and inserts 
Congress' will is going to miss the fabric of the system as a 
whole.
    The second point I'd like to make is about the ``any other 
tax'' provision in section 1(b)(4). While it seems innocuous 
and straightforward, and in the 4-R Act context, it was 
described as a backstop to prevent States from enacting new 
taxes to replace the property tax practices that were 
prohibited, it hass proved to be anything but.
    In my testimony, I outline about 15 cases where the ``any 
other tax'' provision was used to challenge any number of 
provisions in State tax law that treated railroads differently 
than other taxpayers. They range from taxes on the use of fuel 
by railroads, fees assessed for the maintenance of railroad 
crossings, the application of a corporate income tax to 
railroads vis-a-vis other types of property.
    And the point is not that they won in each of those cases, 
but that the ``any other tax'' provision is not as innocuous as 
it might seem, and it needs to be examined. Proponents of the 
bill should, I would argue, be asked to identify what types of 
taxes, what particular taxes they feel fall under the 
provision, so that it can be examined. And it shouldn't be left 
out there as a sword that can then be used to attack taxes 
generally.
    The final point, Mr. Chairman, is the Federal court 
jurisdiction. As you note, if there is a plain, speedy, and 
efficient remedy available at State law, the Federal courts 
demur. If you can prove there isn't a plain, speedy, and 
efficient remedy, you get to Federal court.
    You will hear, and you have heard, that it's difficult to 
deal with State tax cases and State administrative appeals. I 
suspect any taxpayer and any State tax lawyer that has dealt 
with tax cases would agree with that. But those are the 
procedures that are there; they can be challenged; and they are 
the ones that face everybody, whether you're an in-State 
taxpayer or an interstate taxpayer.
    And by establishing the Federal court jurisdiction, you 
provide a special place in the system and a separate avenue for 
the pipeline industry to challenge. And that is not going to 
result in equal justice for that.
    So for these three reasons, Mr. Chairman, simply because it 
was done 30 years ago is not sufficient justification today. 
Thank you.
    [The prepared statement of Mr. Duncan follows:]

                 Prepared Statement of Harley T. Duncan




    Mr. Cannon. Thank you, Mr. Duncan. Let me just say that I 
appreciate your comments on this point and your written 
statements. And we are going to take a very close look at the 
``any other tax'' provision, and undoubtedly limit it from 
where the bill stands today. So I appreciate your input on 
that. I'm sure there will be some questions on that point.
    Mr. Garrett, you're recognized for 5 minutes.

   TESTIMONY OF LAURENCE E. GARRETT, SENIOR COUNSEL, EL PASO 
   CORPORATION, AND ON BEHALF OF THE INTERSTATE NATURAL GAS 
                     ASSOCIATION OF AMERICA

    Mr. Garrett. Thank you, Mr. Chairman, Ranking Member Watt. 
It is indeed an honor for me to appear before this esteemed 
Committee on behalf of the El Paso Corporation and the 
Interstate Natural Gas Association of America, which is the 
trade group for the natural gas pipeline industry.
    I'd like to start out by first saying that this is a very, 
very important bill to the industry. The addition of 
discriminatory taxes that the pipelines currently bear, 
unfortunately, are borne also by those very citizens and 
consumers of natural gas that had nothing to do with the 
imposition of that discriminatory tax.
    In other words, the discriminatory taxes imposed by the 
State of Kansas are borne by the consumers of natural gas in 
New York City and Maryland, as well as the District. So those 
States that do discriminate, in other words--and when I talk 
about discrimination, I think the Committee needs to understand 
what the pipeline industry is saying here. ``Discrimination'' 
means that you are taxing above what you tax other commercial 
and industrial property.
    The pipeline industry is not asking to be relieved of their 
tax burden. They are only asking to remove the discrimination 
and be taxed in the general group of commercial and industrial 
taxpayers.
    Now, there's a big reason for that. First of all, in that 
group there is a substantial amount of legislative clout. There 
are a lot of voters in that group. Pipelines don't vote. 
Pipelines are out of State. Pipelines are permanently fixed. 
They are high visibility targets for those States that think 
they can increase a tax and export it to their neighbor State.
    That is what this bill is designed to address, simply the 
discriminatory tax. What it does not do, it does not limit the 
States from imposing or raising their taxes. What they have to 
do, though, is raise it on all the commercial and industrial 
property, and not simply single out the pipelines.
    With regard to my esteemed colleague, Harley Duncan, I've 
known Harley for 25 years. He's probably the second guy I sued 
out of law school, I think. He was the secretary of revenue for 
the State of Kansas. My background is I litigated a lot of 4-R 
Act cases, which this statute is patterned after.
    Mr. Duncan talked about the disruption in the tax systems. 
We didn't see that with the 4-R Act. I litigated that from 1980 
up through 1999, when I left the industry. We didn't see the 
disruption in the tax systems. Was there a shift in taxes? Very 
small shift. And this pipeline shift would be even smaller. The 
property the pipelines own is less than what the railroads had.
    With regard to the ``any other tax'' measure, I encourage 
this Committee to focus on this very carefully, because that's 
a very important provision. I would analogize that piece of 
this statute--and Harley is right, it's very, very critical. I 
would analogize that to the bottom of the sack: Without that 
piece in there, you have no bottom to the sack.
    In other words, taxes tend to--State taxes tend to displace 
air like a balloon. So when you squeeze on one end, you get a 
puff out on the other. So that's what that ``any other tax'' is 
designed--and when Mr. Duncan cites all those cases, the 
Committee should ask themselves: Why are those cases there? 
Well, the reason they are there, because there was 
discrimination against the railroads.
    With regard to the Federal jurisdiction, absolutely 
critical to this bill. Absolutely critical. I have litigated in 
Federal court with these 4-R Act cases. They are fast; they are 
clean; everybody gets a resolution, relatively speaking, 
quickly.
    I have been involved in litigation in the State court 
system. What happens there is that if you are able to prevail--
and I put a big ``if'' there--the cause of action is generally 
always a constitutional cause of action: a commerce clause 
violation, an equal protection violation. When the court does 
determine that there has been a violation, and if you're lucky 
to ever get that resolved in a matter of ten or 15 years, then 
the problem comes: where is the refund?
    Two things happen. The counties spend that money. It's 
gone. It's not escrowed. And what is a company to do? Well, 
usually, they have to eat it, or take a credit going forward, 
or invoke some mechanism. They generally don't get their money 
back.
    The other point here is, with a Federal court, they are 
more apt to apply Federal law. It's been my observation that 
State courts, while they say that they're bound by Federal 
law--and they are, and I think they try to follow Federal law--
the most important thing is their State law. And you are going 
to have to have an extremely, extremely good case to win.
    Now, in those instances where you do win, I promise you, 
the very next year the legislature will take that relief away. 
They will legislatively unwind what the court did.
    So that's why you have to have the ``any other tax.'' 
That's why you have to have the Federal jurisdiction. It's 
absolutely critical. And I'm open to any questions the 
Committee may have.
    [The prepared statement of Mr. Garrett follows:]

               Prepared Statement of Laurence E. Garrett

                              INTRODUCTION

    The following testimony is submitted on behalf of the El Paso 
Corporation and the Interstate Natural Gas Association of America. El 
Paso Corporation provides natural gas and related energy products in a 
safe, efficient, dependable manner. El Paso owns North America's 
largest natural gas pipeline system and one of North America's largest 
independent natural gas producers.
    The Interstate Natural Gas Association of America (INGAA) is a 
trade organization that advocates regulatory and legislative positions 
of importance to the natural gas pipeline industry in North America. 
INGAA represents virtually all of the interstate natural gas 
transmission pipeline companies operating in the U.S., as well as 
comparable companies in Canada and Mexico. Its members transport over 
95 percent of the nation's natural gas through a network of 180,000 
miles of pipelines. The interstate natural gas pipeline industry has 
two principal federal regulators: the Federal Energy Regulatory 
Commission (FERC) is responsible for the economic regulation of 
pipelines, while the U.S. Department of Transportation (DOT) Office of 
Pipeline Safety oversees the industry's safety efforts.

                               BACKGROUND

    Thank you Chairman Cannon and Ranking Member Watt for the 
opportunity to testify today on HR 1369, legislation that, if enacted, 
would finally put an end to the unfair discriminatory taxation of 
interstate natural gas pipeline property that occurs in some States 
today. My name is Larry Garrett, and I serve as Senior Counsel for the 
El Paso Corporation Western Pipeline Group. I appreciate your interest 
in this important issue.
    Our founding fathers and the original framers of the Constitution 
recognized that Congress should have the authority to ensure that 
entities engaged in interstate commerce are not unfairly discriminated 
against by individual States. With the robustness and fluid nature of 
our modern economy even more dependent today on interstate commerce, 
this protection is vital to ensure consumers in one State are not 
unfairly affected by the actions of regulators in another State.
    A generation ago, Congress in its wisdom demonstrated its 
understanding of this fundamental principle. In 1976, Congress acted 
upon this understanding by passing legislation, the Railroad 
Revitalization and Regulatory Reform Act, to protect interstate rail 
carriers, in part, from discriminatory tax practices by the states. 
Moreover, Congress later enacted legislation granting motor carrier, 
and air carrier transportation property these same protections from 
taxes imposed by states in ways that unreasonably burden and 
discriminate against interstate commerce. As a result of this wise 
action, consumers of goods transported by rail, highway or the air in 
one State are protected from the harmful effects that discriminatory 
taxation in another State can have on the price and availability of 
those goods and services. Unfortunately, consumers of natural gas 
transported by interstate natural gas pipelines are not afforded this 
protection. In fact, interstate natural gas pipelines are the only 
major mode of interstate transportation that is not protected by 
federal law. El Paso and the membership of INGAA feel very strongly 
that now is the time for Congress to protect interstate natural gas 
pipelines in the same manner as provided to the other vital modes of 
interstate transportation.
    Under current federal law, a State may not assess rail, motor or 
air carrier transportation property (49 U.S.C. Sec. Sec. 11501, 14502 
and 40116), respectively, at a value that has a higher ratio to the 
true market value of the property than the ratio that the assessed 
value of other commercial and industrial property in the same 
assessment jurisdiction has to the true market value of the other 
property. A State also may not levy an ad valorem property tax on the 
transportation property at a tax rate that exceeds the tax rate 
applicable to commercial and industrial property in the same assessment 
jurisdiction.
    In other words, thanks to Congress acting, States can no longer 
discriminate against the commercial property of these protected 
interstate transporters as compared to how that State treats its own 
intrastate commercial and industrial property.
    Unfortunately, interstate natural gas pipelines are a different 
matter altogether. Since pipelines do not receive the same federal 
protection given to other interstate transporters, some States have 
been aggressive in their discriminatory taxation of such property. 
Since local property taxes are calculated by multiplying tax 
assessments times the tax rates, discriminatory taxation of interstate 
pipelines usually arises in two ways:

          First, pipeline property may be assessed at a 
        substantially higher proportion of true market value than the 
        proportion of true market value at which other commercial and 
        industrial property is assessed. An example being that a State 
        may assess pipeline property for tax purposes at 100 percent of 
        value, and other property at only 40 percent of such value.

          Second, pipeline property may be subjected to a 
        higher tax rate than the tax rate that is applied for the same 
        purpose against other taxable property. An example of this type 
        of discrimination would be when a State subjects pipeline 
        property at a rate of $1 per $1,000 of assessed valuation, and 
        other property subject to the same tax purpose at a rate of 
        $0.50 per $1,000 of assessed valuation.

    Either way, a pipeline can be forced to pay higher discriminatory 
taxes than other taxpayers with similar property in the same taxing 
district.
    Under current law, pipelines also face a tilted playing field when 
it comes to challenging state tax discrimination. Pipelines are limited 
to challenging discriminatory taxes through the state administrative 
and judicial systems. Resolution of these cases takes years. The only 
avenue of challenge pipelines have is to prove that a State's 
discriminatory taxation violates either the Equal Protection Clause or 
the Commence Clause of the United States Constitution. This is an 
extremely difficult burden to carry.
    In those rare instances where a pipeline can successfully 
demonstrate that a constitutional violation has occurred, state courts 
are reluctant to provide a meaningful remedy and state legislatures 
quickly eliminate any remedies that the courts may grant.
    The problem is best illustrated by some actual cases. In 1994, an 
interstate natural gas pipeline filed a protest with a State's tax 
commission complaining that the personal property of interstate 
pipelines was assessed under state law at twenty-five percent (25%) of 
fair market value, while the personal property of intrastate natural 
gas pipelines, with whom they competed, was assessed at fifteen percent 
(15%) of fair market value. This resulted in an assessment of 
interstate natural gas pipelines at a rate 167% higher that the 
assessment of intrastate natural gas pipelines. Protests were filed 
each year from 1994 through 2005.
    In January 2005, the cases were finally consolidated and set for 
trial before a state district court. The district court ultimately 
found that the state's assessment practices violated the pipeline's 
right to equal protection under the United States Constitution as well 
as its right to equal protection under the State's Constitution.
    After finding these constitutional violations, the court then 
remanded the case back to the state tax commission to reassess the 
interstate pipelines by having the local assessors find ``new'' fair 
market values for the interstate pipelines and then assess the 
pipelines at 15% of the ``new'' fair market value. The court ordered 
the ``new'' fair market value to be calculated by a valuation 
methodology that undisputedly was not designed to find fair market 
value of a rate-regulated pipeline. The clear object was to give the 
assessor an opportunity to eliminate any refund of discriminatory 
taxes. The pipeline was relegated to litigating the fair market value 
of the pipeline in 520 separate valuation hearings in as many as 36 
different local jurisdictions, even though the pipeline's fair market 
value was never an issue before the court. This can hardly be 
characterized as a plain, speedy and efficient remedy.
    In another State, interstate pipelines challenged a discriminatory 
tax on their personal property. The pipelines prevailed in court only 
to have the legislature change the definition of the pipelines' 
property from personal to real. The purpose was to eliminate any relief 
the pipelines obtained in court.
    In yet another State, pipelines challenged the practice of 
exempting the inventory of merchants and manufacturers, but taxing the 
inventories of pipelines. The State Supreme Court agreed that the 
inventories of pipelines should also be entitled to exemption. The next 
year the legislature moved swiftly to eliminate pipeline inventories 
from property tax exemption.
    Plain and simple, the options available for interstate natural gas 
pipelines to protect their right to engage in interstate commerce 
without discrimination are toothless and hollow. They are the same 
toothless options Congress realized the air, highway and rail carriers 
had in the 70's and they are just as hollow today. It would be our 
preference to work with the states in solving this problem. However, 
some States, recognizing that interstate pipeline assets, by their 
nature, are not mobile, single out pipeline property for discriminatory 
tax treatment. Put another way: ``interstate pipelines aren't going 
anywhere, so we might as well tax them''. In these instances, the only 
remedy for interstate natural gas pipelines is for Congress to enact 
federal protections to protect their interests.
    It is also important to realize this discriminatory taxation is not 
done in a vacuum. The consequences of each State's discrimination are 
felt far beyond the pipeline companies themselves. Ultimately, the 
pipeline and the consumer pay the bill for discriminatory taxation. Not 
only are such taxes reflected in the pipeline costs of transportation 
purchased by the consumer, but also the consumers of States which do 
not discriminate are forced to share the cost of these burdensome 
tolls. Furthermore, state tax policies that discriminate against 
interstate natural gas pipelines have the unintended consequence of 
determining where and if facilities are built. States that arbitrarily 
discriminate against pipelines are less likely to see the needed 
infrastructure built or expanded to provide energy services to sustain 
and grow the economy. Interstate natural gas pipelines, as a result of 
FERC Order 636, operate in a competitive marketplace with all of the 
associated market pressures faced by other businesses. If a pipeline 
project cannot be competitive in the market, such projects will not be 
built. State tax policies do enter into the decision making process in 
determining to proceed with major capital projects.
    We strongly support the passage of H. R. 1369. We specifically 
would like to point out a couple of the bill's most critically needed 
aspects. First, Chairman Cannon's bill will eliminate the 
discriminatory tax practices that negatively affect our national 
pipeline system and burden the Nation's consumers of natural gas. It 
will finally declare these types of taxation activities to be an 
unreasonable and unjust discrimination against and an undue burden on 
interstate commerce. Second, the legislation also wisely gives the 
District Courts of the United States jurisdiction to grant mandatory or 
prohibitive injunctive relief, interim equitable relief, and 
declaratory judgments as may be necessary to remedy any acts in 
violation of this bill. The jurisdiction provided for by this bill is 
not made exclusive of the jurisdiction which any Federal or State court 
may have. It is important to point out this provision to show that the 
legislation will not infringe upon a State's right to adopt a flexible 
taxation policy towards interstate pipelines. The simple truth is that 
this bill will in no way alter the freedom of a State to tax its 
taxpayers so long as interstate natural gas pipelines are accorded 
equal tax treatment with other taxpayers.
    In closing, the recent tragic events along the Gulf Coast have been 
a blunt reminder to us all how fragile life can be. Hurricanes Katrina 
and Rita have also reminded us all how these tragedies can interrupt 
our energy supply and, in turn, detrimentally affect people all across 
the country. This vulnerability is arguably most present in the natural 
gas market. Considering a majority of the natural gas consumed in this 
country is produced in only a few specific regions, the role of 
interstate natural gas pipelines to ensure that the natural gas found 
in those areas is accessible and reliably delivered to consumers in 
other areas is a foundation to our economy and livelihood. Whether it 
is used to generate electricity, heat our homes or serve as a feedstock 
in the production of many products we use daily, the dependable and 
affordable transportation of this fuel from one region to another is 
critical to this country. I would urge you to recognize the injustice 
we see today by affording the same protection to interstate natural gas 
pipelines that you have already given to the other interstate 
transporters of important products.
    Thank you once again for the opportunity to provide testimony on 
this important issue. I would be pleased to answer any questions you 
might have.

    Mr. Cannon. Thank you. We appreciate your testimony. And 
now we're going to shift to questions. I'll take the first 5 
minutes.
    Dr. de Rugy, are these kinds of taxes, taxation of 
pipelines in particular, do they tend to be progressive, 
meaning that richer people pay more tax, or do they tend to be 
regressive, meaning that poorer people end up paying a larger 
burden?
    Ms. de Rugy. You mean the tax on property?
    Mr. Cannon. The property tax on pipelines.
    Ms. de Rugy. Well, it actually depends on how it's assessed 
and whether it's a progressive rate or a proportionate rate. 
But as a general rule, the bigger the property, the more the 
tax you pay.
    Mr. Cannon. No, what I mean is, ultimately consumers are 
going to pay. The taxes are going to be passed on.
    Ms. de Rugy. Oh, consumers--yes, well, consumers----
    Mr. Cannon. So when consumers pay the taxes----
    Ms. de Rugy. It falls on every consumer, regardless of 
their income. So they tend to be regressive.
    Mr. Cannon. So it's regressive----
    Ms. de Rugy. Yes.
    Mr. Cannon. --and disproportionate----
    Ms. de Rugy. Yes.
    Mr. Cannon. --on poorer people.
    Ms. de Rugy. Because the rate is proportional, you know, 
and falls on everyone.
    Mr. Cannon. And since 62 percent of people in America heat 
their houses with gas----
    Ms. de Rugy. Homes.
    Mr. Cannon. --their homes with gas, I suspect that that is 
across the board.
    Ms. de Rugy. Yes.
    Mr. Cannon. I mean, you don't have any statistics----
    Ms. de Rugy. No, but I----
    Mr. Cannon. --to suggest that poor people use electricity 
or something else?
    Ms. de Rugy. Well, I could try to look for it, if you would 
like.
    Mr. Cannon. No, I suspect it's pretty----
    Ms. de Rugy. But I mean, it's regressive.
    Mr. Cannon. I mean, typically, I think people are going to 
be across the board. The decision to heat with electricity or 
oil are different. And so I suspect that it really is quite a 
regressive tax.
    Ms. de Rugy. Yes.
    Mr. Cannon. Mr. Schroeder, you explained the problems that 
you've had with regard to tax assessments in Louisiana in the 
testimony you submitted. With all the problems that State has 
had over the last month, are you saying that you don't want to 
pay taxes in the State?
    Mr. Schroeder. No, sir. First, let me just say, you noted 
from my biography my longstanding personal ties to Louisiana. 
In fact, all my family, my siblings and my in-laws, are still 
in Louisiana. So there's probably nobody here more acutely 
aware of the problems in Louisiana.
    Moreover, CenterPoint as a company and its employees have 
gone above and beyond in terms of devoting significant 
financial and human resources to the disaster in Louisiana, and 
more recently now the disaster in Texas with Hurricane Rita.
    We've spent long hours rendering service and restoring 
service in New Orleans, with our employees devoting their time 
over there. We completely provisioned one of the evacuee 
centers in Houston--not the Astrodome, but the Houston 
Convention Center, which was completely staffed and supported 
by our company.
    And more importantly, we have a very long-standing 
presence, and will continue to do so in Louisiana. We're a 
significant employer and a significant capital investor in that 
State. And we have done, and will continue to do, more than our 
share as a company to support Louisiana as it recovers from 
this.
    However, and we believe as a company, Louisiana is 
certainly free to raise taxes: raise taxes on our company, 
raise taxes on property, generally. They're certainly free to 
petition Congress for funds to deal with the disaster. What we 
don't believe is appropriate, though, is to allow them to 
discriminate in the assessment of taxes and shift their tax 
burden onto consumers outside the State.
    And I also think it's important that we all recognize that 
we ought not be making policy, longstanding policy, about who 
bears these tax burdens and whether or not discrimination 
against interstate commerce is or isn't appropriate, on the 
basis of this particular disaster, or in light of this 
particular disaster. It should be done in the context of what's 
good for the Nation, what's good for all the consumers of 
natural gas and all the rate payers that purchase our services 
across the country.
    Mr. Cannon. Thank you, Mr. Schroeder. Mr. Duncan, thank 
you, in the first place, for your testimony, which I thought 
was very, very coherent and concise and interesting and 
insightful. And clearly, we have a situation of great 
complexity. And one of the reasons I personally prefer not to 
be mandating to States is because they have these complicated 
balances that you talked about.
    So given that you've got 9 or 10 States that have this 
classified system of taxation, given that those balances are 
very different in each of those States, would it be fair to say 
that the effect, not of the general taxation policies within 
those States, but as it relates to just pipelines and taxation 
of gas pipelines, that the tendency in those States is to 
benefit their voters with taxation revenues that come from 
taxpayers in other States?
    Mr. Duncan. I'm not sure that you can make a blanket 
statement that the effort is to use pipeline revenues to 
benefit voters in the State.
    Mr. Cannon. Well, the point is not that that's the effort 
of the taxing State. But, isn't it the effect that when a State 
adds taxation to pipelines that go through the State, that 
people in other States end up paying into a system that brings 
revenue, taxation revenue, into the State that doesn't come 
from in-State voting taxpayers?
    Mr. Duncan. I'm not going to deny your essential point, but 
it isn't as simple a matter as the tax on pipelines is all 
taken out of State. First of all, some of the gas is used in 
the State.
    Second, there's a school of thought in the public finance 
literature--I haven't looked at it in a while--that says that 
the incidence of property taxes falls back, in part at least, 
on the owners of capital--that is, the owners of the pipeline 
and the shareholders--depending on the nature of the market 
conditions.
    Mr. Cannon. Right.
    Mr. Duncan. And I'd be glad to get that for your staff.
    Mr. Cannon. We would love to have that. But my 
understanding from what you've just said is that you agree that 
there is a tendency to shift that taxation outside the State to 
other sources, either through the process you've just 
described, or just through the higher rates that people pay in 
other States. I mean, that's simple, but----
    Mr. Duncan. Well, yet is it, but there's a lot of complex 
economics that goes with it sometimes; it depends. But the fact 
is that if one is taxing interstate activity, there are certain 
times that the ultimate incidence is going to shift out of 
State, and it may fall back, and it may fall onto others. Yes, 
sometimes taxes are exported. Nevada would be the classic 
example of trying to export tax.
    Mr. Cannon. Thank you, Mr. Duncan.
    Mr. Watt? The gentleman is recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. I acknowledged at the 
outset that I don't know much about this bill, so I want to ask 
a couple of very, very, very basic questions, so I can make 
sure I understand what the bill does, or proposes to do.
    I'm looking on page 3 of the bill, and it would make 
illegal four different kinds of things. And the fourth one is 
this ``other tax'' issue, which the Chairman says he's going to 
look at. And we could spend all day speculating about what 
those other taxes might be, so I'm not even going to deal with 
that aspect.
    The other three seem to fall into two categories. Number 
one is levying or collecting a property tax at a rate, at a tax 
rate, that exceeds the tax rate applicable to commercial and 
industrial property in the same assessment jurisdiction. And 
the first two, numbers one and two, talk about making an 
assessment that is in some way discriminatory.
    Basic question: Are there States that tax at a tax rate 
that is higher for property that has a pipeline running through 
it? The rate, itself; not the assessment. Are there States that 
are doing that? Mr. Garrett, Mr. Schroeder, you all operate in 
this business. Tell me what those States are, and if there are 
any such States.
    Mr. Garrett. You know, Ranking Member Watt, I am not aware 
of any State that has done that.
    Mr. Watt. Mr. Schroeder?
    Mr. Schroeder. Well, in Louisiana, in particular, our 
interstate natural gas pipeline property is taxed at a 
different percentage rate of fair market value than intrastate 
natural gas pipelines. That's the crux of our legal issue in 
Louisiana today, is we pay a tax based on 25 percent of our 
fair market value, as an interstate natural gas pipeline 
company; while the very intrastate pipeline companies with 
which we actually compete for business, in addition to taking 
our gas out of State, are taxed at a 15 percent rate. So we 
think that's a prima facie case----
    Mr. Watt. Okay. So Louisiana actually taxes this property 
at a different rate.
    Mr. Schroeder. Yes.
    Mr. Watt. Are there any other States? Mr. Garrett seems 
to----
    Mr. Garrett. If I could follow up on your question, 
Congressman, are you asking about how much--the mill levy that 
is applied?
    Mr. Watt. Yes.
    Mr. Garrett. Because usually, that's what we talk about 
when we talk about rate.
    Mr. Watt. Right.
    Mr. Garrett. Not the level of assessment. The level of 
assessment, I think, is as Mr. Schroeder pointed out. There is 
difficulties there. They do charge at different levels of 
assessment. In other words, the pipelines in Louisiana are 
assessed interstate at 25 percent of fair market value. But to 
that value, to that assessed value, then they apply the tax 
rate.
    Mr. Watt. All right. But the rate itself is an equal rate?
    Mr. Garrett. [Nods head.]
    Mr. Watt. Okay. So the question that we are dealing with 
here is an assessment matter, by and large, except for 
Louisiana. Is that my understanding? Mr. Duncan, would you be 
able to enlighten me on that?
    Mr. Duncan. I think, in terms of the tax rate of so many 
dollars per hundred dollars of assessed valuation, the 
distinction that--if there is one made in a State, it is 
generally between residential and non-residential property.
    The issue here is the assessment rate. Once you find the 
value of the property, how much of it goes in the tax base? And 
the concern of the pipelines is that in some States 30 
percent--in the case of Louisiana, for example, 25 percent of 
the total value of the pipeline constitutes the tax base for 
interstate pipelines, and 15 percent of the value--determined 
in a different manner, I might add--constitutes the tax base 
for the intrastate pipelines.
    The issue is primarily one of assessment ratios. But if you 
didn't have the prohibition against assessment ratio and rate, 
you could get to the same end. And I would give them that.
    Mr. Watt. All right. So this is not about the assessed 
value of a piece of property. I mean, how do you value a piece 
of property that has a pipeline under it?
    Mr. Schroeder. Well--and Mr. Garrett can correct me if I'm 
wrong, because he's more of a specialist in this field than I 
am--but in Louisiana, the Louisiana Tax Commission publishes 
tables that provide for the uniform assessment of pipeline 
property. So there is some uniformity there in terms of how 
they value pipeline property on a statewide basis for 
interstate natural gas pipelines, if that answers your 
question.
    So it's really--as Mr. Duncan and Mr. Garrett said, it's 
the percentage of the fair market value that is subject to the 
assessment that has been, in our experience, the most common or 
egregious example of the discrimination.
    Mr. Watt. So the actual assessment itself, the valuation of 
a piece of property, is not the issue here?
    Mr. Schroeder. It hasn't been our experience. It can be an 
issue. It's conceivable that an assessor would not follow the 
guidelines, I suppose. But that has not been our experience to 
date.
    Mr. Garrett. Sir, if I could give you an example, if you 
take--let me correct the record just for a moment on Louisiana. 
Louisiana like a lot of States assess and appraise interstate 
pipelines on a central assessment basis. That means the State 
does the actual appraisal. And how they do that is, they 
usually follow a cost, a market, and an income approach to 
value.
    Mr. Watt. That's the way every piece of--isn't that the way 
most States do every piece of commercial real estate?
    Mr. Garrett. No, it isn't. And the prime example here is 
Louisiana. The intrastate pipelines are not appraised on an 
income basis. What they are appraised on is a replacement 
cost----
    Mr. Watt. Oh, okay.
    Mr. Garrett. --less depreciation. In other words, their 
pipe is valued like per mile of just simple pipe. And probably, 
there's nothing wrong with that. They're not a regulated public 
utility. In other words, their earning capacity is not limited 
like a FERC-regulated interstate natural gas pipeline.
    Mr. Watt. All right. I think I understand the issue a lot 
more. And Mr. Duncan has another response that will help me 
understand it more. But I won't ask another question. I'm just 
trying to understand what the issue is here.
    Mr. Duncan. I don't know if this will help you understand 
or not. I'm glad to hear that the method of valuation is not an 
issue. It was often said that method of valuation was not an 
issue in the 4-R Act context, but there were cases brought 
challenging that method of valuation. So if the method of 
valuation is not an issue, that would be a good measure to set 
aside in the bill, as well.
    Mr. Garrett. I'd like to respond to that. The fair market 
value, or the valuation, is the denominator to this equation. 
The assessed value is the numerator. So if a State tampers with 
the assessed value and the numerator, they can discriminate. Or 
they can tamper with the fair market value in the denominator.
    This is what the railroads went through in their 
litigation. What happened is the railroads, the first case they 
win is strictly on a discriminatory 20 percent of fair market 
value versus 30. Well, then the States take the position they 
can tinker and get that money back by raising the value.
    And so fair market value, Ranking Member Watt, is a very, 
very important part of this bill. It was a very, very important 
part of the railroad bill.
    Mr. Watt. Okay. Thank you.
    Mr. Cannon. The gentleman yields back.
    Mr. Chabot, I believe you were here next.
    Mr. Chabot. I thank the gentleman.
    Mr. Cannon. The gentleman is recognized. The gentleman from 
Ohio is recognized for 5 minutes.
    Mr. Chabot. Thank you. Dr. de Rugy, I'll start with you, if 
I can. From what I gather, my home State of Ohio collects a 
large amount of taxes from the natural gas pipelines. In fact, 
if I'm understanding this chart correctly, I think we're the 
second-highest State, around 40 million in 2004, after 
Louisiana at about 46 million. And I think New York at 39 was 
next. But we're way up there.
    Could you tell how, arguably, this impacts the State's 
economy and the consumers? And is it logical to assume that 
this tax causes Ohio consumers to pay more for natural gas in 
their heating bills, therefore, than they otherwise would?
    Ms. de Rugy. You're asking in the present state?
    Mr. Chabot. The way it is right now, yes.
    Ms. de Rugy. I guess there are a lot of things that go into 
the price of the tax. But it is possible, totally possible, 
that it means that the consumer in Ohio are going to pay much, 
much more for their gas than in other States.
    I mean, there are different prices of gas, crude oil or 
natural gas, across States. And it's a mix of the cost of 
production and taxes, some of which can be transferred to other 
States, but most of it can't. And it's going to have to be paid 
by taxpayers in Ohio.
    Mr. Chabot. All right. Okay. Thank you. Mr. Duncan, if I 
could go to you next, Ohio has a large number of natural gas 
pipelines in the State, it's my understanding. And I understand 
the rate is high, as well. Could you tell us what burdens there 
might be in the State of having so many pipelines? What is the 
practical effects of that?
    Mr. Duncan. Well, the State would provide a number of 
services to pipelines and to pipeline owners. Most 
particularly, you're going to have issues of safety, I suspect. 
So that there's a regulatory burden--a regulatory and a safety 
burden that would be most directly attributable to the pipeline 
property, would be my guess.
    Mr. Chabot. Okay.
    Mr. Duncan. You also have the period--I mean, the 
disruption to any public rights-of-way, if they have to go into 
repair. You also have the issue of easements on the private 
rights--private lands, as well.
    Mr. Chabot. Okay. Mr. Garrett, and also Mr. Schroeder, what 
drawbacks are there for consumers when States charge 
discriminatory taxes? And how could this affect the pipeline 
infrastructure, as well? Either one that would like to go 
first.
    Mr. Garrett. Well, with respect to the consumers, the 
property taxes of a pipeline are included in the rate base for 
the pipeline. So consequently, the consumers are paying a piece 
of that discrimination.
    Now, unfortunately, every consumer that consumes gas 
through that pipeline that's been discriminated against, 
regardless of whether it's in the--Mr. Duncan was correct--
regardless of whether it's in the state of discrimination or 
elsewhere, is paying a piece of that.
    But also, the pipelines are paying a piece. And let me show 
you why. It is, unlike years ago where a cost of service could 
be passed down to the rate payer, that's not correct today. 
That isn't what really in reality happens. You have a policy at 
the FERC today that is encouraging competition.
    And competition is a good thing. I mean, nobody denies 
that. The problem of it is when your rates are regulated the 
pipelines have to take a discount to ship gas, if you will. And 
when they do take a discount, they're not earning their rate. 
So in other words, that discriminatory piece of that tax, the 
pipelines are paying a share of that, also.
    Now, that takes away from the ability to move capital into 
new areas. You want the gas out of the Rocky Mountain region to 
the East here. That takes a lot of money, and that money comes 
from pipelines.
    And the difficulty here is when a pipeline makes a--when 
they're dealing with a discriminatory tax, and you're going 
into a State, you really have no brakes on. The risk 
skyrockets. Because once you put that pipe in the ground, it's 
hard to take it out. And when a State comes along and steps on 
your neck afterwards, it creates undesirable results.
    Management--and I've sat in management meetings where this 
very issue has come up: ``What about this State?'', you know. 
``Well, we don't want to--'' you know, ``It's so uncertain, 
they don't have a tax-friendly policy, we have no Federal 
protection, it's a high risk.'' So, yes, it does. It has a 
terribly adverse effect at business.
    Mr. Chabot. Thank you. Mr. Chairman, my time has expired, 
but if Mr. Schroeder could respond very briefly?
    Ms. de Rugy. Can I just----
    Mr. Chabot. Yes.
    Ms. de Rugy. If you want, we could send you some--there's 
actually a large literature that shows that for investments 
that are irreversible the uncertainty can be disastrous, 
because then that will reduce the amount of investment that you 
make either to maintain or to build or to add to the 
investment.
    Mr. Chabot. I think all the Committee would probably like 
to receive that. Mr. Schroeder?
    Mr. Schroeder. Just to agree first with Mr. Garrett and 
reinforce, when we design our rates, we don't design them to 
charge people in Louisiana, or just Arkansas, or just Oklahoma, 
based on the costs and expenses associated with that particular 
State's service. So you put all the property taxes in a bucket; 
essentially, spread them out uniformly across all of our 
consumers. And the result is that people in Arkansas and 
Missouri are carrying some of the tax-raising burden that 
Louisiana has imposed on our services.
    There's also an important point that we haven't touched on 
here, and that is the effect that this can have on producers, 
as well. And today, in this high-price environment, certainly 
producers are not ones that are going to engender a great deal 
of sympathy, but these things go in cycles. And in periods when 
gas prices are lower and producers are competing over markets, 
they are all selling into a market at a largely uniform price. 
For example, at a hub, that hub price might be $6; it may be 
$10 today; a few years ago, it was $3.
    If my pipeline traverses several States with higher 
property taxes, if my transportation rate to get into that 
marketplace where everybody is getting paid three or five or 
six dollars, if my transportation rate is higher than my 
competitors who are coming from other producing basins, the 
producers that I deliver gas from into these other pipes will 
receive a lower net-back. So there is also a penalty 
potentially being paid by producers, as well.
    I realize that in today's environment that's not a 
particularly compelling argument. But we should remember that 
these things do go in cycles, and that there are times when 
producers feel the effect of that net-back, and it does run the 
risk of inhibiting investment on their part.
    Mr. Chabot. Thank you.
    Mr. Cannon. The gentleman yields back.
    Ms. Wasserman Schultz? The gentlelady is recognized for 5 
minutes.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman. Actually, I 
have two questions, and any of the panelists could choose to 
answer it. The need for this legislation has been--the citation 
that has been referred to in the need for this legislation has 
been the 4-R Act of 1976. And at the time, my familiarity with 
that act is that the U.S. railroads who benefitted from it were 
in bankruptcy. And certainly, the pipelines are not in any such 
situation.
    So I'd like to understand why, when that act was adopted as 
a form of relief for U.S. railroads, when there doesn't appear 
to be any need for relief for pipelines, why it's necessary to 
move forward with legislation.
    Ms. de Rugy. Very quickly, I'll answer to that by saying 
that, actually, in my testimony, my written testimony, I never 
made any reference to that act, for that exact reason. The 
reason why it would be important to get rid of that 
discrimination has nothing--I mean, has nothing to do really 
with the fact that other companies benefitted from that.
    It's from an economic point of view it would be a very 
important thing to do, independently of whether other companies 
have benefitted from it. So I think that's why, you know, 
comparing--saying, ``Well, you know, we did it because this 
industry was in bankruptcy or was having problem,'' is just not 
the argument.
    Ms. Wasserman Schultz. Mr. Duncan, can you comment, please?
    Mr. Duncan. I tend to--I mean, I agree with your point. It 
was adopted in 1976. It was part of a major package looking at 
regulations, some actual relief. It was the establishment of 
Conrail, and this was a piece that was included as a way of 
providing relief.
    We hear today that it's discriminatory taxation. I have a 
feeling that if we didn't have the 4-R Act, we'd hear a lot 
less about the discriminatory taxation. Because the practice of 
the States would be to treat a broad group of property that we 
would traditionally call public utility, but that would include 
pipelines and the railroads and the motor carriers and the air 
carriers, in much the same fashion for property tax purposes. 
So it's the intervention of Congress in 1976 that leads to the 
discrimination that we're hearing about today.
    Mr. Garrett. And if I may follow up on that, I wasn't 
involved in the 4-R Act legislation, but I was involved in the 
4-R Act litigation; so I had an opportunity to read a lot of 
the legislative history there. And you're absolutely correct; 
the railroads, certainly the eastern railroads, were in 
financial straits. The western railroads were not. But the 
objective was--is to eliminate this discrimination on 
interstate commerce.
    I would encourage the Members of the Committee just to 
simply go back and look to see what their predecessors did. 
With the railroad bill, with the motor carriers, and with the 
airlines, there was a clear need to eliminate discrimination.
    And I can refer the Committee Members to--S. 2289 is the 
Committee report on the discriminatory State taxation of 
interstate carriers. And it gives an excellent background of 
what they were looking at. And one of the quotes out of there 
is that ultimately the shipper and the consumer pay the bill 
for discriminatory taxation. That's true with the pipelines; 
that's true with the railroads; that's true with the airlines; 
and it was true with the trucks.
    That's what Congress wanted to eliminate, this 
balkanization, this idea of a State imposing a discriminatory 
tax on a good--like a tariff, if you will.
    Ms. Wasserman Schultz. Yes, but my impression is not that 
that was the purpose of that act. The understanding that I have 
of the purpose of that act was for relief; not for relief from 
discrimination, for financial relief.
    Mr. Garrett. Well, it was relief from discrimination. And 
if I may continue here, not only are such taxes reflected in 
the transportation cost of goods purchased by the consumer--the 
same here with the pipelines today--but also, the consumers of 
States which do not discriminate are forced to share the costs 
of these burdensome tolls.
    You know, you can look at a pipeline. A pipeline is a 
railroad underground. They do not own the cargo that they ship; 
the railroads don't own the cargo that they ship. Both of them 
are fixed assets that are very expensive, that are very 
important to our national infrastructure. You just simply can't 
pick them up and move when the taxing environment gets 
unbearable. That's what Congress stepped in to protect.
    Ms. Wasserman Schultz. Mr. Chairman, I have another 
question, but my time has expired.
    Mr. Cannon. Without objection, the gentlelady is recognized 
for another minute.
    Ms. Wasserman Schultz. Thank you very much. The only other 
question I wanted to ask was on a different subject. I'm a 
former State legislator for 12 years, and so I jealously guard 
when we remove jurisdiction from the States and grant it to the 
Federal Government. Kind of a home rule thing.
    And you know, I just don't really see in the research and 
the reading that I've done that there is an access to the 
courts issue. I mean, if there is a discriminatory issue, then 
the State and local courts seem available to pursue a remedy.
    And I'm not sure why it needs to be--the jurisdiction needs 
to be moved to the Federal level. It doesn't make sense, unless 
there is some access to the courts issue that I'm not familiar 
with.
    Mr. Garrett. Well, there is an access to courts issue. One 
is in the State system. And I might add, too, take Kansas, for 
instance. Pipelines have a separate appeal procedure. They're 
not allowed to pay their taxes under protest, and sue. What 
they must do, if they have a complaint about their valuation or 
assessment, they must bring an action to the State board of tax 
appeals within 30 days of the assessment.
    First of all, that time is very--you can hardly analyze 
your case in 30 days; let alone, bring a cogent defense. The 
system is extremely slow. I brought an action before the Kansas 
State Board of Tax Appeals, started in--the case started in 
1998. The Kansas Supreme Court finally heard it this year; 
ruled in the--this was not a pipeline case, but it was a 
gathering lines case--ruled in the pipeline's favor; the 
companies still haven't received a refund. And Lord only knows 
when we're going to get to that.
    Ms. Wasserman Schultz. Mr. Chairman, would you let Mr. 
Duncan just give an alternative?
    Mr. Cannon. Absolutely.
    Ms. Wasserman Schultz. Thank you so much.
    Mr. Duncan. Thank you. You know, I hear these things about 
State procedures and State cases. I mean, I've had State tax 
attorneys that work for me make the same arguments: that it is 
cumbersome; it is difficult; you can't get the records, and the 
like.
    I think the answer really is that we have a system that 
State and local tax cases are brought at the State and local 
level. There are procedures out there that affect everyone. If 
the Federal court, in reviewing that, sees that it's not plain, 
speedy, and efficient, they can take the case. And they have, 
in fact, on occasion, taken the case.
    But everybody is treated by the same rules, and they all 
play by the same rules. I think, you know, is it cumbersome? 
Sometimes it is. Sometimes you don't get the answer you want, 
either. But we are all playing by the same rules. And the 
Federal court can assert itself, if they think the remedy is 
not there.
    Mr. Cannon. The gentlelady yields back. And sometimes when 
the rules even work it's hard to get paid, according to Mr. 
Garrett. The gentlelady may be interested in a map of pipelines 
that we have, the Committee staff has. Because I suspect that 
you may want to support this bill, since I think the weight of 
the testimony here is that taxpayers in Florida are subsidizing 
revenues in Louisiana. And so from your historic perspective as 
a legislator, that may be interesting.
    The gentleman from North Carolina, and senior Member of the 
Committee, is recognized for 5 minutes.
    Mr. Coble. Thank you, Mr. Chairman. Mr. Chairman, I have 
two meetings going on simultaneously. That's why I was late 
getting here.
    Mr. Duncan, you earlier said that Nevada was an ideal 
example. I may be the only guy in the room who is not sure why 
Nevada is an ideal example.
    Mr. Duncan. It's simple. Nevada--and I can understand that 
you wouldn't understand this. Nevada has most of its tax money 
come from gambling and liquor and other things that are imposed 
on tourists. So that's how it exports its tax burden. I'm 
sorry.
    Mr. Coble. Well, I figured it probably involved one of 
those ``sinful'' activities. Thank you, Mr. Duncan.
    Mr. Garrett, you point out in your testimony--in fact, my 
colleagues may have touched on all these questions previously. 
But you point out, Mr. Garrett, that the interstate and natural 
gas pipelines are similar in nature to rail, air, and trucking 
modes of transportation. And I don't disagree with that.
    Comment a little more in detail about the similarities and 
the differences that you see, A; and, B, why were the 
interstate natural gas pipelines not afforded the same 
protection that was extended to air, rail, and truck in the 
'70's?
    Mr. Garrett. Thank you, Congressman. First of all, the 
similarity is--specifically with the railroad, the railroads 
have an infrastructure; the differences being, of course, one 
is above ground; the pipelines are below ground, they're 
hidden. They both transport commodities in interstate commerce.
    The difference between the railroad and the pipeline is, 
the pipeline simply transports natural gas; where the railroads 
transport all sorts of commodities. They are both captive. They 
both are capital intensive. They both cross States that 
discriminate.
    The reason, I think, that it's--I can't give you an exact 
answer why the relief wasn't given to the pipelines back in the 
'70's, but here's probably at least my take on it. Back in the 
'70's, the pipelines were simply a small segment of the energy 
industry. In other words, the pipelines owned the interstate 
transportation; they owned the gathering systems; they owned 
the production; and sometimes they even owned the local 
distribution companies. They literally owned the whole, entire 
supply chain.
    Today, since 1993, the Federal Energy Regulatory Commission 
ordered the unbundling of all of those entities. So today, when 
you have an interstate natural gas pipeline, that's all you 
have. They cannot own production; they cannot own the gas in 
the line, except that necessary to run the pipeline. That is 
somebody else's commodity. So today they are identical to a 
railroad.
    Mr. Coble. I got you. Dr. de Rugy, what is the proper 
balance, in your opinion, of whether this bill is an 
infringement of States' rights, on the one hand, or a protector 
of a State's right to protect its residents from higher or 
excessive prices due to another State?
    Ms. de Rugy. Thank you, Congressman. I think it's a very 
good question. It really seems to me that this bill is actually 
a good federalist policy. I'm a fervent defender of States' 
rights. And this bill doesn't mean that the Federal Government 
is going to impose on them how they should impose, which rate 
they should impose on companies within their States. This is 
not at all the point.
    On the other hand, but this bill does--because this bill 
doesn't impose a national way of imposing taxes on pipelines. 
What it does, though, it protects all other States from a given 
State discriminating against a given industry, and this State 
exporting the costs on other States.
    So actually, it is the perfect federalist solution, it 
seems. I mean, and I think it is. Because, as I said, it just 
balances those rights; without imposing a national policy which 
then would go against States' rights; yet protecting one State 
from suffering from the tax policy in another State. Actually, 
it does seem to me like a good federalist policy.
    Mr. Coble. We appreciate you all being with us. Mr. 
Chairman, I yield back.
    Mr. Cannon. Thank you. You know, I had a person on my staff 
who loved to go to Las Vegas. And I could never understand why 
anyone would want to go subsidize somebody else's tax system, 
but he did. And it was his choice. The problem, of course, 
we're dealing with here is where you don't have choice.
    And Dr. de Rugy, you mentioned earlier that you had some 
information on how uncertainty and exaggerating the risk leads 
to a huge distortion in investments. If you could get that to 
the Committee, I'd very much appreciate that, because that's a 
big, big part of the issue that we have here.
    [The information referred to is available in the Appendix.]
    Mr. Cannon. I want to thank the panel for the very 
thoughtful, insightful testimony. And we're going to work on 
this some more, and appreciate that. And at this point, the 
hearing is adjourned.
    [Whereupon, at 3:15 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

   Response to Post-Hearing Questions from Veronique de Rugy, Ph.D., 
   Research Scholar, American Enterprise Institute for Public Policy 
                                Research



  Response to Post-Hearing Questions from Harley T. Duncan, Executive 
               Director, Federation of Tax Administrators



  Response to Post-Hearing Questions from Laurence E. Garrett, Senior 
 Counsel, El Paso Corporation, and on behalf of the Interstate Natural 
                       Gas Association of America



                                 
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