March 11, 2008

Oil taxes

Speaker Nunez has revived the idea from Prop. 87 -- defeated at the polls -- to levy a severance tax on oil companies, and he is coupling it with a "windfall profits" tax on the same firms. All of the money raised -- an estimated $1.2 billion -- would go to the schools.

I'm intrigued by this proposal on several levels, and more inclined to be open toward the severance tax than the profits tax. Here are some thoughts and questions:

--Supporters of the severance tax say California is the only one of the 22 oil-drilling states that does not have one. That must make California, relative to the other states, a more attractive place for oil companies to drill. At least with all other things being equal. We probably have other things here -- regulations, other taxes, higher prices -- that make it less attractive, but the lack of a severance tax would mitigate those to some effect. If it becomes more attractive to drill for oil in Texas than in California, will that reduce production and employment, and would that reduce the amount of net revenue the tax would generate? Is there a union representing oil workers? How do they stand on this?

--To the extent that you make California oil more expensive at the wellhead, you make imported oil relatively cheaper. That means more of the oil we use would be imported. So much for reducing our dependency on foreign oil.

--This proposal promises to somehow prevent oil companies from "passing through" the new taxes to consumers. I don't know how, exactly, you do that. If they raise prices, how do we know if they are passing through the tax, or the rising cost of oil, or raises for their CEO or blue collar workers? It seems like it would take a massive bureaucracy to sort through all of that. And the question is, why? The Democrats are fighting global warming by increasing the regulation of carbon emissions, and threatening either a carbon tax or an auction for pollution credits to make carbon-based products less attractive to consumers. Wouldn't passing this tax through to consumers have the same effect?

--The "windfall profits" tax would be applied to any individual or corporation earning more than $10 million from the oil business. Is there an economic or moral rationale for such a tax? They already pay personal and corporate income taxes. Why should they be singled out to pay a higher rate than all other individuals and businesses? Are their profits somehow different from those earned by banks, insurance companies, housing developers, gun manufacturers, tobacco companies, and newspapers? A "windfall profits" tax reminds me of "hate crimes." A crime is a crime, no matter the motivation. And a profit is a profit. Why should it matter which industry or line of work it came from?

--All of the money raised by the tax -- an estimated $1.2 billion -- is going to go to the schools. Schools are popular, but is that the best use of the money, at a time when enrollment is flat while people are being turned away from health care and the poor might be going without cost of living increases in their monthly stipends? Further, does it help solve the state's budget problem?

It seems like if there is a structural deficit, and you raise more revenue but then you spend it all on schools, you still have a deficit. It would be no different than what the state did in those boom years when they got unexpected revenue and spent it all. I would use all extra revenues, whether unanticipated or generated by a tax increase, to pay down debt and other one-time obligations while holding ongoing spending flat until the state was in the black again.

--Prop. 98. What are the implications for the future? Does plowing all that money into schools increase the base for Prop. 98, obligating the taxpayers to higher spending even as revenues from the tax will presumably decline as we wean ourselves off oil and oil company profits decline?

Just wondering.

*An earlier version of this item suggested that the bill was primed to fly through the Assembly. Clearly it's ready to fly to the floor but will be stopped there by the two-thirds vote requirement.

Posted by dweintraub on March 11, 2008 2:56 PM