Bill Would Change State’s Status as the Only One Not Taxing Oil Extraction

Thursday, February 14, 2013
Midway-Sunset oil field (photo: Jim Wilson, New York Times)

Despite its reputation as never having met a tax it didn’t like, California is the only major energy-producing state that doesn’t levy an oil extraction tax on drillers.

Check that. The state does charge an 8-cent-per-barrel tax to cover expenses of the oil and gas industry’s chief regulator, the Division of Oil, Gas and Geothermal Resources in the Department of Conservation. That is compared to the 25% “severance” tax that Alaska charges, which brings in billions of dollars to state coffers.

California’s lonely status might change soon. Democratic state Senator Noreen Evans has introduced legislation that would require oil drillers to pay 9.9% of the gross value of each barrel they extract to a state Oil Severance Fund. Senate Bill 241 directs that 93% of the revenue be spent on higher education and 7% on maintenance and improvement of state parks.

The new tax would raise an estimated $2 billion a year, but that number could fluctuate wildly depending on the price of oil. Oil companies would pay it in addition to the property and income taxes they already pay.

This is not the first time California has considered an oil severance tax. Lawmakers have rejected it in the past, and voters gave Proposition 87 a thumbs-down in 2006. Prop. 87 would have raised an estimated $225 million to $485 million a year and was the most expensive initiative contest ($154.3 million) in history up until then. It lost, 54.6%-45.4% after the oil industry poured $100 million into the campaign to defeat it.

Prop. 87 forbade oil companies from recovering their tax expense by raising prices, but the Legislative Analyst’s Office raised questions at the time whether that could effectively be enforced. Senate Bill 241 does not contain that directive as it begins its journey through the legislative process.

Supporters of the tax say the prohibition isn’t necessary because the price of oil is set by international markets and producers wouldn’t be able to pass the tax on to consumers. The Legislative Analyst agrees that “refiners could substitute non-California oil that is not subject to this severance tax . . . thereby preventing producers from passing along the cost of the tax.”

–Ken Broder


To Learn More:

Democratic Lawmakers Revive Oil Extraction Tax for California (by Patrick McGreevy, Los Angeles Times)

Time for a California Oil Severance Tax (by Jonathan Zasloff, Legal Planet)

The Robin Hood Tax (Legislative Analyst’s Office) (pdf)

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