BP oil spill: Claims can't make up losses for many Gulf residents

The BP oil spill has cost the company almost $150 million and counting in compensation for damages to Gulf Coast workers and businesses. But replacing millions in undocumented income from the tourist-driven Gulf economy may prove impossible.

The US government has no idea how much money Sam Smith, a bartender in Orange Beach, Ala., socks away during the 100 days of summer that define the Gulf Coast high season. Let’s just say it’s a fair amount.

But not this year. The BP oil spill has seen to that, as the usual stream of tourists has become a trickle. Likewise for Mr. Smith’s hours on the job and tips from customers.

BP has promised to make “whole” those whose livelihoods are curtailed because of the gargantuan spill. But now the claims process is being taken over by Kenneth Feinberg, the Obama-appointed manager of BP’s $20 billion escrow account aimed at settling damages from the Gulf oil spill, and Smith suspects that his inability to document his prior years’ earnings means his bid to recoup what’s likely to be a catastrophic loss of wages will probably be denied.

“I might not get fully compensated, but at least I’d get a check from BP,” says the father of a 10-month-old girl, who asked that his last name be changed for this story. “With the government involved, my chances of recovering what I might have made are going to be just about nil.”

Here on the bucolic Gulf – pink sunsets, sand between toes – cash-in-pocket defines the rhythms of life and commerce for Smith and many of the nearly 400,000 yearly and seasonal tourism workers, as well as tens of thousands of fishermen and dockworkers.

At least $1.4 billion of income is likely kept off the books every year along this stretch of Texas, Louisiana, Mississippi, Alabama, and Florida – a system that’s prevailed for generations on well-worn docks and restaurant patios, far from the eyes of IRS agents.

With tourism business down by 80 percent along much of the oil-tainted coast, those least able to handle a crimp in wages are likely to be hit hard under any new Gulf Coast-Feinberg Fund guidelines. The reality is that BP’s compensation promise, with a federal administrator in charge, may fall short for the denizens of the Gulf Coast’s vast underground economy.

“The bottom line is we need to be worrying about today and tomorrow,” says Jimmie Fry of the nonprofit Legal Services Alabama, which represents low-income residents. “Let’s don’t take bread out of these people’s mouths so we can cross t’s at the IRS.”

The underground economy on the Gulf is largely unquantifiable, never captured on the IRS’s 1099 forms.

But there are educated guesses about its size. It is generally thought to make up about 10 percent of gross domestic product (GDP). The Gulf region’s tourism and fishing economy is worth $14 billion, meaning about $1.4 billion churns under the table. (The underground economy nationwide has grown to about $600 billion over the past decade, and the recession has accelerated that growth – all at a time when the government is gasping for tax revenue.)

The figure is probably bigger. The percentage of cash income going untaxed in tourist areas tends to be higher than 10 percent, says Adam Sacks, managing director of Tourism Economics, a consulting firm in Wayne, Pa.

Making matters worse, “Those people make 70 percent of their yearly income within those three months,” Mr. Sacks says. “It’s a highly seasonal income curve that’s being hit at a particularly bad time.”

Claims BP has paid so far have been smaller emergency “cover” checks, in which income documentation has received only passing scrutiny by the nearly 800 claims adjusters working in 32 BP claims offices across the region. But that’s about to change. The bulk of the payments are yet to come, specifically those aimed at compensating businesses, fishing captains, and seasonal workers for what may be an entire season lost to the swirling masses of crude oil billowing out of the blown-out Macondo well 50 miles off Louisiana.

A best-case scenario from Moody’s Investors Service indicates that the five-state Gulf region will lose $1.15 billion of its GDP this year from the oil spill. At least $115 million of those losses come from tax-evading workers.

As of July 5, BP had paid 85,060 claims equaling $147.2 million. Mr. Feinberg has said he’s committed to revamping the red-tape-tangled process and paying out claims faster. He has talked about the possibility of making payments for a six-month lump sum, with a final negotiated settlement per claim paid out when the spill is finally corralled. But documentation of income will have to be part of each claim.

“There’s nothing wrong with getting paid in cash,” Feinberg told Reuters June 29. But “when you say ‘under the table,’ that sounds to me like a violation of the federal tax laws, and I cannot be distributing money in violation of federal law.”

Joe Stapo, who runs a gift store in Orange Beach, Ala., says people living off undocumented cash have only themselves to blame for their plight. “They should have thought about something like this happening,” he says, “when they were pocketing all that cash.”

Yet given the scope of the oil spill damages and the potential impact on the Gulf’s working class, the idea of a tax amnesty for underground workers is building. Congress would have to approve such a change, but it’s not clear if there’s political support for it.

One proponent of a tax amnesty for affected Gulf Coast workers is Craig Taffaro, president of St. Bernard Parish in Louisiana, who told National Public Radio that it could both help workers recover from the spill and get many cash-dependent workers on the books once and for all.

“You get in the game – you get financially compensated for your losses,” Mr. Taffaro says. “But now you’re in the system, and now you’re going to have to live by all the tax codes that everyone else lives by.”

So far, BP says, it has not received claims for undocumented income, but that’s likely to change as the ruined summer season wears on and stashes of under-the-mattress cash dwindle.

If turned away by Feinberg, legions of Gulf workers will probably seek state and federal welfare benefits, says Mr. Fry, the legal services director. That puts the onus on states to make claims on the behalf of distressed workers, so that taxpayers aren’t left holding the bill.

Smith, the Orange Beach bartender, says his earnings are already down dramatically. He’s had to find a smaller apartment and has spent hours at the local BP claims office making his case.

In nearby Bon Secours, Ala., bartender Jason Kryder says he asked the restaurant’s accountant to pull together his tip amounts, using diners’ credit-card receipts.

He has filed a claim, but his hopes aren’t high that he’ll be able to reclaim all that he would have put in his pocket this season. After seeing business drop off dramatically due to the spill, the Tin Top restaurant where he works discontinued its lunch shift June 25.

Little left to do but wax philosophical, he says, “This place will never be put right. How do you put a price tag on that?”

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