Californians for Responsible Economic Development pushing ballot initiative to create oil and gas severance tax

by Andy Cohen



North Dakota does it. Louisiana does it. Florida too, and Alaska. Even Texas has an oil and gas severance tax, which largely funds state government there. Alaska is almost entirely dependent on their oil severance tax.

But in California, no such tax exists. California, unlike just about every other oil producing state in the U.S., practically gives away its natural resources to private industry. That could change, however, by way of the 2014 midterm elections.

The group Californians for Responsible Economic Development hopes to bring an initiative to California voters in 2014 that will impose a 9.5% severance tax on any and all oil and natural gas extracted from California land or coastal waters, a fairly modest proposal in comparison to other states. The fee in North Dakota, for example, is 11.5%. In Louisiana the rate tacks up to 12.5%. In Alaska, oil companies are dinged at the rate of 25-50% of the net value of the oil and gas extracted. California is clearly missing out on a massive revenue opportunity for state coffers.

“This is a modest proposal that would not affect oil production in California,” said Kevin Singer, the Communications Director for CRED, in response to concerns that business would leave the state. “Oil producers would not leave the state because of this tax.”

According to Singer, the proposed bill, called the California Modernization and Economic Development Act would provide an additional $1.2 billion in education funding, $60 million for state parks operations, $400 million in subsidies for clean energy development and implementation, and $300 million for infrastructure funding at the local government level. If voted into law, the bill would provide subsidies for small businesses to convert to clean energy sources. For example, a delivery company would be subsidized in their effort to convert their trucks from gasoline or diesel to natural gas or biofuels.

“This has the potential to save small businesses a lot of money,” said Singer.

The clean energy subsidy portion of the bill would sunset in 2025.

Interestingly, the local infrastructure funding could be applied to aid San Diego Mayor Bob Filner’s push to place solar panels on all city buildings. But really, Singer says, the infrastructure funding could be used for just about anything a local government deems necessary.

The ballot push comes at the same time that State Senator Noreen Evans (D-District 2) is pursuing a separate initiative in the State Legislature. Introduced in the State Senate as SB 241, the bill would also impose a 9.5% severance tax on oil and gas extracted in the state. And like the CMED, Evans’ bill would also use the money collected to fund schools and state parks.

SB 241, according to the text of the bill, would send 93% of the proceeds from the new tax toward education funding—both bills would create a California Higher Education Fund that would then distribute the money to all levels of the state’s education system—and the remaining seven percent would be put toward maintenance and upkeep of state parks.

Unlike CMED, however, Evans’ proposal would not provide any infrastructure or clean energy funding.

“Oil severance needs to be passed one way or another, whether through the Legislature or through a proposition (popular vote)” said Singer.

The trouble with the efforts in the State Legislature, Singer says, is the outsized influence of the oil and gas industry on politicians. Industry interests are not going to allow a new tax without a fight, and it is highly in doubt whether the bill can get through the Senate and the Assembly, even with a supermajority of Democrats, and despite the fact that the effort would seem to be perfectly and completely logical and an easy lift. After all, even the most staunchly conservative states have a significant oil and gas tax, so why should a more liberal California be exempt?

There are also doubts about whether Governor Jerry Brown would support the legislative initiative, favoring instead a ballot proposal. While no veto threat has been issued, it was a campaign promise by Brown in 2010 that any and all proposed tax increases be brought before the voters.

It is also entirely possible—likely, in fact— that legislators could see the CMED ballot proposal as the perfect cover, allowing them to avoid the financial ire of oil and gas interests by voting against the Evans bill and—especially for the Democrats—allowing them to steer clear of being seen as raising taxes and being labeled “tax and spend Democrats.” As with Prop 30, they could then point to the new tax as being “the will of the people.” It would not exactly be a demonstration of political courage, but politics being what they are it is the more probable outcome, and California’s penchant for legislating via ballot initiative is sure to continue.

Evans’ bill, in other words, is probably dead on arrival, regardless of the widespread support for the notion.

Despite the passage of Prop 30, and even with the recent improvement of California’s budget prospects, the state is still in need of additional revenues. It is almost unthinkable that there isn’t already an oil and gas extraction tax, and given the profitability of the oil and gas industry whose profits are soaring to record levels even through the economic downturn, the severance tax would seem a small price to pay, particularly in light of what other states demand. And given the unlikelihood of passage through the State Legislature the CMED bill is a viable and reasonable option.

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