New Orleans, LA, USA. It’s certainly no secret that the oil industry remains deeply embedded in Louisiana culture.

Not only does it employ tens of thousands of people, but it is the economic engine state leaders depend on as they struggle to recover from the devastation of Hurricane Katrina.

Even so, it was something of a surprise earlier this summer when the first round of lawsuits over the BP oil spill reached a federal court in downtown New Orleans.

One of the judges on the court — the U.S. District Court for the Eastern District of Louisiana — recused herself because she owns stock in BP. Another bowed out because her husband holds stock in the firm. Several others stepped aside because they have family members who are involved in BP litigation. In all, at least seven of the court’s 12 judges have stepped out of the legal battle over the disaster, citing conflicts of interest, according to the National Law Journal, which first reported on the recusals in June.

Now that oil has stopped gushing in the Gulf of Mexico, state and local governments are tallying their economic losses — and vowing to hold BP accountable.

But they are moving carefully, mindful that much of the region’s economy depends on the industry they are confronting.

The conflicts in the Eastern District of Louisiana point to a larger reality in the Gulf Coast states that are now dealing with the aftermath of the worst offshore oil spill in U.S. history: the industry responsible for the disaster and the governments that must respond to it are, in many cases, deeply intertwined.

Besides providing jobs to Gulf Coast residents, the oil industry pumps millions of dollars into the region’s tax receipts, helping to fund state and local programs at a time of deep economic uncertainty. Its tax payments — and its generous campaign contributions — ensure that it is politically powerful at all levels of government. And despite popular outcry over an offshore oil drilling accident that is unparalleled in scale, the industry has plenty of friends and defenders.

Now, as local and state officials seek reimbursements from BP for government losses related to the spill — primarily lost tax revenues — they are moving carefully, aware that their region depends heavily on the industry they are confronting.

"A delicate balance"

Like Louisiana, Texas is also taking stock of the tax revenue it lost because of the spill — and trying to decide what to do about it. Both states suffered vast financial reverses suffered by fishermen, shrimpers, hoteliers and other business owners directly affected. At the same time, however, attorneys general in both states are suing the federal government to allow deepwater drilling to begin again as soon as possible.

A federal moratorium on deepwater drilling is in effect until Nov. 30 while the Obama administration works to ensure that all operations are safe. But the two states’ legal teams say the lost economic activity and tax revenue caused by the moratorium will only make their economies worse.

“We must protect the delicate balance between the environment and the economy,” Louisiana Attorney General Buddy Caldwell said, “but shutting down 33 deepwater rigs, directly impacting more than 35,000 jobs, isn’t the way to go about it.”

In Florida — perhaps the state that stands to lose the most from the oil spill because it relies so heavily on beach tourism and visitors’ sales tax payments — Governor Charlie Crist sought to impose a permanent ban on offshore oil drilling in the wake of the BP spill. When he called lawmakers into a special session in July, however, they quickly rejected the idea and adjourned.

State officials elsewhere are urging caution rather than coming down hard on BP for the spill, at least in the short term. In Alabama and Mississippi, governors have asked their attorneys general to wait before suing the firm over the disaster.

The governors say that states — like individuals affected by the spill — should file reimbursement claims with BP for now, working with the company and potentially avoiding costly legal battles that could drag out for years and hold up payments. BP has set up a $20 billion reimbursement fund for individuals, businesses and others affected by the spill; the money is being managed by a federal administrator, Kenneth Feinberg.

Mississippi Governor Haley Barbour says he favors following the claims process for now, pointing to the aftermath of the 1989 Exxon Valdez oil spill in Alaska as an experience he wants to avoid. There, hasty litigation exacerbated tensions with the oil industry and led to years of unresolved disputes and delayed payments, Barbour says. Indeed, arguments over compensation from the Valdez oil spill were still being heard at the U.S. Supreme Court as recently as 2008.

But state attorneys general can make up their own minds over how to proceed. Alabama Attorney General Troy King filed the first state lawsuit against BP, arguing that the claims process can proceed simultaneously and that a lawsuit will ensure that the state has the company’s full attention. Mississippi Attorney General Jim Hood is considering his own legal action.

How much was lost?

Florida officials were bracing for a major hit in sales tax collections after the oil spill caused tar balls and other debris to wash up on some of the state’s pristine shores. Economists predicted that the effect would be far worse in Florida than elsewhere because the state has no personal income tax and relies heavily on money spent by tourists.

One of many unknowns surrounding the oil spill is how much money state and local governments along the Gulf Coast actually stand to lose. The missing revenues and economic activity that can be attributed to the spill — as well as to the current drilling moratorium — could take months to tally with any certainty, as experts compare the numbers from this year to similar periods in years past. The uncertainty has only added to the debate over how states should respond to the oil spill and the drilling moratorium.

But Florida is still waiting on numbers that substantiate a major hit in tax revenues, and a recent report by VisitFlorida, a public-private agency that tracks the state’s tourism, showed that 700,000 more people visited Florida in the second quarter of this year than in the same period a year ago. The months in question include May and June, when oil was gushing from the uncapped BP well at a rate of millions of gallons per day.

Alabama has put together a task force of economists, state officials and others to pinpoint exactly how much money it has lost from the spill. The task force recently submitted a $148 million claim to BP for lost sales taxes and other revenues that help fund Alabama’s public education system. State officials note that the claim covers only the initial weeks after the oil spill, and that it will certainly grow. The lawsuit filed by the state’s attorney general, meanwhile, does not specify the amount of lost tax revenue the state is seeking to recoup.

By far the more dire estimates of economic losses, meanwhile, are contained in analyses of how much the federal drilling moratorium, rather than the spill itself, will cost the Gulf Coast.

Even those, however, are a moving target. The U.S. Interior Department said in a court filing this month that the moratorium would result in 23,000 lost jobs and $10.2 billion in lost economic activity, but so far oil companies have weathered the moratorium relatively well, laying off far fewer workers than initially expected — while waiting to see whether political pressure will result in a loosening of the ban.

Stateline is a nonpartisan, nonprofit news service of the Pew Center on the States that provides daily reporting and analysis on trends in state policy. TS-Si thanks The Pew Charitable Trusts for its support and cooperation.

Stateline reports are prepared and published by TS-Si.org with permission. Signed articles do not necessarily convey an official position of TS-Si, its partners, or affiliates.

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