A California tax on oil drilling? Why not?
The most persistent misconception about Californians is that we hate to raise taxes. The truth is that we adore raising taxes -- as long as someone else is paying, that is.
So nonsmokers vote to raise cigarette taxes, teetotalers to raise liquor taxes. The middle and working classes want to hike taxes on the rich, who are happy to return the favor.
Yet this only compounds the mystery of why we’re so resistant to raising taxes on perhaps the biggest, fattest target of all: the oil industry.
At least twice since 1981 Californians have considered proposals to impose a so-called severance tax on oil -- a levy on every barrel that drillers take out of the California ground. Both times they went down to defeat -- most recently in a $150-million initiative campaign that set a new standard for obscenity in campaign finance, thanks to Chevron and its fellow oil companies. The 2006 defeat of Proposition 87, which would have steered the tax proceeds to alternative fuel programs, preserved California’s status as the only one of the 22 major oil states to give the industry a free ride. And we’re the third-biggest producer in the country.
How embarrassing is it for California to be hanging out there alone? That outstanding anti-tax crusader, Alaska Gov. Sarah Palin, in 2007 raised her state’s tax to 25% of the value of extracted oil and gas. Proposition 87 would have capped California’s levy at 6%. So even if it had passed, we’d still be suckers.
With the state’s fiscal disaster having concentrated the minds of political leaders as never before, the oil severance tax is back on the table in Sacramento. We can expect the oil industry to trot out the same arguments it employed to defeat the tax the last time, so to save time it might be helpful to deflate them now.
But first, let’s place the proposal in fiscal perspective.
According to the state Energy Commission, 240 million barrels of crude were extracted last year from California lands and waters, including federal waters offshore.
At the current world benchmark price of about $70, the 6% tax contemplated by Proposition 87 would have generated more than $1 billion a year from that haul.
Consider some “what if” scenarios: At last year’s peak benchmark price of $130 for California crude, the take would be nearly $2 billion. Palin’s tax rate of 25% would generate $4 billion at a $70 price and nearly $8 billion at the top.
An important aspect of the severance tax is that we’d better collect it now, while there’s still something to tax. California oil production has declined steadily from its 1985 peak of 424 million barrels. Since 2002, according to federal statistics, the state’s known reserves have been depleted to about 3.3 billion barrels from more than 3.6 billion.
The severance tax might be offset by reductions in property and corporate income taxes paid by oil companies. But an analysis of Proposition 87 prepared in 2006 by the nonpartisan Legislative Analyst’s Office found that such offsets would amount to a mere fraction of the severance tax, so the state would still come out way ahead.
Let’s be candid about the rationale for the severance tax. States levy it because they can: The oil’s not going anywhere. Oil companies can’t pack it up and move it to a state where rates are lower. It creates wealth -- enormous wealth at times of elevated market prices, like now -- and any jurisdiction in need of funds to cover services it provides to its residents has a perfect constitutional right to claim a piece of it, as it claims a percentage of the value of real estate and income (earned, unearned and inherited).
The virtue of taxing oil is that it’s an easy target and really valuable. California’s failure to recognize this is just a measure of its economic stupidity.
The big question is who pays the tax. The public’s main fear about Proposition 87 was that the industry would pass it on to consumers in the form of higher gas prices at the pump. The oil companies played on this fear ruthlessly. The point had a certain shallow logic, since all California crude is refined in-state and almost all the refined output is sold here, too.
To undermine that argument, the measure’s drafters outlawed any such pass-through. No one was really sure how to enforce the provision -- who really knows why gas prices rise or fall? In any case it was nothing but campaign window-dressing, for the drafters and the critics undoubtedly know that the very notion that oil companies could pass this through is flawed.
That’s because the price of crude is set by the worldwide market or, more pertinent to California’s situation, by the market for grades similar to ours, such as Alaskan crude. Severance taxes are more or less built in to the market price, and a California tax’s contribution to the total would be negligible, and probably invisible.
As the leading oil economist Severin Borenstein of UC Berkeley told me last week, California producers couldn’t raise their prices to cover the tax, because California refineries have too many other options for the purchase of crude.
“California refineries can buy from anywhere in the world, and they do,” he says. Indeed, California oil drillers sell their crude for the market price even when their production costs would allow them to offer a discount. (Only 38% of the state’s crude supply comes from within our borders, with 13.4% coming from Alaska and the rest from overseas.) “Producers would have to absorb the tax,” Borenstein says.
Here’s an important piece of evidence that drillers knew it would be hard for them to stick consumers with the bill: The oil industry went to extraordinary lengths to kill Proposition 87.
The oil companies outspent the Yes on 87 side -- which was bankrolled mostly by Stephen L. Bing, a movie producer and backer of green causes -- nearly 2 to 1 during a campaign whose total cost of $150 million was the largest in any state on an initiative campaign.
It’s possible that Chevron and its cronies spent their $95-million share purely to save California residents from paying a few more cents at the pump. My skeptic’s soul tells me, however, that they probably did so because they knew the tax levy would come out of their hide.
One other argument against the severance tax deserves attention. This is the claim that it will drive marginal producers out of business. UC Riverside economist Mason Gaffney says we shouldn’t swallow this idea.
It’s natural, he says, for the industry to trot out marginal victims of a tax bite as though they’re typical. “These are the ‘widows and orphans’ of every tax debate, advanced to distract attention” from the big oxen getting gored, he says. Keep your eye on the big players -- Chevron acknowledged that Proposition 87 would have cost it $200 million a year.
An oil severance tax in this state is long overdue. It might even serve as the vanguard of a new approach to overlooked sources of revenue. Gaffney mentions sand and gravel, undertaxed timberlands, water pumped for commercial sale and, yes, marijuana.
And why not? California has bestowed much of its natural wealth on the rest of the country for free, like a beribboned gift. In our time of need, we deserve to get something back.
The view from Sacramento
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