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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 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

BOB INGLIS, South Carolina 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

CHRIS VAN HOLLEN, Maryland 

DEBBIE WASSERMAN SCHULTZ, Florida

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 

TRENT FRANKS, Arizona 

STEVE CHABOT, Ohio 

MARK GREEN, Wisconsin 

RANDY J. FORBES, Virginia 

LOUIE GOHMERT, Texas 

MELVIN L. WATT, North Carolina 

WILLIAM D. DELAHUNT, Massachusetts 

CHRIS VAN HOLLEN, Maryland 

JERROLD NADLER, New York 

DEBBIE WASSERMAN SCHULTZ, Florida

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

JAMES DALEY, Full Committee Counsel 

BRENDA HANKINS, Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

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

(1)

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. 

2

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. 

3

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 opeds 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. 

4

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. 

5

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 

6

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. § 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. § 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. § 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 

7

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 ApVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
8

peal 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 

9

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 comVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
10

panies 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 

11

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. 

12

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-ofState 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 onehanded 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. 

13

1Klein, 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. 

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. 

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 

14

2Michael S. Greve (2002), ‘‘Business, The States And Federalism’s Political Economy,’’ Harvard Journal of law and Public Policy, Summer, p. 895–929. 3Kydland, Finn E. and Edward C. Prescott (1977). ‘‘Rules Rather than Discretion: The Inconsistency of Optimal Plans,’’ Journal of Political Economy 85(3): 473–492. 

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. § 11501), motor carrier transportation property (49 U.S.C. § 14502), or air carrier transportation property (49 

U.S.C. § 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. 

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 

15

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. 5For more information see http://www.ingaa.org/Documents/Foundation%20Studies/F-2005-

01%20(Avoiding%20and%20Resolving%20Conflicts).pdf 6 Ibid, p. 1. 

7 Republican Study Committee (2004), ‘‘How Congress should help meet the Nation’s Natural 

gas supply needs,’’ November 16. 

against tax discrimination. The companies may reasonably fear that states will raise 

their taxes, and this uncertainty dampens their motivation to invest today. 

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. 

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 expe- rience 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. 

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. 

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 

16

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 

17

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:]

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PREPARED STATEMENT OF HARLEY T. DUNCAN


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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. 

29

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 regVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
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ulation 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. §§ 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 

31

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 twentyfive 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 naVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
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tional 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——

33

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. 

34

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, numVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
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bers 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. 

36

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. 

37

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 discriminaVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6601 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
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tory 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 reVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6601 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
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sult 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. 

40

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 reVerDate 0ct 09 2002 15:55 Jan 20, 2006 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 G:\WORK\COMM\100605\23815.000 HJUD1 PsN: 23815
41

move 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. 

42

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. 

43

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.] 

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RESPONSE TO POST-HEARING QUESTIONS FROM VERONIQUE DE RUGY, PH.D., RESEARCH SCHOLAR, AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH


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RESPONSE TO POST-HEARING QUESTIONS FROM HARLEY T. DUNCAN, EXECUTIVE

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RESPONSE TO POST-HEARING QUESTIONS FROM LAURENCE E. GARRETT, SENIOR

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