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Oil severance tax gets close look in the Capitol

As the magnitude of California’s fiscal crisis deepens, one proposal that has been rejected by lawmakers and voters in the past is getting serious consideration – a tax on oil as it is pumped from the ground. Democrats and Republican Gov. Arnold Schwarzenegger are supportive. Republican lawmakers, opposing taxes and fees across the board, are opposed, as is the petroleum industry. But the depth of California’s projected deficit – it has nearly tripled since last summer to $42 billion over 18 months– has put an oil severance tax back on the front burner.

California is the only state in the nation without an oil severance tax.

In 2006, California rejected an oil severance tax ranging from 1.5 percent to 6 percent per barrel which would have raised an estimated $4 billion over time. Supporters of the sliding-scale tax disputed the industry’s research on the issue, and noted that the industry’s multimillion-dollar ad campaign persuaded voters to oppose it. Schwarzenegger, aligned with business interests, anti-tax forces and the petroleum industry, opposed that tax.

“It significantly impacts our economy and increases our dependence on foreign oil,” said Teresa Casazza, president of the California Taxpayers Association. “It’s absolutely the last thing we want to do.”

But the governor, in a major break with business interests, now favors an oil severance tax – although it is in a different form than in 2006 — and has proposed a 9.9 percent levy in his 2009-10 budget. By one estimate, it would raise $855 million annually, or more than $8 billion over a decade.

But the numbers are a moving target and swing wildly, because projected revenue is pegged to the per-barrel cost. On Monday, the price dipped to $39, down from a high last summer of more than $147 on the world market. That level of fluctuation makes it difficult to plan budgets: With oil selling at $40 per barrel, the proposed tax would bring in about $1 billion, all of the money going to the state’s General Fund.

California, the third largest oil-producing state after Texas and Alaska, produces more than 260 million barrels of oil annually, or about 12 percent of national production. Unlike Texas or Alaska, almost all the oil produced in California is used within the state. California refiners meet about a third of the state’s oil demand, according to a 2006 ballot analysis.

Just who pays what and how much is crux of the debate over the oil severance tax.

Industry-backed research showed that imposing the proposed 2006 tax would have made California’s petroleum industry the highest taxed in the nation. The state already collects an oil and gas production tax, a severance tax would have been an added burden.
“The basic concerns of people back then are magnified by the scope of this tax,” said Tupper Hull, a spokesman for the Western States Petroleum Association, which represents oil producers in six western states. “The economics of this type of tax placed on production indicate it will result in a decrease in the amount of oil produced in California and an increase in the amount we have to import to supply the market.”

Supporters of an oil severance tax dispute the industry’s assessment of the tax’s impact, contending that the 2006 study by the Law and Economics Group used skewed data to reach its conclusions. “In reality, California has the lowest total taxes on oil in the country by a substantial margin,” according the California Tax Reform Association, which supported the 2006 proposal and supports the governor’s current plan. Another tax plan, authored by then-Assembly Speaker Fabian Nunez, would have levied a 6 percent oil severance tax, as well as an income tax surcharge on oil producers.

The CTRA also rejects the notion that imposing an oil severance tax would drive up the cost of oil products. “It’s false because the global market is competitive, and in a competitive market right now you can’t pass on the cost of oil. You charge what the market will bear,” said CTRA lobbyist Lenny Goldberg.

“There is extensive economic modeling that shows there is no effect on price and no effect on production,” he added.

 But a new analysis by the Law and Economics Group – it is expected to be released this week – examines the impact of 9.9 percent oil severance tax. The December 2008 study assumes the price of oil to be $58 a barrel, and for the purposes of comparison examines a company that produces 100,000 barrels of oil a day in each of the nation’s top-10 oil producing states. According to this study, the total tax burden  – including local property, sales and corporation taxes – on the company would be more than $350 million.
So far, California is the only oil-producing state that does not tax oil that is owned, leased or extracted from private lands. Twenty-one states levy oil severance taxes ranging from 2 percent to 15 percent, in addition to other taxes on oil producers or purchasers.
An oil severance tax has long been a bone of contention in the Capitol. But regardless of fiscal conditions, the public or lawmakers — or both — have rejected it.

But the deterioration of the state’s economy has forced a new discussion of the issue. Talks have been going on, with interruptions, since last summer. The governor in a November news conference noted the need for taxes. “It is now a revenue problem rather than a spending problem, because our spending in this state has not increased now for years,” he said.

But pinning the state’s fiscal hopes on a tax of volatile, uncertain yield that targets oil producers isn’t the way to go, Hull said. “Trying to balance the budget on an energy tax of this nature is only going to make the problem worse.”


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