Oil severance fee: For California, the time has come

California is at the precipice of insolvency. With a forecast $42 billion shortfall over the next 18 months, the state will suspend payments in February for assistance to the blind, disabled and elderly; for centers that provide services to the developmentally disabled; and for grants to college students. LA Unified School District has announced layoffs of 2300 teachers. California State University has slashed admissions by 10,000 for fall 2009. These are glimpses of the catastrophe that awaits us if Sacramento leaders cannot agree on new revenues.

We can reduce the budget pain by joining the rest of the nation in taxing oil produced in our state.

California is the nation's third biggest oil producer – and the only state that fails to charge oil companies a severance fee for extracting a non-renewable natural resource from our land. State fees range from 2 percent to as much as 12.5 percent in Louisiana and 12.25 percent in Alaska. Gov. Schwarzenegger has proposed a 9.9 percent oil severance fee in his 2009-10 budget.

Exxon Mobil, Shell, Chevron and Occidental Petroleum extract over 70 percent of the oil pumped from California's ground. In 2007, these four giants reported combined record profits to the tune of $95 billion. That's $260 million every day, seven days a week – with 2008 profits expected to be even higher.

Severance fee revenues would fluctuate along with oil prices and production levels. Estimates of the revenue that the Governor's proposal would bring in range from a very conservative 800 million dollars a year to one billion dollars a year or more.

We believe that's a fair price for these wealthy corporations to pay to help reduce the budget pain sure to be inflicted on our schools, public safety, and health services.

Big Oil is squealing like a stuck pig at the very thought of California joining Sarah Palin's Alaska, George Bush's Texas and Dick Cheney's Wyoming in levying a severance fee. Generally their case boils down to three erroneous claims. One, California oil companies are actually the highest taxed in the nation already and a severance fee would be an unfair burden. Two, this fee will be passed on to consumers, which in turn will lead to higher gasoline prices. And three, production will be reduced. 

According to an analysis by the California Tax Reform Association, California oil companies currently pay the lowest amount of overall taxes on oil in the country by a substantial margin. Reasons for this include: the lack of an oil severance tax; the comparatively small cost paid in sales tax on equipment; corporate taxes are apportioned, with an effective corporate rate on oil companies of about 3 percent; and property taxes paid by oil companies are kept low under Proposition 13.

In 2006 Big Oil spent $95 million to defeat Proposition 87, which would have levied a variable severance fee of up to 6 percent based on the price of crude oil. That measure also would have prohibited oil companies from passing along the cost of the fee to the consumer. The Legislative Analyst's Office found that the state could easily enforce this provision, but might not have to. The LAO report stated that oil prices are largely determined globally, giving refiners options to purchase from other sources, which in turn inhibits Exxon's and Chevron's impulse to raise prices locally.

California produced 243 million barrels of oil in 2007. California's average annual oil production is in a long term gradual decline of about two to three percent a year since it peaked in 1985. An oil severance tax is not a permanent fix, but it would matter greatly over the next couple of decades in keeping health clinics, fire stations and classrooms open. With a concerted effort, in twenty years we will be weaning ourselves off of fossil fuels anyway for the good of our planet.

Today, we're consuming oil and laying off teachers. We desperately need to raise revenues and Big Oil can afford to pay. If this tax was in place in 2007 it would have reduced the combined profits of Exxon Mobil, Shell, Chevron and Occidental Petroleum to a measly $94 billion.

Lawmakers face painful choices in closing the budget gap. In light of the severe cuts that will disproportionately affect the lives of the least fortunate among us, we believe an oil severance fee is a painless and overdue measure of tax fairness.