The Pipelines Behind The Epic Paul Ryan-Koch Industries Feud

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WASHINGTON ― Koch Industries, one of the nation’s largest importers, is waging a campaign in Washington against a major new importation levy ― but it is doing so only on principle, the company says.

Either way, the battle puts the Kochs, who have given billions to conservative causes, at odds with House Speaker Paul Ryan (R-Wis.). The irony of the fight is heightened by just how close they have been in the past. It was the Kochs who pushed hardest for Ryan to be Mitt Romney’s running mate in 2012, and last year, Charles Koch was still hoping Ryan would emerge as a surprise presidential nominee even on the eve of the Republican National Convention.

The cornerstone of Ryan’s agenda is a reform of the tax code that would eliminate the current corporate tax regime and replace it with a “territorial” system that would tax imports at around 20 to 25 percent while allowing exports to flow freely. The aim is to give an advantage to U.S. manufacturers and to cut corporate taxes.

More than a hundred other countries have moved to similar systems, but it faces stiff opposition in the Senate — and from America’s big importers: Walmart, Target, Home Depot and Koch Industries.

Koch Industries, which is not thought of in the public imagination as an importer, makes the list largely for its importation of tar sands oil. In 2015, the last full year for which the Department of Energy has records, the company’s Pine Bend refinery in Minnesota imported just under 80 million barrels of tar sands oil from Canada, accounting for a quarter of all the oil imported from up north. Even though the price of tar sands oil has fallen to as low as $8 a barrel, while global crude prices are about $55 a barrel, the Kochs would end up with $640 million in imports. A 20 percent tax on $640 million in oil would cost the Kochs $128 million each year.

To put the Kochs’ importation business in context, Dole Food is considered by the Journal of Commerce to be the fourth-largest importer in the U.S. But the business press often leaves the Kochs out of such conversations. Last year, Dole pulled in $4.5 billion in revenue. Subtract from that profit and the cost of importing and distributing its fruit and other products, and you’re left with the value of the imported goods themselves — likely less than the Kochs’ $640 million in imported oil.

Koch Industries doesn’t tout Pine Bend publicly as part of its empire, but the importance to its business is hard to overstate. “This was always referred to as the crown jewel of Koch,” said one former Koch insider. “The deal that made Pine Bend refinery a part of Koch Industries was a seminal moment in the history of the company. Without Pine Bend, we probably never would have heard of Charles and David Koch, and they certainly wouldn’t be spending in elections the way they are without it.”

Acquiring Pine Bend in 1969 was “one of the most significant events in the evolution of our company,” Charles Koch wrote in his 2007 book, “The Science of Success.” It allowed the Kochs “to enter chemicals and, more recently, fibers and polymers.” The development of western Canada’s tar sands extraction industry, and the resulting pipeline boom that has become a political flashpoint at the border and on tribal lands, would have happened far differently were it not for the Koch brothers.

“Without Pine Bend, Koch Industries as you know it today does not exist. It allowed them to invest in buying and growing companies like Georgia Pacific, Molex, Invista and Koch Fertilizer,” said the Koch insider.

The volume of imports puts Koch opposition to Ryan’s importation levy into an entirely different perspective. Earlier this month, HuffPost asked Koch Industries if its opposition to the border tax would be softened by exempting oil imports. Philip Ellender, president of government and public affairs at Koch Companies Public Sector, said that if oil was carved out of the border tax, “Koch would benefit,” but they’d still oppose it on principle.

“If there is in fact a carve-out for oil ― or any industry ― we will not support it,” Ellender said. “While Koch would benefit, we are opposed to taxing consumers in order to cut our company’s taxes. We agree with Speaker Ryan on the need for comprehensive tax reform, but we do not support a border adjustment tax and his plan as currently proposed.”

But in December, when the Kochs initially announced opposition to the border tax, the messaging was a bit different, putting the focus on the manufacturing the Kochs do. “While companies like Koch who manufacture and produce many products domestically would greatly benefit in the short-term, the long-term consequences to the economy and the American consumer could be devastating,” Ellender said at the time.

David Dziok, a spokesman for Koch Industries, said this week that ultimately the Kochs would benefit from a border tax, because the tax on their imports would be passed on to consumers. “A BAT will force Americans to pay higher prices for the goods they use every single day ― from clothing to gas to groceries,” he said. “Koch Industries agrees on the need for comprehensive tax reform, but we are opposed to taxing consumers in order to cut our company’s taxes.”

But even if the company can pass on the entire increase to its consumers ― not always possible ― raising the price of gas tends to mean people will buy less gas. As fuel prices rose a decade ago, sales of gas-guzzling SUVs fell. With gas prices dropping, sales of bigger cars are on the rise. Whether the drop in demand would wash out the rise in price is impossible to predict, but a Goldman Sachs analysis of the House Republican plan predicted a 30-cent-a-gallon hike in gas prices in the short term but noted it would “likely moderate over time” as U.S. production rose and the dollar strengthened, which would drive down the price of foreign oil.

The confusion over such a basic question as whether the company would be hurt or helped, or whether its tax bill would go up or down, flows from the Kochs’ longtime insistence that their libertarian politics and their corporate self-interest are entirely unrelated. There’s glory in fighting for freedom but not in lobbying for corporate profit. People outside Washington may find it head-scratching, but maintaining this public distinction is deeply important to the Kochs, said three people who’ve worked with the company. Koch Industries and its representatives routinely refer to the brothers’ opposition to ethanol subsidies, for instance — even though they are one of the largest producers of ethanol — as evidence of the purity of their libertarian values. So lobbying that it does on public policy must be divorced from the corporate bottom line.

That lobbying is kicking into high gear, said the former Koch insider. “They’re marshaling their resources and going back to their old playbook, which means unleashing [Americans for Prosperity] and leaning on academics they have ‘sponsored,’” said the former Koch insider.