Dan Morain

Dan Morain: Calculating the profits, pitfalls of an oil tax

Dan Morain
Dan Morain

At least some of those grease spots on the Assembly and Senate floors are what's left of grand legislation to raise taxes on the oil industry.

Emboldened legislators have proposed 12 versions of an oil tax since 1994. They sought billions of dollars to fund all sorts of good causes. An Assembly speaker tried. So did a Senate president pro tem. Oil industry lobbyists crushed them all.

Sen. Noreen Evans is carrying the latest bill to tax oil at the wellhead. Senate Bill 241 would earmark as much as $2 billion a year for right and relevant programs such as higher education and parks.

"If we can't do something this simple, why do the Democrats have a two-thirds majority?" asked Evans, a Santa Rosa Democrat, whose bill faces its first committee vote today.

If it were that simple, someone would have succeeded long ago. Evans knows her bill will meet the same fate as the others – probably.

The Brown administration is developing regulations governing fracking, the process of injecting huge amounts of liquid into shale and extracting oil and gas. Democratic lawmakers have proposed no fewer than four bills to regulate or halt the practice.

The potential is huge, with reserves spread underneath 1,750 square miles of the state known as the Monterey Shale Formation. The U.S. Department of Energy estimates that the formation contains more than 15 billion barrels of oil, approximately two-thirds of the known shale oil in the United States, an Assembly staff report says.

Perhaps a deal could be struck: authorize oil companies to expand fracking, tapping into the new black gold mine, in exchange for paying a hefty severance tax.

"There are a lot environmental impacts," Evans said of fracking. There would be big profits, too. "It's only fair that Californians share in it."

Another factor changing the calculation is Tom Steyer, the San Francisco billionaire who retired last year from Farallon Capital, the hedge fund he founded, and is spending much of his wealth fighting climate change.

"I'm assuming the Legislature will do the right thing" by approving a severance tax, Steyer said over tea at Ambrosia, a block from the Capitol. If the Legislature shocks him, as it has in the past, expect to see an oil tax on the ballot, in 2014 or 2016. "I guess we'd think about it," he said, probably understating what he is thinking.

Other major oil-producing states impose such taxes. Texas, for one, levies $14.33 per barrel, three times more than does California.

"We have to get off fossil fuels," Steyer said. "If we are going to produce fossil fuels, we should charge the companies in the same way every other state does."

The history of oil tax initiatives is not pretty. Hollywood producer Stephen Bing and Silicon Valley billionaires pumped in $61 million to promote Proposition 87 in 2006 to impose a wellhead tax. Oil companies spent $92 million to defeat it, modest considering the initiative would have raised $4 billion a year from oil companies.

Steyer won't push an initiative until he does his research. But he has some ideas of what might fly.

"The Legislature in considering the oil severance fee should give serious consideration to giving that money back to the citizens in some form or another," he said.

What form that might take is to be determined. But there are possibilities. An oil tax increase could correspond to reductions in income, sales or corporate tax rates. Perhaps Californians would get dividend checks.

"It could be a great statement in terms of values," Steyer said, "that this is not just about creating revenue for state government."

Steyer, who plays politics to win, spent $6 million in 2010 to defeat Proposition 23, an oil industry-funded initiative that would have rolled back California's AB 32 to reduce greenhouse gases. He spent $29.5 million last year to pass Proposition 39, which raises taxes by $1 billion a year on out-of-state businesses, with half of it earmarked for energy conservation.

Steyer was in the Capitol Tuesday to urge legislators to spend that bounty in ways that put Californians to work. Needless to say, politicians pay rapt attention when a guy with pockets as deep as Steyer's and a record of success visits the Capitol.

A Senate committee approved the bill he backed, Senate Bill 39 by Sen. Kevin de León, unanimously. That's quite a shift from last year when legislation to impose the tax failed, prompting Steyer to push his Proposition 39.

The same could happen with an oil tax. Evans' bill might become another smudge on a Capitol carpet. But between potential profits from fracking and Steyer's money, perhaps the day is nearing when the oil industry pays its fair share.

Follow Dan Morain on Twitter @danielmorain.