Old ideas percolate anew in state budget discussion

Alone among the nation's oil-producing states, California has no oil-severance tax – a tax on oil as it comes out of the ground. That's not likely to change. The disinclination of lawmakers, particularly Republicans, to levy new taxes, and the influence of the powerful petroleum industry — in the Capitol, they are called the "oilies" — have combined to head off such levies at least a half dozen times in the last three decades.

But the issue arises again this year, as lawmakers confront a $15 billion shortage and are on the prowl for new money. There also is a proposal for offshore drilling in state waters, which over time could raise $20 billion or more for the state through royalties, supporters contend. The two camps, pro-taxes and pro-drilling, are not coming to agreement but their debate is being heard in the Capitol.

Both sides have historic roots in the Capitol. During the past four decades, among those who authored or backed oil-severance tax bills include former Senate and Assembly leaders, and former Gov. Pat Brown. Opposition to offshore drilling is equally long, and flared dramatically after the 1969 Santa Barbara oil spill.

One key to the renewed discussion of off-shore drilling is the perception that the public's opposition to it is dwindling. A survey by the Public Policy Institute of California reported July 30 that barely more than half of Californians – 51 percent – favor more drilling of the California coast. The approval level was the highest during the past three decades, and 10 percentage points higher than the results of a survey a year ago. Drilling critics believe the findings reflect the sharp spikes in gasoline prices, rather than a positive attitude toward drilling. On Tuesday, oil sold for $113 a barrel, nearly $35 below its record high on July 11 of $147.27 per barrel.
"The polls might be transient blip cause by high gas prices," said Bill Magavern of the Sierra Club. "Certainly, there is bipartisan opposition to offshore drilling. Democrats and Republicans at both the state and federal levels, and the governor, are opposed to drilling. If we approved more offshore drilling, it might bring down the cost of gasoline by a few cents a gallon in 10 years from now, but we can do a lot more than through efficiency."

Late last week, Assemblyman Chuck  DeVore, the vice-chairman of the Assembly Revenue and Taxation Committee, proposed a plan for "slant drilling" in California waters to tap into an estimated $100 billion worth of oil deposits. Traditional royalty agreements of 20 percent, he said, could provide the state with some $20 billion over the next two to three decades.

"The drilling is in state waters, and this decision could be made at the state level," DeVore said. With an oil severance tax, "all you're doing is putting California at a competitive disadvantage with foreign oil. We will import more foreign oil into California. It makes no sense from a tax policy standpoint, it doesn't make sense from a national security standpoint."

Slant drilling, he added, is more environmentally acceptable than other types of drilling. "We end up replacing oil that would have been imported in supertankers. That would be a lot more environmentally sensitive than burning up all that fuel to bring the oil in from 8,000 miles away. We desperately need new revenue from non-tax and non-fee sources. It has routinely been brushed aside before, but some of these ideas are going to be brought up again."

But Democrats are more disposed toward taxes. A bill by then-Speaker Fabian Nunez would establish a 6 percent oil-severance tax, plus a 2 percent surcharge on oil-company income in excess of $10 million. The bill, which needed two-thirds of the 80-member Assembly for approval, failed in March when it got only 45 votes on the floor, nine votes shy of the 54-vote threshold. No Republicans voted for it.

Despite the failure of the bill – it remains alive despite the adamant opposition of Republicans – its provisions continue to have support from Democrats, at least in the Assembly. The bill is similar to the provisions of Proposition 87, which voters rejected by nearly 800,000 votes in 2006. That proposition, financed largely by Hollywood producer Steve Bing, would have levied oil severance taxes of up to 6 percent to raise a maximum of $485 million annually. Supporters saw the proposal as a way to encourage a reduction in oil consumption and to finance alternative energy programs.

"We appear to be the only place in the world that does not collect taxes or royalties on oil production…" noted an analysis by the California Tax Reform Association. "While oil is a declining resource in California, there still are very large reserves of heavy oil. So, at these high oil prices, revenues will continue for a long time."

The tax would not lead to increased prices at the retail pump, according to the analysis, because "virtually all economists agree that the world market sets the price of oil, and that underlying taxes, whether from Texas, Kuwait or California, are not passed through at the pump."