San Diego Union-Tribune Editorial Against California Oil Severance Tax is Wrong on Economics and Hypocritical

Not that money doesn’t play a role in public policy in California in the halls of the legislature and the Governor’s back room.

One of the hypocrisies in the Union’s position is their steadfast opposition to campaign finance reform. Not just Prop 89 that failed on the November 2006 ballot—but bills such as Assemblymember Loni Hancock’s AB 583 the California Clean Money Act. If there are payoffs going on in Sacramento, the San Diego Union offers precious little to reform this—aside from tarring a number of good legislators when they disagree with them on an issue with a broad brush.

Mind you, I have taken on the California Teachers Association in these pages for their opposition to Prop 89 which would have publicly financed campaigns for state offices including the Assembly and State Senate. I’d like to see campaign finance reform to remove the tarring that our public officials open themselves up to whenever they vote on one side or another of an issue and so that we can be sure they are taking positions based on public policy beliefs. This editorial is a powerful exhibit for the need for such legislation.

But by what logic does the Union-Tribune fail to note the contributions of the big oil companies to Republicans who will vote against this fee and a tax on the oil companies? The last time I checked (this morning) Exxon Mobil Corporation is listed as a Major Donor and Independent Expenditure Committee by the California Secretary of State’s office. In their last report of campaign contributions you will see the California Republican Party and its former leaders in both houses--Senator Dick Ackerman and Assembly George Plescia. You’ll find contributions to other sitting Senator such as ones made to the McClintock for Lt. Governor Committee.

Chevron is a major donor also and its last report shows $197,000 to California Republican Party in 2007, $100,000 to Schwarzenegger’s California Recovery Team (recovery of what, oil?) and even $100,000 to Committee for Term Limits and Legislative Reform (the committee formed by Speaker Nunez to try to pass Prop 93). All and all, they contributed $1.2 million in 2007. And to be fair, they just contributed in January of this year $70,000 to the California Democratic Party and $50,000 to the California Republican Party.

So are those Republican votes against a severance fee and a tax on oil produced in this state a payoff also? Where is that mentioned in the editorial?

The Union-Tribune editorial also raises the straw man of provisions in Prop 98 that allow for different actions in a time of fiscal emergencies:

“Consider the history of Proposition 98, the landmark 1988 initiative that guarantees schools about 40 percent of state revenue. Its language explicitly said the guarantee could be dropped during fiscal emergencies. But by 1991, the CTA was arguing that the guarantee should only go unmet after an “act of God” emergency such as a devastating earthquake.”

The editorial makes its point by taking an argument to its logical extreme. But this begs the question asked by Dave Johnson in an article in these pages in December, California is Fighting an "Emergency" With One Hand Tied Behind Our Backs: “But in an "emergency" why would the Governor make a pre-emptive announcement that takes half of the state's budget options off the table? A budget consists of spending and revenues. Yet the Governor proposes to solve the problem entirely by cutting government services like education, social services and law enforcement, and is not even discussing raising taxes. Shouldn't half of the solutions toolkit warrant half of the discussion?”

It’s not like there aren’t other choices here—including the yacht tax and an oil severance fee—unless you believe in fairly extremist economic views.

The editorial is wrong on the economics of this as well. It is based on this trickle down Reaganomics that you can never have industry pay its fair share in taxes, or in this case pay even a severance fee. The Union-Tribune states:

"It's a clever ploy: The public is asked to side with noble teachers over evil Exxon Mobil. But the group really being punished wouldn't be oil companies. It would be drivers. Nunez's proposal inevitably would raise the price of gasoline in California directly by increasing the cost of oil and indirectly by reducing the supply of oil (630,000 barrels a day) now produced here."

We went through all this in the campaign the oil companies waged against Prop 86 in 2006. That would have enacted an oil severance fee to pay for alternative energy sources. This is what we said at the time:

"Slicker than Oil: The Debate Over California’s Proposition 87" appeared last week on the Applia Econ Blog; News for Econ Students. It is written by Paul Romer, a Stanford professor of economics. He is a Senior Fellow of the Hoover Institution, a fairly conservative think tank named after Herbert Hoover. All the more important for his conclusions.

“His analysis of Proposition 87 shows that it will not increase gas prices (using what he calls an "introductory macroeconomics course" level analysis) and lays to rest the arguments of the oil industry. While he remains neutral with regard to 87, he does say that opponents are totally off base in the main arguments they are making.

“This is a little of what he has to say:

“The market for oil is global, and the price of oil is set by global supply and global demand. California produces less than 1% of all the oil produced in the world, so changes of a few percent in its output would be far too small to have a noticeable effect on global supply and demand. Taken together, all the producers in California are in the same position as a single firm in a competitive industry. …

“Understandably, these producers have raised a lot of funds to support a campaign to oppose the imposition of this new tax. The tax would raise up to $4 billion before it expires, so for oil producers as a group, it makes sense to spend millions of dollars to defeat the tax. What is interesting about the campaign ads that they support is their repeated claim that the tax will raise the price of gasoline. No doubt, their campaign consultants have found that raising this irrelevant issue is the most effective way to get people to vote against this proposition."

One question the oil companies could never answer was posed by President Bill Clinton, when he campaigned in California in support of Prop 86: “Now, I know the oil companies have trotted out some economists in their ads. But let me ask you something: If they really thought you were going to pay for this, would they be spending all that money trying to convince you to vote against it? You need to know that California is the only state in America without any kind of extraction fee on its natural resources on oil.”

Clinton then made this comment based on experience: “I come from a state, Arkansas, where we had an oil and gas severance tax. It never makes any difference in the price. It's set in the market. There are plenty of states with very, very high severance taxes, much higher than Prop 87 would impose here, that have less expensive gasoline. Believe me, this -- all this campaign is a ruse. This is designed to slow down America's transformation to a clean, independent, energy economy.”

The Union-Tribune’s editorial is part of a similar ruse to make straw man arguments against properly funding education. Or is it because of their revenues from the gas and oil companies who advertise? I wouldn’t argue their motivations—without evidence—but I sure disagree with their conclusions and the manner in which they have put them forth in their editorial.