|U.S. Foreign-Trade Zones Board|
PHIBRO ENERGY, INC. V. RONALD H. BROWN,
This remand determination is submitted in accordance with this Court's May 9, 1995 decision in this case, in which the Court ordered that the Foreign-Trade Zones Board ("FTZ Board" or "Board") fully explain the rationale underlying its decision to deny plaintiff's application for subzone status at its Texas City, Texas refinery. Based on the information and analysis below, the FTZ Board reaffirms its determination that the proposed subzone was not in the public interest. This determination is based on evidence findings that the negative effects to the community related to the loss of ad valorem inventory tax revenue, as claimed in the opposition evidence from local public officials, are not outweighed by public benefits.
Summary of Rationale
The rationale for the FTZ Board's denial of the application may be summarized as follows: Consistent with its established practice, the Board's evaluation of the case record included consideration of the views of local public officials. These views were important evidence for the Board in determining whether the granting of foreign trade subzone status at Phibro's Texas City refinery was in the public interest. Local officials expressed overwhelming opposition to Phibro's subzone proposal based on the net negative economic effect subzone status for Phibro would have on their community. In its December 18, 1991 decision memorandum, the Board endorsed the findings of the examiners committee report that there was not sufficient evidence of positive public benefits to overcome the negative effects cited by opponents of the proposal. P.R. 117.
Subzones are single-user zone sites at which FTZ procedures are available only to the site operator. This makes them a private type of zone, differentiated from general-purpose zones which are public in nature and designed to accommodate multiple users. Under its regulations, the FTZ Board reviews proposed zone activity -- whether it is conducted in general-purpose zones or subzones -- to determine if it is in the public interest. The criteria involves consideration of the trade policy implications and net economic effect of the proposed activity.
Applicants for subzones must demonstrate not only how the proposed subzone activity will help them, but also how it will result in a public benefit. That is, subzone applicants are expected to explain the savings they expect from subzone status, how it will help them, and further, how the savings will result in positive economic effects for the local community.
In its review of the Phibro application, the Board considered the entire record, including evidence developed by FTZ Board staff. Neither the evidence presented by the applicants nor the record as a whole provided a public interest basis for granting subzone status.
The discussion below contains background information on the FTZ Board's decision process, its application of the broad "public interest," and how these factors were applied in the Phibro case.
I. Decisionmaking Process of the Foreign-Trade Zones Board
As provided in the FTZ Act, the Foreign-Trade Zones Board is composed of the Secretaries of the Departments of Commerce, Treasury, and the Army, with the Secretary of Commerce acting as the FTZ Board's chairperson. The FTZ Board operates like an interagency committee with members viewing decisions in light of their respective jurisdictional responsibilities and areas of expertise. The Commerce Department takes the lead on economic and industry impact issues. The Department of the Treasury's main responsibilities involve the enforcement of Customs laws and the supervision of zone activity. The Department of the Army is involved through its Corps of Engineers, which advises the FTZ Board on land use and environmental matters when they exist.
Each zone application is evaluated under a process which draws on the expertise of the respective agencies. The review is directed and coordinated by the FTZ Board staff, located at the Department of Commerce and directed by the FTZ Board's Executive Secretary. The review process in effect when the Phibro application was filed has been described as follows:
- The Executive Secretary designates a Commerce examiner (usually from the FTZ Staff) for each case. This person chairs an Examiners Committee that includes a Customs member designated by the Regional Commissioner for the area involved, and the District Army Engineer. The function of this committee is to conduct an investigation of the application.
- Public notice is given in the Federal Register in all cases (applicants are encouraged to issue local press releases and a public comment period of 30-45 days is announced).
- When additional time is requested by interested parties to review the application and record, extensions of 40-60 days for public comment are generally given. This allows opposing parties an opportunity to submit comments and briefs in rebuttal. While the public comment period is usually open no more than 90-120 days after filing, the Commerce examiner continues to review all written material and information he receives as part of his continuing investigation. Should any submission contain new evidence that could affect the outcome of the case, opposition parties would be informed of the evidence or point in issue and given an opportunity to submit further evidence or comment.
- In the course of the investigation, the Commerce examiner consults with Department officials on policy, and with other agencies or Department staffs. These contacts are usually to obtain information, and to request comments or studies to assist in the evaluation of economic and policy issues. For example, in recent years there have been consultations with DOE [Department of Energy] (oil refineries), USDA [Department of Agriculture](food products), DOT [Department of Transportation] (shipyards), and DOD [Department of Defense](strategic materials). Within Commerce the examiner uses ITA's [International Trade Administration] industry specialists as a resource.
Foreign-Trade Zones [FTZ] Program Needs Restructuring, Committee on Government Operations, H. Rep. 363, 101st Cong., 1st Sess. at 8-9 ("Operations Subcommittee Report"). Upon completion of the review, an examiners committee report is prepared with findings and recommendations:
- As the investigation draws to a close, the Commerce Examiner and/or the Executive Secretary discuss precedents and the Department's position on policy questions with the Assistant Secretary [for Import Administration]. The examiners committee report summarizes the application and record, the proposal and its economic impact, policy considerations, and concludes with a non-binding recommendation for the FTZ Board. The comments of the Customs and Army Engineer members are appended, and they receive copies for concurrence.
- The Examiners Committee report and recommendations are circulated by the Executive Secretary with a draft resolution to the staffs of the other FTZ Board members. Meetings and discussions are held as necessary at the staff or policy level. Customs Service headquarters officials conduct a final appraisal and forward papers to the Department of Treasury. Upon receiving the votes of the Treasury and Army Departments, the Executive Secretary prepares final documents, including a memorandum that summarizes the case process, and a FTZ Board Order for a decision by the Commerce Secretary or Assistant Secretary. The FTZ Board Order is published in the Federal Register.
Id. (footnote omitted). After the interagency review is completed, decision documents are prepared for the FTZ Board Chairperson. The decision "package" includes a decision memorandum, a resolution similar to the one adopted by the other FTZ Board members, and a FTZ Board Order. A copy of the examiners report is attached as are copies of the resolutions signed by the Treasury and Army FTZ Board members noting their concurrence with the Examiners Committee report and recommendation. Finally, a Federal Register notice of the FTZ Board Order is published.
As discussed below, this process was followed in the Board's consideration of the Phibro application. The rationale for the Board's decision in this case is contained in the Examiner's Committee report, summarized in the decision memorandum, and adopted by the Board order published in the Federal Register.
II. The "Public Interest" Mandate
In light of the Court's request that the Board "explain whether and in what manner approval of [Phibro's] request for subzone status for the Texas City site would not serve the public interest," Slip Op. at 21, some background on the Board's public interest mandate is appropriate.
The FTZ program has been the subject of executive and legislative scrutiny as the use of zones and subzones for manufacturing has increased since the early 1980s. Two Congressional committees held hearings in the late 1980s. In addition, both the U.S. General Accounting Office (GAO) and the International Trade Commission (ITC) conducted a number of studies on the FTZ program at the request of Congress.
A major concern expressed throughout the hearings and studies regarded the public interest component of the Board's analysis, and the potential adverse domestic effects of Board action. The recommendations made to the FTZ Board call for a careful review that results in granting zone benefits only when there is evidence of a net positive economic effect, there is no trade policy conflict, and no adverse effect on domestic industry. While it was the Board's longstanding practice to evaluate subzone cases using such criteria, including the net economic effect, these recommendations appeared to urge codification of Board practice in this area. We have considered these recommendations important guidance as to how we should evaluate zone activity in terms of the FTZ Act's public interest mandate, and, in fact, the criteria were codified in the 1991 revision to the Board's regulations.
The Board considers a number of factors as necessary criteria for a grant of authority, including the need for zone services, the adequacy of the operational plan and proposed site, and the support of government officials and the local community. As articulated in the Decision Memorandum, "the views of local public officials are important in corroborating whether subzone proposals are in the public interest." P.R. 117 at 1.
These criteria are reflected in the applicable regulations, which required that the applicant demonstrate that "the anticipated commerce, benefits, and returns, both direct and indirect" justify approval of the project. 15 C.F.R. ' 400.400. The 1991 regulations, which largely codified existing practice, were even more explicit:
[The Board will consider] [t]he extent of state and local government support, as indicated by the compatibility of the zone project with the community's master plan or stated goals for economic development and the views of State and local public officials involved in economic development.
15 C.F.R. ' 400.23(a)(3).
The Board's public interest analysis is particularly appropriate when considering an application for subzone status. Subzones are single-user facilities, which are not structured to serve the public. While subzone status would undoubtedly provide a private financial benefit to an operation such as Phibro's Texas City refinery, it is the public effect of such status that must be evaluated.
The FTZ Board has considered subzone status to be a privilege rather than a right and that prospective subzone users have the burden of proof to demonstrate significant public benefits that will result from subzone status. After its 1989 FTZ hearings, the Government Operations Subcommittee suggested that we formalize our position on burden of proof:
The FTZ Board's regulations should provide that an FTZ license is a privilege, not a right. The granting of a zone license, with its associated reduction in tariff revenues, should only be given upon the basis of demonstrated public benefits. The FTZ Board's regulations should be amended to reaffirm that the burden of proof is on the applicant to show why he should be granted the privileges of an FTZ license.
Operations Subcommittee Report at 25. The GAO similarly recommended that [t]he Congress should amend the FTZ Act to provide guidance for decisions on grant applications, particularly those involving manufacturing. Such an amendment should establish that subzone grants, with their potential tariff revenue loss, are a privilege to be based on a demonstrated public benefit. It should also specify factors to be considered, such as the estimated effects of a proposed grant on exports, imports, employment, and investment.
1989 GAO Report at 42.
The FTZ Board took these views into account when we revised our regulations in 1991. The revised regulations codify the stricter standards applicable to subzone operations:
The factors enumerated  with regard to subzones are essentially a codification of current practice. . . Authorization to conduct manufacturing activity in zones is a privilege, not a right, and in addition to viewing technical requirements, the FTZ Board must determine that zone activity is consistent with the public interest. . . In the case of subzones, the application burden is greater. Subzones are single-user facilities, which are not structured to serve the public. It is their activity that has a public effect, and case law has recognized that the FTZ Board has broad discretionary authority to evaluate that effect in terms of the public interest. See Final Rule: Foreign-Trade Zones Board, 56 Fed. Reg. 50790 (October 8, 1991) (citations omitted) (emphasis supplied). As noted, the revised regulations codified past practice with respect to review criteria and procedure. The regulations reflect the FTZ Board's deliberative approach toward subzone authorization in order to comply with the Congressional direction received during the last ten years.
IV. Review of the Phibro Subzone Application
In reviewing the Phibro application, the FTZ Board considered material submitted by the applicant in the application and in later submissions, the concerns expressed by opposition, industry analyses and the advice of other government officials. This record material was evaluated in terms of the public interest standard as discussed above. The following discussion summarizes the key factors considered in the decision to deny Phibro's request for subzone status at the Texas City site.
A. The Examiners Committee Report
In order to conduct an investigation of the Phibro application, the applicable regulations required the designation of an "examiners committee," comprised of representatives of each of the three Board agencies. 15 C.F.R. ' 400.1308 (1990). Commerce was represented by the Board's Executive Secretary, Treasury was represented by a Customs official designated by the Regional Commissioner for the area involved, and the Army Corps of Engineers was represented by the District Army Engineer. P.R. 2.
The committee report set forth its evaluation criteria and summarized the application and the administrative record. P.R. 110. The report discussed at length the ad valorem taxation issue which was the focus of local opposition and ultimately concluded that the Texas City subzone proposal was not in the public interest. Id.
In its discussion of the evaluation criteria, the report summarized the Board's approach to requests for subzone status:
Applicants seeking subzone status must demonstrate that the proposed operations cannot be conducted within a general-purpose zone serving the area, and that the activity is in the public interest, including the fact that the use of zone procedures will result in a public benefit.
Id. at 2. Reflecting longstanding FTZ Board practice with respect to subzone cases, the report noted that the evaluation of the "public interest" includes an assessment of the "net economic effect, taking into account the impact on both the local community and from a national perspective." Id.
As the report pointed out, the Phibro application was unusual in that it lacked the support of local public officials. Id. In every oil refinery case approved to date there had been support from local public officials signifying that the local effects were deemed to be in the public interest. The report explained why support by the local community was particularly important in the case of the Texas City proposal:
When the application involves a plant in a community which raises revenue through ad valorem taxes [AVT] on tangible personal property, including plant inventories . . ., the views of these officials remain significant. The proposal for the Texas City site presents the FTZ Board with its first case where the local public sector opposes the establishment of a subzone because of the effects of the AVT exemption.
This opposition to Phibro's Texas City proposal did not develop until after close of the announced comment period, apparently because local officials were not made aware of Phibro's application. Galveston County and Texas City public officials subsequently contacted the Board to register opposition to the Texas City proposal and members of the Texas congressional delegation also indicated their concern. Id. at 4. Even the applicant, the Port of Houston Authority, acknowledged the seriousness of local opposition.
The report reflects a thorough inquiry into the application, which considered both the opposition to the Texas City proposal by local officials and the claims by Phibro that approval of the proposal was in the public interest. As the report notes, opposition to the proposal was based on the detrimental effect which local officials argue would occur due to the loss of AVT revenue. [Phibro] paid over $600,000 in such taxes in 1989 (the estimated current loss is $945,000; [Phibro] estimated $1.2 million in the application). Other companies are expected to follow suit if [Phibro] is approved. Local officials contend that the loss of tax revenue would adversely affect public services and educational expenditures. (It is claimed that 15 percent of school district, 10 percent of City, and 5 percent of County revenue could be affected.)
Id. at 5. Local officials concluded that the negative effect of approval outweighed any potential positive effects. Id. at 9.
For its part, Phibro asserted that subzone status was needed to ensure its "international and domestic competitiveness, and to help the company achieve its operating cost reduction goals." Id. According to Phibro, the FTZ Act itself precluded the AVT exemption from being considered in the Board's public interest evaluation. Id.
The examiners report acknowledged the legal basis for the AVT exemption and the importance of this issue for certain Gulf Coast refineries:
The AVT exemption has a federal Constitutional basis (commerce clause) that has been recognized as a matter of interpretation by most jurisdictions from the outset of the FTZ Act. It was made an explicit part of the FTZ Act by amendment in 1984 (19 U.S.C. 810(e); Pub L. 98-572, Title II, sec. 231(b)(1), 98 Stat 2991)(1984 amendment) through the efforts of Texas zone interests who were faced with a state constitutional barrier to the exemption. The 1984 amendment expressly provides for the exemption from State and local ad valorem taxation for tangible personal property imported from outside the United States and held in a zone, and for tangible personal property produced in the United States and held in a zone for exportation. This benefit has been a major reason for oil refinery subzone proposals in Texas and Louisiana, these being among the few states that impose this type of tax.
Id. at 7. The report noted that "applicants in these cases usually consult with local tax authorities before applications are filed." Id.
The examiners report gave appropriate weight to the overwhelming opposition expressed by Galveston County and Texas City public officials. Id. at 8. As the examiners reported, [t]he opposition contends that the proposal is not in the public interest because the negative effects of lost local tax revenue are not considered to be offset by public benefits. It notes that the plant would likely remain at its current level of operation with or without subzone status. Viewing the case through a prism that reflects the opposition, it appears there is a serious barrier to approval of this site.
The record reflects strong local public sector opposition, instead of the evidence of underlying public support the Board looks for in subzone cases. [The Port of Houston Authority] did not become directly involved in consultations with local officials in this site because it is in another county. As more was learned about the local tax effect of subzone status through discussions with [Phibro], the local opposition emerged. By April 1991, the record showed unequivocal opposition from Galveston County, Texas City and County school district officials (local officials). They did not find the projected public benefits great enough to warrant their endorsement of the proposal. They saw no significant public benefits resulting from approval because [Phibro] appears to be operating profitably with no threat to local employment. There were further meetings with [Phibro], but the local opposition only intensified.
Id. at 9.
The report reflects consideration as to whether there were, in fact, significant public benefits (such as retention of employment that might otherwise be lost) which would offset the negative effects articulated by local officials. Id. However, Phibro itself indicated that zone procedures were not critical to continued operations at its Texas City plant, and no evidence was found to suggest otherwise.
Based on the record evidence, the report concludes that there was a solid basis for the opposition to Phibro's Texas City proposal:
Other Galveston County companies have indicated their intention of seeking subzone status if [Phibro] gets it, and local officials are concerned about setting a precedent for supporting tax relief absent compelling circumstances. They appear to oppose the subzone approach to local tax abatement because they view a local decision process as essential to ensure equitable treatment and justification. [Phibro], on the other hand, contends that the Board should not consider loss of local tax revenue as a public interest factor, arguing that the 1984 amendment preempts on this point.
Id. at 9-10. Thus, according to the evidence reviewed by the examiners, local officials fully considered the ramifications of the subzone proposal and had weighed the proposed tax exemption against other methods of tax abatement.
The report also suggested that the local opposition expressed in this case stemmed from that community's disproportionate reliance on inventory tax revenue:
Galveston County, thus, appears to be at a variance with other Texas communities that have supported the use of subzones as a means of granting relief from AV taxes. It appears that the Galveston view is affected by the County's greater reliance on inventory taxes, as well as the limits of its taxable base. Local tax revenue has become critical to Texas communities in recent years to finance education and public services. The opposition is concerned that if this subzone is approved, others would follow. The effect is both in terms of the taxes from which [Phibro] would be exempt, and the ripple effect that would result from other similar applications from plants within the county. The County views itself as faced with a decision as to whether it should commit itself to a policy that would require its support of other similar proposals.
As the report notes, this case presented the Board with a unique question: to what extent may the FTZ Board consider local public sector opposition based on local tax consequences as a factor in its public interest evaluation? The report concluded that such evidence is relevant and subject to full consideration by the Board. This is not to say that the loss of local tax revenue is a basis for disapproval per se. The tax issue should be evaluated in the overall context of the public interest aspects of the proposal. Although the view of local officials is just one factor, it is a critical one.
Id. at 10.
Given the relevance of the tax issue to the Board's public interest analysis, the report provided the Board with a detailed discussion of the AVT exemption:
The AVT exemption is one that has by interpretation been granted from the outset of the zone program by most states and communities on federal constitutional grounds (commerce clause -- goods in zones are still in international commerce). Interest in an amendment to the FTZ Act to codify this interpretation came from Texas zones that were denied the exemption by local tax authorities who contended it was barred by the Texas Constitution.
The amendment was intended to affirm the exemption as a matter of federal law. The legislative reports note that the purpose for the provision was to have a uniform rule apply to zones regardless of their situs (Senate Report 98-308, 11/10/83; House Report 98-267, 6/24/83). The parties interested in the provision were local public sector officials who wanted to use subzones as a means of local tax relief.
Id. (emphasis in original).
The report recounted attempts by Commerce officials to confirm the purpose behind the legislation:
In checking on the legislative history, phone calls were made by Commerce officials in September 1991 to Congressional trade committee staffers familiar with the legislation and its background. They indicated that the provision was meant to codify preemption on the tax question without affecting the application process in a way that would preclude the consideration of views of local authorities on tax issues of this nature.
Based on this background, the report concluded that [t]he effect of the amendment is, therefore, to codify the fact that no state law can be cited as denying the AVT exemption to a legitimate zone or subzone user. That is the extent of its preemptive effect. To argue that the amendment was intended to exclude local officials from the process of deciding whether a zone or subzone (that makes possible the local tax exemption) should be approved in the first place has far-reaching implications. To deny them the opportunity to take a position based on local tax consequences would deprive these officials of a say on matters directly affecting their ability to provide public services and education. Such a drastic measure would require clear and unequivocal statutory language to that affect, something the provision does not do.
Id. at 10-11.
The report then reiterated why the views of these local officials were critical to its analysis:
As a matter of Board practice, the views of local officials have always been considered of primary significance in reviewing zone economic impact. Local public support is normally the starting point for a zone project. The views of local officials on tax consequences were considered before the 1984 amendment was adopted, and that practice has continued since then.
Id. at 11. The report noted that no subzone case has ever been approved with local opposition on record such as in Phibro's case.
The report concluded by balancing the negative effects expressed by local officials with any positive public benefits that might accrue from zone status. This public interest review allows for a balancing of the positive effects of granting subzone status against the effects of the AVT exemption. In determining whether proposed zone activity is in the public interest, the Board has broad discretion pursuant to 19 U.S.C. 81c, 81g, and 81o(c) (See, Armco Steel Corporation v. Stans, 431 F. 2d 779, 785 (2nd Cir. 1970).
As the report explained, the advantages to the company involved must translate into a public benefit. Accordingly, the report concluded that [Phibro] essentially relies on the rationale that has been accepted for oil refineries generally. It has not documented any specific problem relating to foreign competition. The Texas City plant is currently operating profitably with no serious threat of cutbacks.
Past approvals based on the general rationale have involved case records that included supportive testimonial evidence of local public officials. This type of evidence is important in corroborating positive effects that are difficult to quantify and are not easily demonstrable. It is the absence of such evidence that has seriously weakened this proposal. Not only is the corroborative evidence missing, but worse, parties who normally submit such evidence are here strongly opposed to the proposal because of their view that it is not in the public interest.
Local public officials appear to have given full consideration to the arguments made by [Phibro] in a deliberative way. There is no indication of disagreement among these officials. Their position is essentially unanimous. Because of the judgmental factors involved in an assessment of this nature, the testimony of these officials carries heavy weight in balancing the kinds of factors that are involved in this case.
In the final analysis, the array of opposition evidence outweighs the projected public benefits. There is no national impact argument to buttress [Phibro]'s position or provide a basis to broaden the scope of the review. In the balance, there is no substantial evidence of positive effects to overcome the negative impact claimed by the opposition. Thus, the evidence appears to call for a denial of the application for the Texas City site.
This conclusion does not imply that Phibro had no basis for its proposal. It made plausible points that warranted and were given consideration. On the other hand, there is no evidence that local officials have been arbitrary or disinterested in considering the overall merits of [Phibro]'s proposal. Should the views of local officials change, the matter can be reconsidered.
Id. at 11-12. On the basis of this conclusion, the examiners committee recommended that the Board deny subzone status for Phibro's Texas City refinery.
B. The FTZ Board Decision Memorandum
Id. Based on these findings, the Board concluded that "the evidence appears to call for a denial of the application for the Texas City site." Id. These findings and conclusions were the basis for the Board's Resolution and Board Order which stated that approval of the Texas City proposal "would not be in the public interest."
Adopted and signed in Washington, DC, this _____ day of __________ 1995.
Susan G. Esserman
V. ConclusionBased on the discussion of the record evidence as summarized above, we conclude that approval of Phibro's subzone application for its Texas City, Texas facility would not be in the public interest. Thus, we reaffirm the FTZ Board decision in this case.
Adopted and signed in Washington, DC, this _____ day of __________ 1995.
Susan G. Esserman
Concur: John P. Simpson
Adopted and signed in Washington, DC, this _____ day of __________ 1995.
Susan G. Esserman
Concur: Kyle E. Schilling