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Saturday, May 24 2014 08:30 PM

Debate over state oil severance tax continues

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    By Felix Adamo/ The Californian

    An oil well approximately one mile north of Highway 46 and east of Highway 33 in a file photo.

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BY JOHN COX Californian staff writer jcox@bakersfield.com

There is little gray area in California's debate over whether to impose a "severance" tax on oil production.

Once again, as occurred in 2013, a bill has been introduced to levy a tax of 9.5 percent on oil and 3.5 percent on natural gas produced in the state. Senate Bill 1017 was introduced by Sen. Noreen Evans, D-Santa Rosa, because, she said, the oil industry "is depleting a natural resource owned by all Californians."

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Some of the taxes and fees petroleum companies pay in California, according to a legislative analysis, include:

* 14.3 cents per barrel (or per 10,000 cubic feet of natural gas produced) to fund the state's primary oil regulatory agency, the Division of Oil, Gas and Geothermal Resources;

* 6.5 cents per barrel delivered to California marine terminals, which handle oil from outside the state. Gov. Brown has proposed expanding that fee to apply to inland train shipments as well;

* 1 percent tax on property including "proven reserves" of oil;

* 8.84 percent corporate tax on net income;

* 2.5 percent gasoline sales tax, and up to an additional 2 percent in locally imposed assessments;

* 39.5 cent adjustable excise tax on every gallon of gasoline sold in the state, not counting an 18.4 cent federal excise tax;

* Royalty payments of between 16 percent and 50 percent on oil produced on state-owned land;

* Local severance taxes in at least three cities, including Long Beach and Beverly Hills; and

* Varying natural gas surcharges as set by the California Public Utilities Commission.

-- Source: Senate Appropriations Committee Fiscal Summary

And again, the bill's prospects do not look good.

On Friday, it failed to advance past the Senate Appropriations Committee, where it died last year under the same chairman, Sen. Kevin De Leon, D-Los Angeles.

The bill would need two-thirds approval of each house of the Legislature to reach the desk of Gov. Jerry Brown, who said while releasing his draft state budget in January he doesn't think this is the right year to raise taxes.

The deadline for the bill to reach the governor's office is Nov. 15.

Supporters have argued since at least 1980 that California oil producers -- Kern County operations, for the most part -- should give the state some share of the sale proceeds on every barrel they pull from the ground.

Opponents say it's not right to increase oil companies' tax burden when they already pay assessments in line with those of oil-producing states with a severance tax. They point to California's rare "ad valorem" property tax on petroleum producers' underground petroleum reserves, among other levies oil companies pay.

Creating a severance tax would not only make California one of the highest-taxing oil states, but it would "discourage investment in and production of our domestic energy resources," Tupper Hull, spokesman for the trade group Western States Petroleum Association, wrote in an email.

Consensus on the matter has proved elusive, as studies comparing California's oil taxes to those of other states have come to different conclusions. Ultimately, the discussion shifts toward more practical deliberations about how a new tax would affect gasoline prices and the general economy.

There is no debate on the disproportionate effect any severance tax would have in Kern. Local property tax revenues could be curtailed, despite assurances to the contrary, and oil companies already with operations in other states could respond by moving their investments -- and jobs -- elsewhere.

Evans hopes to tap feelings in the Legislature that after years of painful state budget cuts, oil companies who now are enjoying prices in the $100-per-barrel range ought to contribute more toward higher education, social services and recreation.

Supported primarily by Democrats, SB 1017 would divide half the severance tax revenues -- an estimated $1.6 billion a year in 2015-16 at current oil prices and production levels -- equally among the University of California, the California State University and California Community College systems. This money would go specifically to deferred maintenance, instructional equipment, minor construction projects and debt repayment. The other half of the tax revenues would be split evenly between state health and human service programs, and maintenance and improvement of state parks.

Stripper wells, defined as those incapable of producing more than 10 barrels of oil per day, would be exempt from having to pay the severance tax.

Often the point is made that California is the only, or one of the only, major oil-producing states without a severance tax. Most other states have them, though they may not also have sales, property or corporate taxes, as California does.

Severance taxes are typically less than 9 percent, much less in some cases, and unlike SB 1017, they sometimes come with deductions and credits. The revenues can account for more than half of some states' total tax generation, paying for things like roads and environmental protection. Alaska doesn't have a severance tax, per se, but does impose taxes of 25 percent on profits totaling more than $12 million a year.

California oil companies say they pay enough already.

A 2012 study by the Los Angeles County Economic Development Corp. estimated they contribute more than $21 billion yearly in various state and local sales, property, personal income, corporate and other taxes -- not counting another $15 billion in federal assessments.

On the other side of the balance sheet, California oil and natural gas producers may receive a tax deduction of up to 100 percent of their net income as a "depletion allowance" designed to encourage petroleum exploration and development. Also, payments of the proposed severance tax could be subtracted from oil and gas producers' earned income, which would lower their corporate or state income tax bills.

An oil industry-funded analysis of a 9.9 percent California severance tax proposed in 2009 found the state well within the range of assessments by other states when accounting for property, sales, severance and other taxes. Its calculations were based on a company producing 100,000 barrels of oil a day, with the price assumed to be $58 per barrel.

But when a new 9.9 percent state severance tax was added to California's total, the hypothetical company's annual tax payments more than doubled to about $350 million -- significantly greater than the corresponding tax burden in any other major oil-producing state examined in the study.

The analysis by Emeryville-based LECG LLC also concluded that because the proposed tax would make California oil activity less profitable, oil wells would be shut down earlier, less new drilling would take place and nearly 9,850 jobs would disappear. It said Kern County specifically could lose up to $16 million a year in property tax revenues. (A legislative analysis notes SB 1017 offers to reimburse counties for lost property tax income, but doesn't explain exactly how it would do that.)

Some have suggested a severance tax in the state could lead to higher gasoline prices for consumers as California oil production declines.

However, supporters of a California oil severance tax reject assertions the tax would essentially be passed on to consumers. They note that oil prices are set on the global market, and individual producers cannot raise their prices unilaterally.

They also refer to a 2008 analysis by the state Franchise Tax board and Board of Equalization that after counting regulatory fees, property, income and other taxes, California's combined tax burden on oil production was $4.22 per barrel, less than a third of the $14.33 per barrel found in Texas.

Sen. Evans said that's not fair, asserting the state's oil industry is "sucking up oil out of California's ground" without paying for the privilege.

The bigger issue is whether California is encouraging oil production or discouraging it, said Hull, the trade group spokesman.

"SB 1017 comes down squarely on the side of discouraging that investment and production in California," he said.

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