Opinion: California currently allows oil companies to enjoy a giant tax break

Let’s get this straight: Oil companies are taking California’s oil, selling it worldwide, without paying a dime in tax for depleting this precious natural resource.

California stands alone among all oil- and natural gas-producing states in refusing to enact a severance tax.  Instead, California lets about a billion dollars in potential revenue fly out the window every year and then hacks funding for college students, our seniors, and people with disabilities.

It’s time to close this tax give-away.

Under the Assembly’s budget plan, new revenue from an oil and natural gas severance tax could be plowed into the general fund to balance the budget and protect jobs. A 6 percent tax could raise nearly a billion dollars.

Oil producers say enacting the tax will put employees out of work, increase prices at the pump by discouraging domestic exploration, and place yet another financial burden on an allegedly heavily taxed industry.

The Center for Labor Research at the University of California, Berkeley determined a billion dollar tax hike for the oil industry would cost 300 jobs compared with a billion dollar cut for In-Home Support Services which would kill 215,900 jobs.

As for arguments that a severance tax would increase prices, I disagree. The industry panders to people’s fears that enacting a severance tax will dramatically raise the price of gas. But in reality, the price of gas is set by the world market and domestic oil production plays a very minor role in that metric.

In testimony last year to the U.S. Senate’s subcommittee on energy, Treasury Department assistant secretary and chief economist Alan Krueger pointed out U.S. oil-production represents merely a tenth of the entire global output and the nation possesses only 2 percent of the world’s known reserves.

If Congress were to end $4 billion in domestic oil industry tax breaks and the costs were passed directly onto consumers, the increase “would be equivalent to less than one cent per gallon,’’ Krueger said.

So, an oil severance tax in California would have a negligible impact on the gas market. In fact, the Assembly’s proposal of 6 percent is a modest proposal compared with Alaska’s 12.25 percent and Louisiana’s 12.5 percent rates.

The industry asserts California has one of the highest tax burdens on oil drillers and producers. To determine the reality, the Assembly Revenue and Taxation Committee asked the state Franchise Tax Board and the Board of Equalization to ascertain and compare the total tax burden on a barrel of oil from California with Texas.

The analysis found that a barrel produced in California had a tax burden of only $4.22 compared with Texas’s $14.33 per barrel. Even if California enacted a severance tax of 10 percent, the total tax burden per barrel would still be below Texas’s costs.

But the central question is why does Big Oil deserve California’s giant tax break? What makes the oil companies so special from any other business that pays its fair share of taxes? The answer is: They aren’t. But, Big Oil and the natural gas companies – both big contributors in Sacramento – are accustomed to wallowing in comfortable tax breaks.

A Congress Budget Office paper in 2005 on taxing capital income, for example, showed petroleum and natural gas companies’ paid 9.2 percent on their capital investments, such as pipelines. That tax rate is “significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry,’’ the New York Times reported.

Unlike Big Oil, the average California family isn’t benefiting from tax give-aways. Families are worrying about their jobs, their mortgages, or the next rent payment.

An oil severance tax has the support of a majority of the public, according to Field polls stretching back to 1986. Today, taxpayers, who are scrimping to get by, are wondering why Big Oil continues to get favored treatment in California.