Most of the attention on the Tax Commission is rightly focused on the package advanced by the chairman, Gerry Parsky: a slight flattening of the personal income tax and replacement of the corporate tax and much of the state sales tax with a new “net receipts” tax on business. Taxpayers, policy wonks and businesses are sifting for every scrap of guidance on what this new tax might look like, and its effects on California business and the economy.
While the debate over these changes will be vigorous, buried among the documents is a proposal that may represent the thin edge of a very long wedge that attempts to marry tax reform with environmental regulatory policy.
Commissioner Fred Keeley, former assemblyman and current Santa Cruz county treasurer, has proposed what he calls a “pollution tax on carbon-based fuels,” a concept that has been discussed in public policy circles for many years. Keeley has stated
That’s the long wedge. But how does the thin edge work, and who feels its blade? As outlined by Commissioner Keeley, the new tax package includes:
1. A new tax on gasoline that would maintain a floor price of gasoline at a designated level, which Commissioner Keeley suggests may be $2.75 a gallon, but is actually based on the price of crude oil. Using that benchmark, a tax of 2.5 cents-a-gallon would be levied for every dollar that the price of crude falls below $72-a-barrel.
A conservative calculation – based only on gasoline usage (not diesel, aviation, etc.) – reveals that had this proposal had been in effect for the past year, California motorists would have paid an additional $6.2 billion in gasoline taxes.
2. To ensure that overall tax revenues do not fall as the price of oil rises, Commissioner Keeley proposes to trigger an oil severance tax whenever crude is above $50 a barrel. He doesn’t propose an explicit rate structure, but states that “(r)evenue from such a severance tax would increase with the price of oil and would offset the loss in revenue from the gas tax.” The interaction of a gas tax triggered when crude is below $72 and a severance tax triggered when crude is above $50 means that the minimum revenues from this proposal would be the equivalent of a 55 cents-a-gallon gasoline tax (($72 – $50) * $0.025).
Since the floor rate of 55 cents-a-gallon would raise about $8.5 billion on an annualized basis (not recognizing dynamic effects of lower gasoline purchase), the level of an oil severance tax to maintain this amount of revenues would be extremely high, if not confiscatory. In fact, the total value of oil produced in California at the healthy price of $45 a barrel is about $9.6 billion. A tax rate that attempted to raise even half the amount needed to hedge rising gasoline prices would very likely shut down oil production in California, which would of course frustrate the revenue raising goals of the proposal.
Therefore, using the past year as a benchmark, and assuming a 10 percent severance tax when crude is between $50 and $72 a barrel, and an aggressive 15% tax when crude is above $72 a barrel, then the total revenues raised from the severance tax would have been about $640 million, for a total revenue increase from gasoline and severance taxes of $6.8 billion. Even at these very high rates, the severance tax would hedge only about one-quarter of the gas tax revenues lost from rising oil prices.
3. To address the regressivity inherent in a large increase in the gasoline tax, Commissioner Keeley also proposes a refundable tax credit of $100 to $300 for every state resident, which would amount to $3.9 billion to $11.7 billion, respectively. This rebate could offset from 50 percent to 100 percent of the revenues raised.
If all of the proceeds of these new taxes were used to offset personal income tax liabilities, then the state’s income tax system would become even more skewed toward high earners than it is today. Millions of income taxpayers today pay less than $100 per person in state taxes, meaning that income tax revenues would become even more dependent on high earners, which would of course increase its volatility.
So the new energy taxes proposed by Commissioner Keeley would increase either the regressivity or volatility of our tax system, and add billions in energy costs to our economy. Given the public policy preferences of the Legislature, this seems like a trend worth watching very closely.