Will another tax hike drive up fuel prices in California?
A little more than a year after raising California’s gas tax by 12 cents per gallon, lawmakers are considering a levy on oil production that Republicans say will further increase prices at the pump.
The bill from state Sen. Bob Wieckowski (D-Fremont) would set an extraction tax at 10% of the average price per barrel of California oil or 10% of the price per unit of natural gas. Wieckowski estimates the tax would generate about $900 million annually, bringing California in line with other oil-producing states including Texas and Alaska.
The proceeds would go into the state’s general fund and could be used for a variety of services including schools and healthcare.
“While oil companies rake in enormous profits and other states take in billions of dollars in revenue for critical programs like education, California is failing to be comparably compensated for the removal of these natural resources,” Wieckowski said.
Republicans and some consumer groups that oppose the tax because of the possibility that it could raise the price of gasoline noted that 2017’s Senate Bill 1, which pays for road and highway repairs, already has built-in gas tax increases that take effect each year as inflation rises. Separate from the inflation provision, the state tax on gasoline will increase on July 1 by 5.6 cents, bringing the total to 47.3 cents per gallon.
“California already has the second-highest gasoline tax in the country, and when the tax rate goes up on July 1, we will have the highest in the nation,” said Robert Gutierrez, president and CEO of the California Taxpayers Assn. “Californians can’t afford the higher gas prices that would result from this new tax increase.”
The gas tax increase approved in 2017 led to the recall of a Democratic state senator from Orange County who voted in favor of it and a ballot initiative petition signed by more than 900,000 voters that sought to repeal the tax increase. That ballot measure, Proposition 6, was defeated in November.
Republicans are warning motorists to brace for another round of increases to fuel prices because of the new bill.
“Here we go again,” said Assembly Republican Leader Marie Waldron of Escondido. “The government doesn’t need the money with a $21-billion budget surplus, but the people of California who will pay more for gas at the pumps do.”
State lawmakers have introduced oil extraction tax proposals six times in the last decade, all of which died in the Legislature. The unsuccessful proposals included a 2013 measure that would have dedicated the money to education and parks programs.
In 2008, as a recession led to a historic state budget deficit, then-Gov. Arnold Schwarzenegger proposed a 9.9% state tax on every barrel of crude pumped out of the ground. He later vetoed a broader budget bill that contained the tax after it was opposed by legislative Republicans.
Past failed attempts also include Proposition 87 in 2006, an initiative that would have taxed oil to pay for research and development of alternative energy programs. The ballot measure received only 45.3% of the vote after oil companies spent some $95 million on a campaign against it.
Supporters of Wieckowski’s bill believe the legislation has a much better chance this year than it would have had in the past. Democrats hold their largest supermajority in decades in both houses of the Legislature, increasing the odds that Wieckowski’s proposal could muster the two-thirds vote needed for passage.
Some believe the odds are also better under Gov. Gavin Newsom — former Gov. Jerry Brown rejected a past plan for an oil severance tax.
“This is a proposal whose time has come,” said Jamie Court, president of Consumer Watchdog, a nonprofit organization that frequently criticizes the oil industry. “Now that we have a governor who isn’t taking money from Big Oil it’s time to make them pay their fair share of taxes.”
During last year’s campaign, Newsom said an oil severance tax is one of several ideas for changing the tax system that are on the table. The governor has not taken a position on the Wieckowski bill.
But the Democratic supermajority does not guarantee passage. The oil industry worked hard last year at electing moderate Democrats. And the top three oil contributors — Chevron, Valero Services and Marathon Petroleum Corp. — gave a combined $13.5 million to political campaigns.
Chevron gave maximum campaign contributions allowed last year to more than two dozen Democrats including Assembly Speaker Anthony Rendon (D-Lakewood), Senate President Pro Tem Toni Atkins (D-San Diego) and Democratic Assembly members Adam Gray of Merced, Jim Cooper of Elk Grove, Blanca Rubio of Baldwin Park and Jim Frazier of Discovery Bay.
Opponents note Wieckowski’s tax is one of several proposed new levies being floated by Democrats even as the state budget has a large reserve fund and a large unrestricted cash surplus.
Other bills introduced before last week’s legislative deadline include a sales tax on services received by businesses, including those from attorneys and accountants, and a water tax floated by Newsom that would boost the average monthly bill by about 95 cents to provide clean water to low-income communities.
“From taxing soda to tires to water, the majority party continues to want more of your hard-earned money,” Senate Republican Leader-elect Shannon Grove (R-Bakersfield) said.
But the oil extraction tax will put jobs at risk, said Catherine Reheis-Boyd, president of the Western States Petroleum Assn.
“In the midst of California’s large budget surplus, this is an unnecessary tax that will impact businesses and consumers and harm our state’s economy,” Reheis-Boyd said.
Wieckowski cited data from the California Energy Commission that says the cost of regular unleaded gas in California today is lower than it was in February 2008.
“The price consumers pay at the pump is determined by events in the global marketplace,” he said.
A 10% tax on oil pumped from the ground would not necessarily translate into an increase of that amount in gas prices, said Andrew Lipow, president of Lipow Oil Associates, an energy consulting firm in Houston. The tax would apply only to oil extracted in California, not imports from Alaska and foreign countries, he said. California provides only about 31% of the oil going to refineries.
“As a refiner, I would tell the California producer they have to reduce their price by 10% — otherwise I would just buy more imported crude,” Lipow said.
But the impact could be that there is less crude oil production in California, so the state would be more dependent on imports, “which in the long run will cost the consumer,” he said.
Wieckowski bristles at critics who question the timing of his proposal just over a year after 2017’s gas tax increases took effect.
“The better question is why should California deny its residents the benefits derived from severance tax revenue when other oil-producing states have been reaping the rewards for decades and providing key services? “ Wieckowski said.
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