Refuting Oil Industry Lies About The California Severance Tax


Posted on 06 July 2010

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By Anthony Rubenstein

The State of California is once again in the throes of a budget crisis.  An oil severance tax has been suggested as one way to increase state revenues in order to avoid or reverse state program and service cuts caused by California's chronic budget problems.  Every major newspaper in the state has editorialized in favor of adopting some version of an oil severance tax. Predictably, these proposals have been met by well-worn lies voiced by a rogues' gallery of paid spokespeople, front groups and experts-for-hire.

California is the only oil producing region on the planet where the Oil Companies get away without paying some form of what's called a severance tax, a royalty paid for the right to "sever" natural resources from the land.  Even oil taken from under federal waters off the California coast is subject to an 18.75% federal royalty, but in California’s territory - nothing.

Facts can make a difference.  This is a fully annotated refutation of the top lies the Big Oil pays to have others tell Californians about the oil severance tax. The Oilies’ Lies are taken from an Op-Ed "written-by" Teresa Casazza of Cal-Tax, which is inter-changeable with many other such screeds.

Oily Lie #1: California oil companies already pay their "fair share" of corporate taxes and property taxes, and adding an additional severance tax would make it the highest taxed oil in the U.S.

Truth: California oil companies pay less than the nominal state corporate tax rate, their property taxes are limited under Prop 13, and Alaskan oil is and will remain the most highly taxed oil in the U.S. Under Gov. Sarah Palin, Alaska instituted a "highly progressive" Oil Profit Tax beginning at 25%, plus a 2% property tax.

Details:

Corporate Taxes:
Every corporation in California is obliged to pay state corporate tax at the nominal rate of 8.84%. In practice, after deductions and write-offs most taxpayers, including corporations, pay less than the nominal rate, which is known as the effective tax rate.  

Forensic accounting analysis to determine what effective rate the Oilies are paying California is extremely difficult because tax records are private information. The best attempt to unpack the public record is by author and activist Antonia Juhasz who in her book The Tyranny of Oil estimates Chevron's effective state tax rate for 2007 at just under 8.0%.

But paying corporate taxes like the rest of us is irrelevant. The real issue is that the Oilies should pay a royalty for the depletion of a scarce, irreplaceable natural resource - just like they do everywhere else in the world.

Property Taxes: All property taxes in California are limited under Prop 13, including oil-bearing properties. As UC Riverside economist M. Mason Gaffney points out, county assessors staff can't or won't keep current with fluctuations in the price of oil, so their assessed taxable property value is far below the true market cost.  Also, property taxes on oil reserves accessed by leasehold are mostly based on the improved value of the land (if there's any building on it) and are paid by the owner of any such property, not by the oil company depleting the underground resource. Again, the point is to make the oil companies pay for the depletion of our natural resources, just like they pay in Texas.

Most tax "burdened": Alaska's oil taxes as a percentage of oil company revenue dwarf the proposed California oil severance tax.  Under Governor Sarah Palin and a majority Republic legislature, Alaska levied a "highly progressive" oil production profit tax that begins at 25% and increases with the market price of oil, plus an additional Oil and Gas Property tax of 2%. Oil-related revenue from fees and taxes funds 90% of Alaska's treasury, including an annual oil revenue share check for every Alaskan citizen. Here's a link to Sarah Palin explaining how increasing Alaska's tax on oil promotes job growth and stimulates the Alaskan economy.

Oily Lie #2: Imposing a tax on California Oil will cause drillers to reduce production, making California consumers more dependent on foreign oil.

The Truth: Increasing severance taxes have never affected oil production levels in Alaska, Texas, or anywhere else.  Chevron and the other Oil companies import oil from Saudi Arabia and Nigeria because it's more profitable for them to import oil than to produce it here.

The Details:

Reduced Production: A study by the State of Wyoming (6% Oil Severance Tax) found that severance taxes have a negligible effect on production. This is because oil extraction is a long-term process, and over the long term oil prices always go up erasing any marginal loss caused by the tax increase.   In practice Oil Drillers do sometimes shut in unprofitable wells, but (as we've all seen in the Gulf) geologic pressures are such that they don't (or can't) shut-in productive wells that might be temporarily less profitable.

More Oil Imports:
Oil Companies get oil from wherever it's cheapest. According to the most recent figures from the U.S. Energy Information Agency average U.S. oil production costs are higher than in the Middle East, South America, and Africa, both before and after including severance taxes (which are all much higher overseas).

Don't be confused by the term "Lifting Costs."  As it says elsewhere on the EIA site "Lifting costs (also called production costs)..."

Don’t be confused by Oily spokespeople citing transportation costs. The price of a barrel of oil that you see in the news is what's called the "Landed Price" meaning it's the price of a barrel of oil delivered to the refinery gate. U.S. domestic drillers don't give American consumers a patriotic discount, they sell to the highest bidder according to the global market price which includes transportation cost.

Sometimes the Oilies' spokespeople try to pull a fast one by citing the fact that California oil sells on the open market for about $10 per barrel less than what's called "benchmark" light sweet crude.  Again, don't be confused. California oil is called heavy sour crude, and sells for $10 less than the other stuff because it costs $10 more to refine.  

Oily Lie #3: Imposing a California Oil Severance Tax will raise gasoline prices at the pump because oil companies will just pass the increased cost through to consumers.

Truth: Oil Severance Taxes have never affected gasoline prices at the pump because they don't affect the market price of oil paid by refiners, and consumers buy gasoline from retailers who bought it from those refiners. They can't "pass it through".

The Details:

Please take a look at the severance taxes listed above. Between 2007 and 2008 U.S. average severance taxes nearly doubled thanks to Governor Palin in Alaska. Now look at gasoline prices at the pump over the same period:

The evidence is irrefutable:

After U.S. severance taxes nearly doubled between 2007 and 2008 gasoline prices at the pump went DOWN.

If you’re unsatisfied by the price at the pump data above, let’s try some common sense:

If the Oilies could just pass the oil tax through to consumers by raising gasoline prices, then a severance tax wouldn't cost the Oil Companies a dime. So, then why does Big Cali Oil spend hundreds of millions to fight the oil tax? It's not because they're looking out for consumers. After all, the Big Oil doesn’t oppose the gasoline taxes every state and the federal government levy at the pump. The oil companies fight the Oil Severance tax because they know that they’ll be the ones paying it, and that they can’t “pass it through.”

The economic explanation for why the Oilies can’t pass along the cost of a severance tax is based on a simple economic principle called the Ramsey Rule which holds that the cost of taxes on the production of commodity raw materials is borne by the producer of the raw material, not the consumer. Famed Stanford economics professor Paul Romer explains it best.

Oily Lie #4: Imposing a California Oil Tax will kill thousands of jobs because of decreased oil production.

The Truth: Letting the Oilies keep their tax break is the real job killer. A new study by UC Berkeley funded by the non-partisan California Endowment found that in the worst case 300 oil industry and related jobs could be lost. The study found that comparable cuts to state programs and services, equal to the $1 billion-plus per year that the Oil Tax would raise,  will kill thousands of jobs statewide.

The Details:

We already showed you a State of Wyoming report that proves oil production doesn't decrease because of an Oil Tax, and this new report from UC Berkeley actually takes takes that data and puts it through some economic modeling.  In the worst case scenario an Oil Severance Tax might lower oil production and industry related jobs by a grand total of 300 jobs.  You can read the report yourself, but here are the numbers:

Letting the Oilies keep their huge tax break is the real job killer.

Oily Lie #5: Imposing an Oil Severance Tax would cost Kern and other oil producing counties millions of dollars because Oil Companies would pay less in local property taxes.

The Truth: Local counties won't lose a penny.  Any loss in revenues will be reimbursed to effected counties by the state with proceeds from the Oil Tax.

The Details:

The State of California reimburses the counties. No revenues are lost by them, tons of revenues are gained by we the people for our schools, roads, and courthouses.

Oily Lie #6: Relying on uncertain revenues from a declining resource subject to volatile pricing swings like oil is unwise tax policy.

The Truth: The entire global oil industry and every other oil-producing region on the planet rely on uncertain revenues from a declining resource subject to volatile pricing swings - oil.

Oily Lie #7: The negative effects of imposing an oil severance tax have been proven by research by respected former California Legislative Analyst William Hamm of LEGC, an independent law and economics research group.

The Truth: William Hamm is an expert-for-hire employed by the Oil Industry through his consulting firm LEGC.  He was California's Legislative Analyst 25 years ago, and has been a serial expert for hire ever since.

The Details:

This fact sheet presents the truth, backed-up by hard facts from truly independent Federal, State and Academic sources. Because the true facts don't fit the Oily storyline, they pay William Hamm and LECG tens of thousands of dollars to make up facts for them. William Hamm and all the other Oily-paid experts and spokespeople are enriching themselves while making all of California poorer.

Now, in California’s hour of deepest need, when every dollar counts, the Oilies don’t care about the damage their lavish tax break is doing to California. They don’t care if teachers, cops, and firefighters get laid-off, if kids drown in backyard swimming pools because the closest fire station is “browned-out”, if the cost of a public college education in California prices worthy students out, or if cuts to the L.A. County Civil Courts will depress the economy by $30 billion.

Here’s the bottom line: the Oil Companies don’t want to pay taxes, they want YOU, the consumer to pay taxes for them.  

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Anthony Rubenstein is a social venture and policy entrepreneur from Los Angeles.  He was founder and Chairman of Californians for Clean Energy – Yes on 87. Proposition 87 proposed an oil severance tax in 2006. Revenues from the tax would have funded a Manhattan Project-style effort to lower Californians’ use of petroleum by 25%. The Oil Industry, defeated Prop 87 by mounting a highly deceptive $100+ million campaign. Anthony was named Consumer Champion of 2009 for his efforts to help lead the fight that stopped Proposition 10, a $10 billion bond issue sponsored by T. Boone Pickens.