Once again there is a call for a tax on oil to help solve California’s budget problems. Assemblyman Pedro Nava called for a 10 percent oil severance tax piling on Assemblyman Alberto Torrico’s bill that would establish a 9.9 percent oil tax dedicated to higher education.
Both plans are a backward way to look at taxing oil extraction.
Adding another tax on oil companies for taking crude out of the ground will discourage production. Since practically all oil taken from the ground in California stays in the state, lower production will mean more reliance on foreign oil.
The cost of the product will undoubtedly increase, although Nava intends to prevent that with government price controls. He wants the Board of Equalization to monitor price increases to make sure that price increases at the pump are not a backfill for the tax. If prices do increase to make up for the tax, the bill would allow the attorney general to take action against the oil company. Did we mention Nava wants to be the next attorney general?
Of course, if the price monitoring plan goes into place that will be another discouragement to pump more oil from the ground meaning less supply. Prices would increase anyway because the oil supply would constrict.
There is a solution that would provide the revenue Nava is looking for while at the same time decreasing the price at the pump: allow offshore drilling to resume in the areas it is permitted.
Oil companies would not fight the taxes paid on this offshore resource. The oil business is already taxed in multiple ways in this state (more on that in a future post). Opening up new offshore wells will bring with them the billion plus in tax revenue Nava believes he will get with an oil extraction tax.
On top of that, the new supply of oil would undoubtedly drop the price consumers pay at the pump.
That is a win-win oil strategy.