Life, Death and Taxes: A look at Chevron’s tax appeal in Richmond and how refineries are valued

The maze of pipes and oil storage tanks at Chevron’s Richmond refinery stretch and wind across 2,900 acres of bayside land. At night, the facility gives off a gentle glow as plumes of steam puff into the skies. The refinery overlooking the city may appear to be serene, but the debate about the refinery, and its annual taxes, are anything but.

Chevron constructed the complex more than 100 years ago, and since then the corporation has become a nearly essential part of the community. Chevron donated $3.4 million to local programs in 2011 and is the largest employer in the city (although just over six percent of their employees are Richmond residents). A Richmond middle school student was even featured in one of their recent commercials promoting science education.

The refinery is also Richmond’s greatest source of tax money, and now Chevron is contesting its taxes for the seventh year in a row. On April 2, the County’s Assessment Appeals Board will decide whether Contra Costa owes Chevron a refund for its 2007-2009 property taxes.

What’s more, cities and counties around the country, and even within the state, are also struggling through their own taxation issues with Chevron.

Down the California coast in El Segundo, a city in Los Angeles County with about 17,000 residents, a similar battle is unfolding. The city perhaps relies on Chevron even more than Richmond—it even gets its name, which means “the second one,” from the town’s refinery being Chevron’s second in the state. Much of the El Segundo City Council agrees that Chevron should pay $10 million more per year in taxes, raising the company’s taxation rates three times what it currently pays. But some residents are loyal to Chevron and think the tax hike is unfair.

In Richmond and in El Segundo, the conflict over taxes is part of a larger debate: Financially, what should an industrial giant owe the communities where it lives?

To answer that question, you first need to figure out the refinery’s actual worth, which isn’t simple or even apolitical. There are three ways to assess a property’s taxable value. First is the approach where foreseeable costs – called the “discount,” in economic parlance – are subtracted from the potential gross income. In the case of a refinery, this is the expected amount of money the refinery will generate. The second approach determines the taxable value by looking at how much similar properties have sold for recently. The third takes into account the cost of building the property from the ground up.

Calculating the taxable value for oil refineries is a bit trickier than, say, calculating the value of an apartment building or a home. The fluctuation in the value of oil heavily determines the value of a refinery, as does the strength of the market, and these factors are difficult to predict in an unstable economy. So tax assessors will often use all three methods, giving more weight to the most appropriate, and then average the results to come up with a value.

Until 2004, Contra Costa County Assessor Gus Kramer met with Chevron representatives every year to try and come up with a tax assessment number everyone could agree on. When differences came up – as they did, Kramer said, over things like the value of improvements to the refinery – the two sides would meet and talk it over.

After 2004, the meetings fell apart. The reasons for this are vague. Chevron blames the assessor’s office while Kramer said he still met with Chevron but that the meetings were unproductive. Either way, the result was a newly contentious relationship that would bring the refinery’s commitment to its community into public debate.

In 2005, Kramer raised Chevron’s assessment from $1.9 billion to $3.5 billion, increasing the amount Chevron paid in property taxes to Contra Costa County by more than $20 million. Kramer said that value is accurate and was based on a combination of all three assessment approaches. In a previous interview with Richmond Confidential, Kramer said the refinery made upgrades between 2002 and 2006 and took in record profits, increasing the value of the property.

Kramer said he does not personally benefit from raising or lowering anyone’s taxes. “There’s no incentive for me to come up with a bogus number,” he said of his process. “It’s as honest as the day is long.”

Chevron disagrees. Chevron representative Dean O’Hair wrote in an email dated December 2011 to a Richmond Confidential reporter that “Chevron feels that the county’s assessment was not legally correct and as such the company has appealed.”

A Chevron tax representative based out of Texas said in hearings that Chevron based its most recent Richmond refinery property value estimate of $600 million —  $2 billion less than the county’s estimate — on an attorney’s opinion. Kramer said this statement implied that the corporation did not rely on mathematical algorithms or expert appraisal values.

“For them to come out and admit in a hearing that their number didn’t come from an appraisal, it didn’t come from an engineer, it didn’t come from a mathematician…it came from a friggin’ attorney? Please,” Kramer said. “I mean it speaks volumes about their approach to these appeals in their properties.”

When asked by email in December why Chevron would leave a decision like this up to lawyers, O’Hair wrote that several respected experts testified on behalf of Chevron. “In doing so, Chevron has presented [a] thorough analysis that uses sound formulas and calculations, to support the company’s valuation contention,” he wrote. “Conversely, we feel that the county’s short, four to five page appraisal reports are inadequate and do not support their value determinations.”

O’Hair added that Chevron operates a number of other large refineries and “there is no equivalent tax assessment matter pending anywhere in the U.S.”

While Chevron isn’t appealing its property tax assessment in El Segundo, it is fighting to prevent the city council from raising its tax rates, and the city has a history of going along with the corporation’s wants. The Los Angeles Times recently reported that records from the 1990s demonstrate that El Segundo officials disregarded a preliminary audit showing Chevron owed up to $9.5 million in back utility taxes. What’s more, the Times reported, city leaders capped Chevron’s gas taxes at $150,000 per year, far less than what auditors speculate Chevron should pay.

Chevron representatives told Richmond Confidential reporters that the main goal of the appeal is to establish a fair and consistent refinery valuation for future years. If the appeal board sides with Richmond, Contra Costa County might be required to refund up to $73 million. While this appeal represents about 0.26 percent of Chevron’s profits in 2011, the refund would have serious impacts on Contra Costa County.

Chevron has appealed its taxes each year for the past seven years, but appeals are taken into consideration in three-year increments. Last July, the appeals board awarded Chevron $18 million for 2004-2006. About $400,000 came out of the Richmond city budget. If Chevron is awarded its current appeal for 2007-2009, County Supervisor John Gioia told Richmond Confidential reporters that “the consequences of the appeal would dramatically affect the ability to provide services in [the] county and Richmond.” The city’s share of the maximum appeal could total over $9 million. The tax refund would mean cuts to the library, school, fire and police services, among other departments.

And for the city, that’s not the worst-case scenario. Twenty-two Contra Costa cities and fire, park, and sewer districts are challenging the county’s refund-distribution formula in court, claiming they should not have to pay a significant amount of the refund when Richmond is the main benefactor of the property tax. If these cities and Chevron win in their respective cases, Richmond could owe Chevron more than $100 million.

Marilyn Langlois, an aide to Mayor Gayle McLaughlin, said Richmond giving any amount of money to Chevron, be the cost big or small, would heavily affect the city. “It just seems very unnecessary to me because Chevron is such a successful and profitable corporation,” she said. “I see no basis for them making all this effort to try and get more money back from the city of Richmond, which is really struggling on a very tight budget to meet some pretty essential and important needs of our residents who are also struggling.”

Langlois said some residents worry that the refinery will relocate if the city does not cater to Chevron’s requests, but that Chevron’s location enables tankers to travel under the Golden Gate Bridge and directly to the refinery and is prime real estate. “And they’ve used that real estate over the last century as a part of their high profitability,” she added. “It’s just a piece of their global operation, but it’s an important one.”

Chevron may donate millions to local programs each year, but Langlois argues that, if they really want to help Richmond, the company should drop the appeal. “If they want to give, that’s fine, no problem. But don’t take away at the same time,” she said.

If the courts rule in Chevron’s favor, there’s a chance that Chevron will accept the change in its yearly tax rates but decide to forgive the refund. Chevron representatives were contacted on March 15 to comment on this possibility and other issues but, as of March 28, Richmond Confidential has not received a response.

Richmond Confidential reporters Rachel Waldholz and Alexis Kenyon contributed to this story.