BACKGROUND
California Oil Production. In 2005, California’s
estimated oil production (excluding federal offshore
production) totaled 230 million barrels of oil—an
average of 630,000 barrels per day. California’s
2005 oil production represents approximately
12 percent of U.S. production, making California the third
largest oil-producing state, behind Texas and Alaska. Oil
production in California peaked in 1985 and has declined,
on average, by 2 percent to 3 percent per year since then. In
2005, California oil production supplied approximately 37
percent of the state’s oil demand, while Alaska production
supplied approximately 21 percent, and foreign oil supplied
about 42 percent.
Virtually all of the oil produced in California is
delivered to California refineries. In 2005, the total
supply of oil delivered to oil refineries in California was 674 million barrels, including oil produced in
California as well as outside the state. Of the total
oil refined in California, approximately 67 percent goes to
gasoline and diesel (transportation fuels) production.
Oil-Related Taxation in California. Oil producers pay the
state corporate income tax on profits earned in California.
Oil producers also pay a regulatory fee to the Department
of Conservation (which regulates the production of oil in
the state) that is assessed on production, with the exception
of production in federal offshore waters. This regulatory
fee is used to fund a program that, among other activities,
oversees the drilling, operation, and maintenance of oil wells
in California. Currently, producers pay a fee of 6.2 cents per
barrel of oil produced, which will generate total revenues of
$14 million in 2006–07. Additionally, property owners in
California pay local property taxes on the value of both oil
extraction equipment (such as drills and pipelines) as well
as the value of the recoverable oil in the ground.
PROPOSAL
Severance Tax on Oil Production in California. Beginning in January 2007, the measure would impose a
severance tax on oil production in California to generate
revenues to fund $4 billion in alternative energy programs
over time. (The term “severance tax” is commonly used to
describe a tax on the production of any mineral or product
taken from the ground, including oil.) The measure defines
“producers,” who are required to pay the tax, broadly to
include any person who extracts oil from the ground or
water, owns or manages an oil well, or owns a royalty
interest in oil.
The severance tax would not apply to federal offshore
production beyond three miles from the coast. The measure
is unclear as to whether the severance tax would apply to oil
production on state-owned lands (which includes offshore
production within three miles of the coast) or production
on federal lands in the state. Additionally, the severance
tax would not apply to oil wells that produce less than ten
barrels of oil per day, unless the price of oil at the well
head was above $50 per barrel. At current prices and levels
of production, the tax would apply to about 230 million
barrels of oil produced in the state annually if state and
federal lands are included, or about 200 million barrels of
oil production annually if they are not included.
Tax Rate Structure. The measure states that the tax
would be “applied to all portions of the gross value of each
barrel of oil severed as follows:”
- 1.5 percent of the gross value of oil from $10 to $25 per
barrel;
- 3.0 percent of the gross value of oil from $25.01 to $40
per barrel;
- 4.5 percent of the gross value of oil from $40.01 to $60
per barrel; and
- 6.0 percent of the gross value of oil from $60.01 per
barrel and above.
The wording of the measure regarding the application of
the tax rates could be interpreted in two different ways. On
one hand, it could be interpreted such that the tax would
be applied on a single rate basis on the full gross value of
oil per barrel. For example, if the gross value is $70 per
barrel, the tax would be applied at a rate of 6.0 percent on
the full $70—yielding a tax of $4.20 per barrel. On the
other hand, it could be interpreted to apply on a marginal
rate basis similar to the income tax. For example, if the
gross value is $70 per barrel, the first $10 is not taxed,
the value from $10 to $25 is taxed at 1.5 percent, and so
on—yielding a tax of $2.17 per barrel.
In general, for a given period of time, the single rate
interpretation would generate twice as much tax revenue
as would the marginal rate interpretation. The issue of
the application of the tax would presumably be resolved
by regulations adopted by the California State Board of
Equalization (BOE) and interpretation by the courts.
Passing Along the Cost of the Tax to Consumers. The
measure states that producers would not be allowed to pass
on the cost of this severance tax to consumers through
increased costs for oil, gasoline, or diesel fuel. The
BOE is charged with enforcing this prohibition against
passing on the cost of the tax. While it may be difficult to
administratively enforce this provision (due to the many
factors that determine oil prices), economic factors may
also limit the extent to which the severance tax is passed
along to consumers. For example, the global market for
oil means that California oil refiners have many options
for purchasing crude oil. As a result, oil refiners facing
higher-priced oil from California producers could, at some
point, find it cost-effective to purchase additional oil from
non-California suppliers, whose oil would not be subject
to this severance tax.
Term of the Tax. The measure directs that the new
California Energy Alternatives Program Authority
(Authority), discussed below, shall spend $4 billion for
specified purposes within ten years of adopting strategic
plans to implement the measure. The revenues are to be used
for new spending (that is, they cannot be used to replace
current spending). Under the measure, the Authority has
the ability to raise program funds in advance of collecting
severance tax revenues by selling bonds that would be paid
back with future severance tax revenues.
The severance tax would expire once the Authority has
spent $4 billion and any bonds issued by the Authority are
paid off. The length of time that the tax would be in effect
will depend on several factors, including the interpretation
of the tax rate, the future price and production of oil, and
decisions about using bonds. Because the measure directs
the new authority to spend $4 billion within ten years, the
tax will be in effect at least long enough to generate this
amount of revenue and longer if bonds are issued.
Depending on these variables, the term of the tax would
range from less than ten years to several decades. For
example, the shorter period would result under the single
tax rate and/or higher oil prices and production levels.
Alternatively, a longer period would result under the
marginal tax rate and/or lower oil prices and production.
Tax Revenues to be Deposited in New Special Fund. The proceeds of the severance tax would be deposited in
a new fund created by the measure, the California Energy
Independence Fund. These revenues would not be eligible
for loan or transfer to the state’s General Fund and would
be continuously appropriated (and thus, not subject to the
annual state budget appropriation process).
Reorganized State Entity to Spend the Tax Revenues. The measure would reorganize an existing body in state
government, the California Alternative Energy and
Advanced Transportation Financing Authority, into a
new California Energy Alternatives Program Authority
(Authority). This reorganized authority would be governed
by a board made up of nine members, including the
Secretary for Environmental Protection, the Chair of the
State Energy Resources Conservation and Development
Commission, the Treasurer, and six members of the
public who have specific program expertise, including:
economics, public health, venture capital, energy
efficiency, entrepreneurship, and consumer advocacy. The
Authority is required to develop strategic plans and award
funds to encourage the development and use of alternative
energy technologies. The board would appoint a staff to
administer various programs specified in the measure.
One of the stated goals of the measure, to be achieved
through the various programs funded by it, is to reduce the
use of petroleum in California by 25 percent from 2005
levels by 2017. The actual reduction would depend on the
extent to which the measure was successful in developing
and promoting—and consumers and producers used—new
technologies and energy efficient practices.
Allocation of Funds. The funds generated from the
severance tax, as well as any bonding against future
severance tax revenues, would be allocated as follows,
after first covering debt-service costs and expenses to
collect the severance tax:
- Gasoline and Diesel Use Reduction Account (57.50
Percent)—for incentives (for example, consumer loans,
grants, and subsidies) for the purchase of alternative fuel
vehicles, incentives for producers to supply alternative
fuels, incentives for the production of alternative fuel
infrastructure (for example, fueling stations), and grants
and loans for private research into alternative fuels and
alternative fuel vehicles.
- Research and Innovation Acceleration Account
(26.75 Percent)—for grants to California universities
to improve the economic viability and accelerate the
commercialization of renewable energy technologies and
energy efficiency technologies.
- Commercialization Acceleration Account (9.75
Percent)—for incentives to fund the start-up costs and
accelerate the production and distribution of petroleum
reduction, renewable energy, energy efficiency, and
alternative fuel technologies and products.
- Public Education and Administration Account (3.50
Percent)—for public education campaigns, oil market
monitoring, and general administration. Of the 3.5 percent,
at least 28.5 percent must be spent for public education,
leaving a maximum of 71.5 percent of the 3.5 percent (or
roughly 2.5 percent of total revenues) for the Authority’s
administrative costs.
- Vocational Training Account (2.50 Percent)—for job
training at community colleges to train students to work
with new alternative energy technologies.
FISCAL EFFECTS
New State Revenues to Be Used for Dedicated
Purposes. Our estimates below are based on 2005 oil
production levels and the average price of oil for the first
six months of 2006. The severance tax would rise from
about $225 million to $485 million annually. The level of
revenue generated would depend both on (1) whether the
tax was interpreted using the marginal rate interpretation
or the single rate interpretation and (2) whether oil
production on state and federal lands is taxed. However,
actual revenues collected under the measure will depend
on both future oil prices and oil production in the state. As
these variables are difficult to predict, there is uncertainty
as to the level of revenue collections.
State and Local Administrative Costs to Implement
the Measure. Because programs of the size and type to be
overseen by the Authority have not been undertaken before
in the area of transportation fuels, the administrative costs
to the Authority to carry out the measure are unknown.
Under the provisions of the measure, up to 2.5 percent
of revenues in the new fund would be available to the
Authority for its general administration costs. This would
on average set aside from about $5 million to $12 million
annually for administration. The amount of administrative
funds available would depend both on (1) whether the tax
was interpreted using the marginal rate interpretation or the
single rate interpretation and (2) whether oil production on
state and federal lands is taxed.
Costs to BOE to collect the severance tax and
administrative costs associated with the issuance
and repayment of bonds by the Treasurer’s Office are
not counted as part of the Authority’s administration
budget and are to be paid from the severance tax
revenues. Additionally, in oil-producing counties, local
administrative costs would increase by an unknown but
probably minor amount, due to increased reassessment
activity by local property tax assessors to account for
the effects of the severance tax on oil-related property
values.
Reduction in Local Property Tax Revenues. Local
property taxes paid on oil reserves would decline under
the measure relative to what they otherwise would have
been, to the extent that the imposition of the severance
tax reduces the value of oil reserves in the ground and its
assessed property value for tax purposes. Although the
exact size of this impact would depend on future oil prices,
which determine both the severance tax rate and the value
of oil reserves, it would likely not exceed a few million
dollars statewide annually.
Reduction in State Income Tax Revenues. Oil
producers would be able to deduct the severance tax
from earned income, thus reducing their state income
tax liability under the personal income tax or corporation
tax. The extent to which the measure would reduce state
income taxes paid by oil producers would depend on
various factors, including whether or not an oil producer
has taxable income in any given year, the amount of such
income that is apportioned to California, and the tax rate
applied to such income. We estimate that the reduction
would likely not exceed $10 million statewide annually.
Potential Reduction in State Revenues From Oil
Production on State Lands. The state receives a portion of
the revenues from oil production on state lands, including
oil produced within three miles of the coast. If the measure
is interpreted to apply to production on these state lands,
then the severance tax would reduce state General Fund
revenues by $7 million to $15 million annually, depending
on whether the measure is interpreted using the marginal
rate or the single rate.
Potential Reductions in Fuel Excise Tax and Sales
Tax Revenues. The measure could change both the amount
and mix of fuels used in California, and thus excise and
sales tax revenues associated with them. For example, to
the extent that the programs funded by the measure are
successful in reducing the use of oil for transportation
fuels, it would reduce to an unknown extent the amount of
gasoline and diesel excise taxes paid to the state and the
sales and use taxes paid to the state and local governments.
These reductions would be partially offset by increased
taxes paid on alternative fuels, such as ethanol, to the
extent that the measure results in their increased use.
Potential Indirect Impacts on the Economy. In addition
to the direct impacts of the measure, there are potential
indirect effects of the measure that could affect the level of
economic activity in the state.
On one hand, by increasing the cost of oil production, the
severance tax could reduce production, reduce investment
in new technologies to expand production, and/or modestly
increase the cost of oil products to Californians. This could
have a negative impact on the state’s economy.
On the other hand, using revenues from the severance
tax to invest in new technologies may spur economic
development in California. This would occur to the extent
that new technologies supported by the measure are
developed and/or manufactured in the state. This could
have a positive impact on the state’s economy.
Taken together, these economic factors could have
mixed impacts on state and local tax revenues. |
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