March 21, 2006

Proposition 87: Oil Tax is Bad For Business

The Corona Chamber OPPOSES Proposition 87 the multi-million dollar Oil Severance Tax Initiative on the November 2006 ballot. The Corona Chamber believes this initiative will cause potential General Fund losses, reduction in local property tax revenues, reduction in transportation funding, and potential job losses.

Summary

1. Establishes a program intended to reduce oil and gasoline use, with research and production incentives for alternative energy, alternative fuel vehicles, energy efficient technologies, and for education and training.

2. Funding will be provided by a tax of 1.5% to 6%, depending on oil price per barrel, on producers of oil extracted in California. Prohibits producers from passing tax on to consumers. Specifies spending $4 billion in 10 years administered by California Energy Alternatives Program Authority.

3. Other points are prohibition of changing tax while indebtedness remains, and revenues excluded from Proposition 98 calculations and appropriation limits.

Background

1. California onshore and offshore oil production totaled 268 million barrels of oil—approximately 733,000 barrels per day. Oil production (excluding federal offshore production) represents approximately 12 percent of U.S. production. California is the third largest oil-producing state, behind Texas and Alaska. (2004 data)

2. Oil production in California peaked in 1985, and has declined, on average, by 4 percent to 5 percent per year since then. California oil production supplies approximately 42 percent of the state’s oil demand, with Alaska production supplying approximately 22 percent, and foreign oil supplying about 36 percent.

3. 29.8 million barrels were produced in Los Angeles and Orange Counties comprising roughly 13% of state’s 2005 total. Virtually all of the oil produced in California is delivered to California refineries.

4. In 2004, the total supply of oil delivered to oil refineries in California was 655 million barrels, including oil produced in California as well as outside the state.

5. Of the total oil refined in California, approximately 67 percent goes to gasoline and diesel (transportation fuels) production.

6. In 2005, the production from the Wilmington Oil Field (Long Beach) totaled 14.9 million barrels (5th largest field in California). Long Beach produced 1.5 million barrels of oil last year.

7. Oil producers pay the state corporate income tax on profits earned in California. California’s corporate income tax rate is among the highest of the top producing states. Texas, in fact, does not have a corporate income tax at all which provides producers a competitive advantage over California in trying to attract capital investment. California producers also pay a regulatory fee to the Department of Conservation (regulates oil production in the state) that is assessed on production, with the exception of production in federal offshore waters.

8. California’s taxes on oil producers are among the highest in the nation. Currently producers pay a fee of 5.3 cents per barrel of oil produced which will generate total revenues of $13.8 million in 2005-06.

9. Additionally, producers in California pay local property taxes on the value of oil extraction equipment (such as drills and pipelines) plus the value of the estimated recoverable oil in the ground.

Fiscal Impact

1. Raises fuel costs for consumers. This initiative is a hidden tax which could cost consumers and businesses hundreds of millions of dollars every year in higher gasoline, diesel and jet fuel prices and higher prices for goods and services provided by businesses that rely on petroleum products for production or transportation purposes. Its promoters made an attempt at doing so, prohibiting an oil producer – or any industry – from passing through the higher costs of doing business could be unconstitutional and is likely to lead to costly litigation.

2. The California Taxpayers’ Association opposes this new fuel tax because Californians already pay the third highest taxes on gasoline in the country.

3. California already faces a growing gap between ever-escalating demand for crude oil and gasoline and our current capacity to produce it. Placing an additional tax on California crude oil will discourage in-state production investments, making us even more dependent on imports – the very opposite effect initiative proponents claim as their goal.

4. Since the tax could not be applied to imported crude oil, foreign supplies would in essence prospectively gain a market advantage over locally and in-state produced crude. Placing further reliance on imports could potentially exacerbate existing air quality issues relative to the region’s ports.

5. A large portion of these new taxes would go into the hands of a self-perpetuating huge new bureaucracy, with little accountability and oversight. The measure mandates this new agency to spend $4 billion within ten years – whether it can justify those expenditures or not. It allows members of the new agency to hire unlimited staff and make political appointments of commissioners who will also be paid at taxpayer expense.

6. Higher business costs imposed by this tax could cost Californians good-paying jobs and benefits, and harm the state’s economy by discouraging new businesses from investing here.

7. The Legislative Analyst in a report dated January 25, 2006 reported the measure would raise between $200 million to $380 million in new tax revenues for this newly created special-purpose agency while resulting in the following:

a. General Fund Losses: The LAO reported that income tax revenues from oil producers that flow into the state’s General Fund would be lower because the severance tax would be deducted from earned income on oil producers.

b. Reduction in Local Property Tax Revenues: The LAO stated “local property taxes paid on oil revenues would decline under the measure…” The report stated that the loss could result in a revenue decline for K-14 school and community college, which the state may be required to offset in some cases. The Analyst also notes the measure would result in non-reimbursable local government costs (of an unknown amount) for administering the new act. Both of these impacts could be particularly focused on Long Beach, given the fact our area is one of the leading crude oil producing regions in the state.

c. Potential Reduction in Transportation Funding: According to the LAO, tax revenues from gasoline, diesel excise and sales tax could be reduced if this measure decreases the use of oil for transportation fuels. Currently these tax sources are a major source of state transportation funding.

8. Reduced Economic Activity and Lost Jobs: According to the LAO, this measure could further affect state and local government revenues by reducing economic activity and causing job losses due to increased costs for oil production and imposition of hundreds of millions in new taxes.

More Information

www.NoOilTax.com