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Oil severance tax plan slips into view

Water dominates California’s toughest, most enduring political battles, but oil isn’t far behind. And as the state’s fiscal misery intensifies, so does the effort to require California to join the ranks of oil-producing states and establish an oil severance tax.

Gov. Brown feared that including an oil severance tax as part of his budget-balancing package would doom the entire plan at the ballot and he avoided it. He’s probably right: If history is any guide, taxing oil as it is pumped from the ground would have drawn a $100 million opposition campaign from the oil industry – enough to defeat not only the tax but the entire budget plan as well.

An anti-tax coalition led by the oil industry says it only reflects the popular will, which opposes new taxes.

But for at least the sixth time in as many years, a move is afoot to establish an oil severance tax on California’s 200 million-barrel-a-year oil production, this time to use the money generated by a 12.5 percent levy, perhaps $2 billion annually, for California’s beleaguered public higher education system. At UC alone, Brown has warned, tuition could double, absent new revenue.

For many tax-reform activists, the oil severance tax stands as way of closing a vast loophole for the petroleum industry, which extracts a precious, finite resource and pays nothing for the privilege, and using that money instead for cash-strapped state services. Others huge oil states – Texas and Alaska, for example – have oil severance taxes. Alaska has a progressive, 25 percent oil severance tax, the largest in the country, and some two-dozen states have severance taxes on oil, gas or both.

So why not California?

“We need to have a shift in priorities, where we are expanding revenues and not just making budget cuts,” said Chuck Idelson, a spokesman for the California Nurses Association, which supports establishing progressive, tax-generated revenues at both the state and federal levels and has favored a number of severance tax proposals.  

“We have enormous resources and wealth, but the problem is that those resources and wealth continue to get transferred from working people to corporations and the super rich. Seeking to balance the budget solely on the backs of working people is a totally misguided priority.”

Oil severance tax proposals have had a stormy history in California, where a well-financed petroleum industry and opposition to new taxes have combined to kill ballot measures and legislation. Last year, the Legislature rejected severance tax legislation “and it looks like it’s coming back at an even larger percentage,” said Gino DiCaro of the California Technology and Manufacturers Association.

“We are certainly opposed to this. California lost 633,000 manufacturing jobs over the past decade, that’s about 33 percent of its manufacturing base. This bill will certainly increase our losses by thousands of jobs,” he added.

An unsuccessful 2006 ballot initiative backed by Hollywood producer Steve Bing and others would have set up a sliding-scale tax of 1.5 to 6 percent per barrel and raised $4 billion over 10 years. Bing’s initiative lost decisively. Bills in the Legislature – including a 2009 measure similar to the latest proposal – withered before industry opposition and were gutted, blocked, hijacked or shipped into limbo and never heard from again.

Former Gov. Arnold Schwarzenegger included a 9.9 percent oil severance tax in a budget proposal, but it was quickly blocked, and recently, two local measures in L.A. to tax oil – one, improbably, in Beverly Hills and the other in the city of Los Angeles backed by the City Council, were both turned down.

“Voters have rejected this over and over again, and people have been trying to pass this off as saying that costs won’t be passed along to the public,” said Scott MacDonald, a spokesman for the coalition opposing the severance tax. “Anybody who knows economics knows that idea is laughable. It’s an insult to people to say you are going to tax something and that no impact will be felt.”

The latest effort is by Assemblyman Warren Furutani, D-Long Beach. His AB 1326 would establish a 12.5 percent severance tax on oil and natural gas, and set up an entity called the California Higher Education Fund, which distributes the proceeds to the University of California, the California State University and community colleges. His bill was scheduled to have its first major policy hearing on Wednesday, but Furutani withdrew the bill to make technical changes, his staff said, and a new hearing was scheduled for May 3.

Although seemingly straightforward, a blizzard of conflicting data surrounds the impact of the tax and the level of California’s taxes. Although California does not have an oil severance tax, it has other levies such as corporation taxes that make up for it, the industry contends – a claim refuted by supporters of the tax.

“California corporation taxes amount to $3.09 per barrel, although since state taxes are deductible from federal taxes at 35 percent, the effective rate is about $2 per barrel. Reliable data from the Franchise Tax Board and a California petroleum company suggests that the actual rate is $1.05 per barrel,” according to an analysis by Lenny Goldberg of the California Tax Reform Association, which has long favored an oil severance tax.

By one estimate, the 12.5 percent levy proposed by Furutani would result in a $10 to $12 tax, which petroleum industry experts say would be passed on to consumers in some form. Goldberg and others, however, note that the price of oil is set in the global market and that the spikes in gasoline costs have taken place repeatedly in California without a severance tax in place.

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