Opinion: Stop dawdling: The time for an oil severance tax is now

The oil companies know it and so do most legislators: Most recoverable oil in California may be heavy crude but the financial deal these highly profitable companies have cut with California is about as sweet as it comes.  

The brainwashing that the oil lobby has engaged in for decades has effectively hamstrung California from righting its course and bringing it in line with every other major oil-producing state in the country.

What we didn’t know five years ago – but we all know now – is that California is the only major oil-producing state in the country not to have an oil severance tax.  Whenever anyone has had the courage to demand such a tax finally be implemented (e.g. Proposition 87 in 2006), a hue and cry from the industry and their supporters rises up with a ‘sky is falling’ rant that raises the dark specter of a rapid decline in existing domestic oil and gas production, lost jobs and the consumer favorite – higher gas prices.  

Nonsense.  A careful analysis of these claims, such as the one done by Anthony Rubenstein, “Refuting Oil Industry Lies about the California Severance Tax,” and a review of the available literature clearly undercuts these arguments and underscores that its high time to pass an oil severance tax and get on dealing with all the other intractable problems California faces in bringing its ongoing and massive budget deficit under control.  

In terms of any “unfair” new tax burden that a severance tax might impose, Rubenstein demonstrates and others corroborate that the oil companies in California already pay well below the corporate state tax rate that other companies pay.  Further, the oft-cited property taxes that they now pay are but a shadow of the property taxes they once paid before Proposition 13.

According to Martin Gaffney in his paper, “A Severance Tax on California Oil” (July 2006), until Proposition 13, property taxes were used to generate revenue from oil and gas production in lieu of a severance tax.  However, due to a loophole resulting from imprecise language in the initiative, the practicable result has been that the value of their assessed taxable property (i.e. proven reserves) has fallen far below the true market cost, not to mention that in many cases it is the landowner that pays the property taxes, not the lessee.
As for hemorrhaging jobs, a study by the UC Berkeley’s Center for Labor Research and Education entitled Budget Solutions and Jobs (March 2010) estimated that California could lose up to 300 jobs if an oil severance tax was instituted, but concluded that the loss of jobs generated by drastic cuts to IHSS, Healthy Families, Medi-Cal and CalWORKS would result in the loss of over 300,000 jobs – a thousand fold increase targeted at some of the most vulnerable in society with direct financial pain on Main Streets across our state.
As for the specter of higher gas prices at the pump, we should all know by now that the price of gas is not determined by whether California has or doesn’t have an oil severance tax; that price is set on the global market and is affected by political manipulations and geo-physical crises well beyond our control.

If the tragic Gulf oil spill has taught us anything it is that this is an industry that has run roughshod over regulators and amassed itself a dizzying array of outdated tax breaks, loopholes, royalty relief schemes, and offshore tax havens that have effectively limited the dollars they re-inject into the American economy.  

How is it that ExxonMobil, the largest corporation in the world, paid NO federal taxes in 2009 and qualified for a $156 million dollar refund?  The same year, Chevron qualified for a federal tax refund of $19 million.  These inexplicable numbers from a scandal ridden industry that has skirted regulatory and safety standards has prompted the Obama Administration to take a fresh critical look at not just the industry’s drilling practices and safety procedures, but the tax and royalty policies (some in place since 1913) that enable these corporations to limit the amount of dollars they contribute to the American economy.  Proposed for elimination are nine tax breaks including rapid write-offs for upfront drilling expenses and generous depletion allowances.  

The New York Times recently concluded that “no other industry enjoys the array of tax breaks and subsidies that the oil and gas industry does.  [And] no industry needs them less.”
It seems to me that if the Federal Government is ready to reassess its economic relationship with the oil industry by scrutinizing every tax break and subsidy they receive, it’s high time that California dig in its heels and peel away the level of industry hysteria regarding the imposition of a simple and constitutionally sound oil severance tax.  

If it means exposing this industry to the scrutiny that BP, Transocean and Halliburton are getting in the wake of the Gulf oil spill, then I think it’s a fine time for the Legislature to set their sights on just exactly how this industry operates in California, exactly what tax loopholes and subsidies they currently receive and what impact those loopholes and subsidies have not just on their bottom line, but on our bottom line.  I would also throw in the cost of monitoring, detecting and forcing clean up of their spills, the health costs that result from the air pollution they generate, the millions of dollars spent on direct and indirect lobbying of the Administration, the Legislature and assorted commissions that regulate them, and the financial savings they would walk away with if they are allowed to limit their liability and responsibility for removing their existing rigs off the California coast.

We do not need a narrow debate over a much needed oil severance tax that ignores the totality of how oil companies operate in California.  Instead we need a comprehensive assessment that examines all aspects of those operations.  Should the Legislature appropriately decide to undertake such a thorough review, the oil companies might just wish they had come to the budget negotiating table early in the process and accepted a reasonable and way overdue oil severance tax. By the way, I hear it’s tax deductible.