The Oil Tax Sticky Wicket

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Oil derricks dotting the landscape of western Kern County. Kern is home to 70% of all California oil production. (Photo: John Myers, KQED)
Few new tax proposals have dominated the recent political debate in Sacramento like calls for a new levy on each barrel of oil produced in California. Both sides say it's a no-brainer; not surprisingly, it's a little more complicated than that.

On this morning's edition of The California Report, we took a closer look at calls for an oil severance tax (sometimes called an 'extraction tax') on every barrel drilled either out of the ground or from under the sea. You can hear that story below:

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Several versions of an oil tax have come and gone, including one that was the funding source for an alternative energy initiative, Proposition 87, rejected by the voters in 2006. The latest proposal is slated for introduction when the Legislature returns -- perhaps as soon as a proposed special session on tax reform -- by Assemblymember Pedro Nava (D-Santa Barbara).

So why does the oil tax idea keep lingering around? Three safe guesses: other states have one and we don't, Big Oil isn't exactly winning any popularity contests, and the state budget remains in tatters.

Keeping Up With The Joneses: California's 215 million barrels of oil a year (2008 data) make us #3 in national production behind Alaska (491 million barrels) and Texas (398 million barrels). But those states both have oil severance taxes, a fact supporters of the proposal point to time and again. Opponents in the oil industry, on the other hand, cite a study from January that argues a version of the tax then being proposed by Governor Schwarzenegger would have resulted in a drop in oil production of at least 54,000 barrels a day and a subsequent loss of more than 9,000 jobs.

Fred Holmes' family has been in the oil business in the Kern County area for three generations. His company currently operates 400 wells. (Photo: John Myers, KQED)
The possibility of a drop in oil production is echoed by independent oilman Fred Holmes, a veteran of the business with whom I spent some time with on a recent reporting trip to Kern County. Holmes says that at current prices (California oil goes for less on the market than its big state competitors), the costs of drilling and production currently leave him with only about $10 a barrel. Take another $6 out of that with an oil severance tax, and he'd likely just walk away from many of his lower producing wells. "We reinvest most of our profits," said Holmes on the need to keep looking for new profitable reserves. "If we don’t reinvest, our wells will run dry, we'll be out of business." Supporters of the tax, including Assemblymember Nava, dispute any notion that California already places a high cost on the oil business. Under the current system, he says, "they don't have to carry their share of the burden."

One particularly nasty battle about the notion of 'fair share' has been waged between oil industry reps and Lt. Governor John Garamendi, an ardent oil tax advocate. "For more than a century," Garamendi told me recently, "California has given its oil away free to the oil industry." But Joe Sparano, president of the Western States Petroleum Association, called that a "ludicrous statement" in a recent interview. And while the industry continues to insist its California operational costs make the state much more expensive than the severance taxed states of Texas and Alaska, Garamendi's response in a recent interview was simple: "Bullshit."

Big Oil: The oil tax debate often overlooks independent producers like Fred Holmes, who says more than half of his 400 wells produce only about a barrel a day. Instead, the debate's usually focused on the big boys. That's because some 70% of all California oil is drilled by the likes of Chevron, ExxonMobil, Shell, and Occidental. The recent record profits of those companies are a likely reason the April statewide Field Poll, found 54% support for an oil severance tax.

Budget Boost... and... Bust?: Assemblymember Nava's version of the oil tax would set the rateat 10% on the gross value of every barrel. The revenues, estimated annually at $1.5 billion or more, would go straight to the General Fund. (The actual language of his proposal, it should be noted, has not been released.) If oil prices should go up, the help for the battered state budget would be even larger.

But for the state's #1 oil region, the revenue picture may be just the opposite. Often overlooked in the statewide debate is the fact that places like Kern County get property tax revenues from all that underground oil. Kern Assessor Jim Fitch tells me that the oil's value is assessed after expenses are calculated. As a result, he projects a 10% severance tax on each barrel would cost Kern County $45 million in lost tax revenues in the first year alone.

None of these arguments are easy to sort out. Both sides make compelling cases. And while the public may be willing to support the tax, the Legislature -- for now -- is not, given the 2/3 rule for any tax increase. (The governor also dropped his support for an oil tax after the February budget deal.) Might the Sacramento stalemate on the issue propel yet another ballot measure effort?

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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