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Fallout from the BP Oil Spill: Will It Be a Revenue Windfall for Local Government?

Posted on September 11, 2014


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Graham Sheridan went to undergraduate school at Washington and Lee University in Lexington, VA and received a  Master’s in Public Affairs program at Brown.

Fallout from the BP Oil Spill:

Will It Be a Revenue Windfall for Local Government?

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By: Graham Sheridan – LinkedIn and Twitter

Last week, a judge in Louisiana dramatically increased BP’s potential liability for the Deepwater Horizon oil spill, calling the firm “grossly negligent.”  As states and local governments prepare their cases it is worth looking at what they may potentially spend their money on.

As CNN Money reports, under the Clean Water Act, the firm could pay the US government up to $4,300 per barrel that went into the Gulf – amounting to around $18 billion in penalties. This is in addition to the cleanup costs and the $4 billion settlement with the US Department of Justice for the deaths of the 11 workers.  In this case, the judge apportioned 67% of the blame to BP, 30% to Transocean, and 35 to Halliburton.  Then the states, localities, and individuals will go after their shares.  One thing that will inevitably be on the juror’s minds is: what will all these gulf coast cities, towns and states do with the money?  To examine that, we should look at another settlement that began on the gulf coast: the tobacco master settlement.

Does History Hold the Answer?

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When the four big tobacco companies settled with states in 1998, it was a major windfall for the states: $206 billion over 25 years for health promotion, anti-smoking programs, public health, and other priorities.  Last year, NPR did an investigation into what the states had done with the money, 15 years later.  NPR interviewed many people, including Mike Moore, the Mississippi Attorney General who was involved in the first lawsuit, to find out.

First, I was surprised that some states securitized their revenue stream and sold it to get a lump sum payment, rather than get some money every year for 25 years.  Some states cut taxes, saying they could keep the budget the same by just throwing the money into the general fund and taxing the citizens less.  Moore was sad to say that in his state, Mississippi, there “should be” $2.5 billion in a trust fund still, but it is close to empty now.  As different governors and legislators came and went, they simply used the money for different prerogatives.    Some involved in the case said to NPR that early on, there was more urgency to spend the money on public health issues, but, as time passed, that faded.

Now, very few places still tie the money to tobacco.  According to the Campaign for Tobacco Free Kids, in FY 2014, states and localities will bring in $25 billion in settlement money and tobacco taxes, and spend around 2% of it on tobacco cessation programs.  As an illustration, my new home state of South Carolina will take in $221.7 million in tobacco money in FY 2014, and spend $5 million on smoking-related initiatives.

The BP money could be used many different ways to stay somewhat related to its source.  States and localities could say they will use it to lessen fossil fuel dependence, so as to reduce the need for offshore drilling in the future. Or they could use it to protect the environment, or help fishermen.

Does Local Government Have a Case?

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So, as Alabama, Louisiana, Florida, and Mississippi gear up their cases against BP, should they be saying they will commit any winnings to the Gulf Coast? To the environment in general? Would that help their case?

Additionally, should the federal government be required to put their $18 billion they just won towards something related to the oil spill, or does it just get put into the general fund? What do you think?

Sources:

Campaign for Tobacco-Free Kids map of spending

NPR “15 Years Later Where Did All the Cigarette Money Go?”

Forbes on the BP Lawsuit

NYTimes on the BP Lawsuit

Supplemental Reading

1998 Tobacco Settlement: Decade of Broken Promises

BP Is Found Grossly Negligent in Deepwater Horizon Disaster

It’s Not a Mall World After All by Graham Sheridan

Vertical Integration Laws: Are They Still Needed?

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