Old debate, new twist: Pitch to tax oil production comes up again
| Monday, Nov 02 2009 06:39 PM
Last Updated Monday, Nov 02 2009 06:58 PM
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Casey Christie / The Californian In the foreground is the pump jack near the Kern River Parkway bike path and equestrian trail, with the Mohawk Bridge construction and oil refinery in the background.
The idea of taxing California oil production is back -- this time with a twist or two that could change the debate over whether such a tax would drain Kern government revenues, kill local jobs and drive up gasoline prices.
A big reason for the shift: higher oil prices. Since the last time the proposal came up in Sacramento, crude prices have settled at a relatively comfortable level. That, combined with the way property taxes are determined, could undermine claims that the oil tax would hurt the county, schools and special districts.
On the other hand, the oil industry already sees itself on shaky ground from a regulatory and market perspective. Some say any new tax would chase away new investment, particularly in oil-rich Kern County.
Separate bills by two state assemblymen have revived a proposal floated and then abandoned last year by Gov. Arnold Schwarzenegger to place a roughly 10 percent tax on most of the crude produced in California. Based on current prices, that would raise about $1.5 billion for either the state General Fund or higher education, depending on the bill.
Arguments for and against the tax are almost identical to those made last year. The two assemblymen proposing a severance tax say California is the largest oil-producing state without a severance tax. The industry counters that oil producers make up the difference when paying property taxes that, in California unlike many other states, are based partly on the value of underground resources.
Oil prices and property taxes
Differences brought on by the relatively high price of oil are starkly illustrated in county staff estimates as to the tax's potential impact.
In November 2008, the county predicted that a 9.9 percent oil severance tax would reduce local property tax revenues by $1.2 billion a year "at current crude oil prices." That was calculated based on petroleum-producing land in the county being worth $4.5 billion less money as a result of the proposed tax.
That prediction came at a time late last year when heavy Kern crude was selling at an average of between $40 and $50 a barrel, down from its peak of more than $120 in July 2008. Now it sells for about $70 a barrel.
Based on these higher prices, county Assessor-Recorder Jim Fitch said the tax would have little or no impact on local tax revenues -- assuming the prices stay high.
The reason for the changed outlook, Fitch said, relates to the fact that property can be valued in two ways: market value or its last sale price. Recently high crude prices mean oil land is generally worth more now than it was at its previous sale. So, unless the land changes hands, the county will not assess such property at a lower rate the way it feared it might have to a year ago.
"The severance tax will not have that big of an impact," he said.
Impact on local economy
Less clear are the tax's potential effects on local employment, investment in Kern's oil fields and fuel costs.
Assembly Majority Leader Alberto Torrico, D-Fremont, who has proposed a 10 percent oil severance tax generating revenues specifically for higher education, dismissed claims that oil producers would pull jobs and money out of California if his bill passes.
He also said that oil companies would not willingly walk away from their existing investments in the state.
"The scare tactics of job losses are just that -- scare tactics," he said.
A similar bill by state Assemblyman Pedro Nava, D-Santa Barbara, would bar oil companies from passing the cost of the tax on to consumers. It would also exempt small, independent producers if the price of oil drops below $50.
The industry's reticence, though predictable even in the best of times, comes as oil producers large and small face an unusual degree of uncertainty. Oil prices have fluctuated wildly over the past year and a half, largely because of expectations about the health of the global economy. And far-reaching clean-air regulations approved in Sacramento still have not been spelled out in concrete rules for industry.
If an oil tax were added to these uncertain conditions, smaller oil producers could simply decide to pull back and cancel new drilling work, said Les Clark, vice president of Bakersfield's Independent Oil Producers Agency.
"The unknowns will put projects back on the backburner again," which would lead to less investment and fewer jobs, he said.
A spokesman for the California Taxpayers' Association, David Kline, estimated that nearly 10,000 jobs would be lost if either of the severance tax proposals passes. He added that Kern would account for a lot of those losses because it is the state's leading oil-producing county.
Already California is at a disadvantage in terms of attracting investment because it is harder to extract oil here than in other states, said Mike Starzer, president and CEO of Bakersfield-based Bonanza Creek Energy Co., which has operations in California, the Rocky Mountains and mid-continent.
Starzer said the 10 percent tax would nearly wipe out many producers' existing profit margins. Some would curtail their California operations as a result, resulting in lower fuel supplies and higher prices at the pump, he said.
