DALLAS — A Texas oversight agency has turned down an oil refinery’s request for a tax break that could have cost local governments and school districts millions of dollars in refunds and lost property tax revenue.

The Texas Commission on Environmental Quality has notified Valero Energy Corp. that it does not qualify for a partial tax-exemption on expensive hydrotreaters it installed to remove sulfur dioxide from diesel and gasoline fuel.

TCEQ director Mark Vickery said in a letter to Valero that the units, which can cost up to $250 million each, did not reduce air pollution at the site as required by state law to obtain the tax exemption.

Counties, cities and school districts that filed objections to the exemption said the removal of Valero’s hydrotreater units from the tax rolls would cost them $92 million in tax refunds and up to $135 million each year in property tax refunds.

The Harris County Appraisal District said there are more than $1 billion of hydrocrackers on Harris County’s tax roll. The property tax on the units provides $7 million in revenues and $2 million a year for the Houston Independent School District.

Valero was seeking the tax break for equipment at refineries in Houston, Texas City, Port Arthur, Corpus Christi and Moore County in the Texas Panhandle.

State Sen. Rodney Ellis, D-Houston, who is a partner at Rice Financial Products, called the TCEQ decision “a major victory for the people and schoolchildren of Texas.”

“Texas schools are already struggling with the $5 billion in cuts,” Ellis pointed out. “Allowing huge companies to essentially rob our schoolchildren of another $100 million would have been unconscionable.”

Valero spokesman Bill Day declined to comment on the action by the state’s environmental commission.

The company has 20 days from Dec. 14 to appeal the rejection.

Valero officials have contended that the refunds and lost revenue would be much lower than the estimate by local governments.

The company reported profits of $1.2 billion in the third quarter of 2011, its highest in more than four years.

Ten similar requests are pending but are expected to be rejected as well. The total refunds from the tax exemptions, including the Valero request, could have been  $135 million.

Valero sought the tax exemption in 2007 after it installed the units under a national mandate from the federal Environmental Protection Agency in 2006 that ordered refiners to reduce sulfur dioxide in motor fuels.

The state agency staff turned down the request after determining the environmental benefit provided by the units occurred not at the refinery site but wherever the fuel was used. Valero appealed while continuing to pay local property taxes on the equipment.

TCEQ chairman Bryan Shaw, who was appointed to the post by Gov. Rick Perry, directed the staff in April 2010 to review Valero’s appeal.

In a statement earlier this year, Valero chief executive Bill Klesse said the company would not seek refunds on school property taxes paid since the appeal was filed more than four years ago.

“Even though school districts in the areas where our refineries pay millions of dollars in property taxes knew we had the application for an exemption pending, they went ahead and assessed those taxes, which we paid,” he said.

“Our settlements should reassure them that we will not require them to pay back the overpayment going back to 2007,” Klesse said.

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