Little
moments can say a lot.
I
experienced one such little moment a few weeks ago when John Perez, the speaker
of the California Assembly, stopped by the Business Journal to talk about the
state budget. He explained that one of the Democrats’ big proposals is to
impose a new tax on oil pumped out of the ground in California. He said it figures to be roughly
9.9 percent.
"Nine-point-nine
percent of what?" I asked.
Now
Perez is a quick-answering, fast-talking sort. Ask him about some bill and
he’ll summarize its points and implications in 15 seconds and do so in
complete sentences. But that simple question stopped him. He paused. He looked
blank. It was a little moment.
"You
know," he said, "I’ve got to double-check what the rate is
pegged on."
C’mon.
This is a critical question. He should know the answer cold. If we’re
talking about a tax of 9.9 percent off the bottom line, after expenses and
deductions – an income tax, in other words – most oil producers
probably could manage, although they’d grumble. But if it’s a tax
on the top line, before any expenses, that would be a far steeper assessment
and perhaps ruinous to marginal producers, especially if prices are low. I
mean, lop 10 percent off your company’s revenue, or your household gross
income, and think of the effect.
So
Perez’s little pause said a lot. It says that one of this state’s
most powerful political leaders wants to impose a tax on an important industry,
but he doesn’t know what he’s taxing. Is it just another big tax,
or is it a potentially ruinous tax? Well, hmmm, he’ll look that one up.
It
turns out the tax would be the onerous kind. It would be on the top line
– on the value of oil as it is taken from the ground. But it gets worse.
There’s nothing in the language of the draft bill that would peg the tax
at 9.9 percent or any amount. The tax in the first year, starting Oct. 1, would
be $6 a barrel. But thereafter, it would be a tax based not on the market price
of oil or any other metric that makes sense. It would be a tax great enough to
replace the loss of money to the state from a reduced sales tax. In other
words, the tax on oil could be any amount. It could be $100 a barrel or $1,000
a barrel. (Actually, those aren’t absurd figures; if the tax succeeds in
killing marginal oil production, each remaining barrel would have to be taxed
at higher amounts to get the revenue the state needs.)
What’s
Perez’s rationale for this? He trots out the "they can afford
it" routine – the tired line mouthed by many of Sacramento’s professional politicians
who, like Perez, have zero business background. He told the Business Journal,
in a story published last week, that the proposed oil severance tax will have
"virtually no impact on the way oil companies operate – or the
profits they generate."
Huh?
It will have an enormous impact on both.
Do
the math. Say you have a well that produces five barrels a day (most wells in
the state are low-producing wells, called stripper wells). And let’s
assume you are now selling your oil for $60 a barrel, which is about the price
for California’s
heavy oil. That means you gross $300 a day. Back out $200 in expenses, which is
about average, and you’re left with $100. Then if you assume a $6 a
barrel tax, you’ll need to deduct $30. You’re left with $70.
I
bet you’d have a kitchen table discussion about whether the hassle, the
legal risk, etc., is worth $70. And if prices drop much, you’d suddenly
be operating at a loss. If it were my well, I know what I’d do. I’d
shut it down and wait for a better day.
And
I’ll bet owners of the 3,400 or so wells in Los Angeles County
– virtually all of which are stripper wells – are thinking those
thoughts.
No
impact on profits or operations? Perez is not just off base, he’s not
even at the turnstiles to the ballpark.
Look,
an oil severance tax may make some sense for California. But it needs to be done
correctly. It needs to be pegged to oil prices: It should be zero when oil
prices are low and rise reasonably as prices go up. The proposal on the table
in California
now – pegged not to oil prices but to revenue from a different tax
– is idiotic.
Lawmakers
could figure out the right way to create an oil severance tax. It
wouldn’t take them long to learn. Maybe it would be a little moment for
them.