Enbridge prevails in Minnesota Tax Court, counties brace for fiscal hit

Minnesota counties that host Enbridge's oil pipelines say they are again looking at a budget-busting debacle after two recent tax court rulings in favor of the Canadian company.

Enbridge's appeals of its state tax valuations have been bouncing through Minnesota courts for years. The Minnesota Tax Court's latest opinions are the most financially damaging yet to the 13 counties.

"This is the worst-case scenario — it is the tsunami," said Matt Hilgart, government relations director for the Association of Minnesota Counties.

For two small counties, Red Lake and Clearwater, refunds due to Enbridge could eclipse their annual tax levies. For larger counties, refunds — "in the best-case scenario" — could still lead to tax increases, service cuts or depleted reserves, Hilgart said.

Local governments and school districts would be hurt, too, since they receive portions of tax collections from counties.

While counties are liable for refunds, the valuations that Enbridge has successfully challenged were made by the Minnesota Department of Revenue. Department officials declined to comment.

"It all boils down to the issue that the counties did not make this error, but now we have to pay for it, and I just don't know where we will get the money to do it," said Bob Schmitz, Red Lake County Auditor. "You can only get so much milk out of a cow."

The Tax Court ruled this month that the Revenue Department consistently overvalued the pipelines from 2012 through 2016. "We are talking about multibillions of dollars of differences in valuation disparities," Hilgart said.

The counties "are between a rock and a hard place. If Enbridge wins this," Hilgart added, "the money will have to come from the communities that largely supported the new Enbridge pipeline."

He was referring to the $3 billion-plus pipeline that Enbridge began building in December after a six-year battle before Minnesota regulators. It will replace the corroding Line 3, one of six Enbridge pipelines across northern Minnesota.

"We have been very supportive of Enbridge," Schmitz said. "I just hope Enbridge is willing to work out a repayment plan."

In a statement, Enbridge said it "is committed to working with counties to ensure undue hardship does not result from these proceedings," reiterating a pledge it made in 2018 after an earlier favorable Tax Court decision.

However, Hilgart and some county auditors say they haven't heard any details from Enbridge about how the company would help.

"There has never been an Enbridge payment plan proposed," said Kyle Holmes, Carlton County Assessor. "I don't want to blame Enbridge, but it's just fluff so far."

"I even asked them in a public forum," he added, "will you wave the interest?" The answer was something like 'we'll run it up the flagpole.'" By state law, the tax refunds carry 4% interest.

Enbridge said "the tax disputes have been in litigation for years, and until we know the outcome of the decisions it is premature to talk specifics." (The recent tax court orders can be appealed). Enbridge also said new Line 3 will generate $35 million in new property tax revenue annually.

Unlike most property, pipelines — along with utilities and railroads — are assessed by the state, though the bulk of the tax proceeds flow to counties and local governments. Enbridge has claimed that due to six years of over-taxation it's owed $55 million in refunds.

In May 2018, the Minnesota Tax Court ruled that the Revenue Department overvalued Enbridge's pipeline system by $2.2 billion in 2014, or 40%; and by $880 million, or 21% and $156 million or 8% respectively in 2013 and 2012.

The Revenue Department appealed that decision to the Minnesota Supreme Court, saying the Tax Court had not properly considered a key state administrative rule. The high court agreed, so the Tax Court went at it again.

In November 2019, the Tax Court raised its valuation of Enbridge's pipelines, though not to levels set by the Revenue Department. That ruling said the Revenue Department had still overvalued the pipelines by 16% for 2014; 8% for 2013; and 5% for 2012.

In June 2019, the Tax Court also ruled on Enbridge's appeals for 2015 and 2016, saying the pipelines' valuations should be increased by 5% and 3% respectively. In other words, Enbridge would owe more taxes for 2015 and 2016.

But Enbridge appealed those 2019 rulings to the state Supreme Court, saying that the Tax Court's new methodology was flawed. The Supreme Court agreed and again remanded the case to the Tax Court.

In a March 9 ruling, the Tax Court concluded that the Revenue Department had overvalued the pipelines by 38% and 21% in 2014 and 2013 respectively, close to its original May 2018 calculations, but well below its November 2019 appraisal.

Worse, from the counties' perspective, the Tax Court ruled that the pipelines were overvalued by nearly 15% in 2012, up from 8% in its original 2018 decision.

The older the refund, the bigger the burden for counties due to interest payments. "If you add in the interest factor, that makes it lot worse," said Red Lake County's Schmitz.

In an opinion last week, the Tax Court also flipped its position on 2015 and 2016, ruling that the Revenue Department overvalued the pipelines. So, counties must now pay Enbridge refunds for those years, too.

In a statement, Enbridge said the decisions "recognize that the Tax Court and the Department of Revenue must rely on the evidence, and not a formula" in valuing its pipelines.

The counties have asked the Revenue Department if it will appeal the most recent Tax Court decisions. "We are waiting for what the Revenue Department has to say," said Allen Paulson, Clearwater County's auditor.

Nearly 60% of Clearwater County's tax base comes from utilities, with Enbridge — which has a terminal there — comprising most of that.

Clearwater County has limited options, Paulsen said. "We can't levy to get of this mess. We don't have large reserves either."

Mike Hughlett • 612-673-7003