In his recent article advocating for an oil severance tax, The Times' Michael Hiltzik makes a bold statement, calling Californians dumb for not imposing a severance tax on California oil companies.
He sides with hedge fund billionaire and environmentalist Tom Steyer, who has launched a campaign to impose a severance tax.
To start with, Californians shouldn't believe that just because the state lacks an oil severance tax -- a levy on each barrel extracted from the ground -- it doesn't tax oil altogether. To the contrary, California's property taxes and high business income and sales taxes practically substitute for a severance tax.
California has the highest corporate income tax in the Western United States. Hiltzik compares California's tax burden to Texas, which has a severance tax but does not have a state income tax. Furthermore, California has the highest statewide sales tax rate in the nation. Alaska has a severance tax but no state sales tax. To compare California -- a state ranked by the Tax Foundation as having the third-worst business tax climate in the U.S. -- to states that lack sales and income taxes is misleading.
California also assesses oil-producing property based on the current value of the oil in the ground, meaning California oil is taxed whether or not it’s produced. As the oil is produced, refined and sold, companies are subject to a host of other taxes that generate an estimated $6 billion in revenue for state and local governments.
On top of that, oil companies that produce oil from state lands pay royalties in addition to taxes. In 2012, royalty payments to Sacramento exceeded $500 million. Moreover, oil companies pay billions to private individuals who own mineral rights, which also generates taxes.
Hiltzik notes that Alaska instituted a 25% oil severance tax under then-Gov. Sarah Palin’s administration in 2007, but he neglects to mention that Alaska reduced and simplified the tax this year. Why? Because with the higher rate in place, Alaska had suffered a significant decline in oil production. It simply didn't work for Alaska, and it won’t work for California.
The implications of an oil severance tax would not only damage our economy but also threaten the jobs of some of the 330,000 people whose livelihoods are both directly and indirectly linked to the petroleum industry in California. Oil production jobs are high paying and generally located in areas where jobs, let alone high-paying jobs, are scarce. The San Joaquin Valley, where most of California’s oil is produced, suffers from chronic poverty and high unemployment.
Declining oil production means fewer jobs, less tax revenue, greater reliance on imported oil and higher gas prices. Californians have rejected proposals to raise taxes on oil production time and again, but not because they are dumb. In fact, they have done so because they are smart. They have looked past the inflammatory rhetoric that usually accompanies these proposals and have come to understand the true consequences of bad tax policy.
Catherine Reheis-Boyd is president of the Western States Petroleum Assn.