Out Of Their Minds

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Severance Tax on Big Oil?

By Harrison Sheppard

Voters in November will be asked to consider a ballot measure that would impose a new tax on oil extraction in California to help fund alternative-energy measures. The proposed tax from the Clean Alternative Energy Act (Proposition 87) would range from 1.5 percent to 6 percent and generate $200 million to $380 million a year until reaching a $4 billion total.
    The funds would be dedicated to alternative-energy research and incentives, such as consumer loans and subsidies for alternative-fuel vehicles; incentives for construction of alternative-fueling stations and research grants to California universities. The goal is to reduce the use of petroleum in California 25 percent by 2017.
Supporters argue that as oil companies take in huge profits, they should be forced to contribute. Opponents counter that the tax will increase the cost of gas and create a new bureaucracy that will not be accountable to the public.
    This month, Ira Ehrenpreis, general partner in Technology Partners, and Dorothy Rothrock, senior vice president for government relations at the California Manufacturers & Technology Association, discuss the bill’s pros and cons with writer Harrison Sheppard.

Ira Ehrenpreis
General Partner, Technology Partners
technologypartners.com

What is the purpose of this measure?
“It’s essentially an initiative to reduce California’s dependence on gasoline and diesel 25 percent over the next 10 years.”

It does that by imposing a tax on the oil industry?
    “It’s funded by what we think of as a modest and temporary assessment on the extraction of oil in California. It’s paid for by oil companies that drill in California. We have an economy that’s addicted to oil, and we’re being gouged by big oil companies.
    “One, California’s way too dependent on oil. We’re No. 1 in the nation in terms of oil consumption. This is all about creating and funding incentives to replace gas- and diesel-powered vehicles with cars, trucks and buses that run on clean, affordable alternative fuels.
    “Two, we all know right now consumers are paying almost $3 a gallon, and oil company profits have tripled in the last three years. It’s the biggest profit margin of any industry in history. The big oil companies are not paying their fair share to California.
    “We are the third-largest oil-producing state. But we’re the only state in which those oil companies do not pay assessments on oil taken from the ground. Texas, Alaska, Louisiana, New Mexico: All these other states have similar fees to what this initiative is proposing.
    “If you look at the percentage, it’s essentially a minor assessment, particularly compared with some of the other states I mentioned.”

The measure says the tax increase should not be passed along to consumers. How do you ensure that doesn’t happen?
    “One, it’s illegal. The California attorney general has determined the initiative specifically prohibits oil producers from passing on the assessment to consumers. And oil-company executives who attempt to do so could face criminal prosecution and jail time.
    “Two, the U.S. Supreme Court has upheld the consumer-protection provision that firmly establishes, as legal precedent, a state’s right to prohibit companies from passing on a tax to consumers.
    “Three, oil prices are set on the global market, not by California and not by big oil. It’s well-established by economists and oil companies that oil is a global commodity.”
Don’t we already have a lot of alternative-energy technologies without the state having to contribute tax funds?
    “As an investor in the alternative-energy sector, I can say we are in the early stages of technology development in this sector. We’ve just scratched the surface, in terms of innovating and solving some of the world’s most important and fundamental energy issues with technology.”


Dorothy Rothrock
CMTA
cmta.net

Why do you oppose this measure?
    “Because it will raise the price of energy in the state.”

But what about the argument that it would encourage the development of other energy sources in California?
    “The CMTA, first of all, isn’t opposed to promoting new alternative sources of energy. What we oppose about this initiative is that it creates a huge bureaucracy that’s not accountable and that will have up to $4 billion in tax dollars to be spent in a way that, frankly, we don’t know if it’s going to solve the problem.”

So you’re not convinced that they would effectively use the money?
    “There’s no accountability in the initiative for the use of the money. It creates more than 50 political appointees. They have the power to hire unlimited staff. They’re outside the state budget review process, and they’re outside the normal checks and balances that govern other agencies.”

The measures authors say they have worded it so that the oil companies would be prohibited from passing the increased costs to consumers. Do you think this is feasible?
    “The purpose of the initiative is to impose a tax on the production of oil. So you’re increasing a cost to the refinery that’s going to be producing gasoline for the public. It may be very difficult to track, frankly. However, even if they don’t pass on that cost, just the reduction in the supply caused by the tax will cause the prices to be higher.”

How will supply be reduced?
    “We have, in the state of California, oil production that is at a certain level right now. When you add a tax to producing oil in California, you make it more expensive to produce it here. That would mean some of the less-economic wells would close down. And we’ll still need the oil, so we’ll go outside California, where there’s not such a tax, where the price of production is lower. And we’ll get the oil that way.”

Wouldn’t this spur investment in new technologies and industries in California? The state could become a leader in the alternative-energy industry, producing an overall benefit to the state’s economy.
    “An overall benefit? No. We think there’s a right way to do this. If the state and the country want to develop new alternative-energy sources, we ought to provide incentives to companies; we ought to be encouraging research and development; we ought to make it easier for companies to embrace new technology. There’s a right way to do this and there’s a wrong way. And this is the wrong way.”

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