A one-two punch is being aimed at California’s oil and gas industry and that just may be fine with anti-fossil fuel crusaders but it could have an immediate disruptive effect on the California economy.
Between proposals to raise the oil severance tax and property taxes, California’s oil and gas producing companies face a double whammy that could threaten their businesses. While supporters of these tax increases may applaud the idea that oil production is cut back, they may not be so joyous if the double attack undercuts the state’s economy.
Senator Bob Wieckowski introduced a 10% oil and natural gas severance tax bill, SB 246, arguing that California producers should pay for the right to sever oil and gas from the ground such as is imposed by other oil producing states. Yet, many of those states do not levy ad valorum property taxes on the oil that sits in the ground as California does.
If the oil severance tax is not enough to threaten the industry, the split roll property tax initiative destined for the November 2020 ballot would levy another hit on many producers’ land and improvements.
California oil production has already fallen off dramatically over the last few decades. California oil production dropped from 394 million barrels in 1985 to 173 million in 2017.
Imagine what two tax increases would mean to the industry over a short period. The quest for renewable energy is moving forward but if the tax hit over the next couple of years reduces oil and gas production how does the state’s economy function to full capacity?
Despite being one of the top oil producing states, California already imports a large portion of its oil. That is because California is the second largest consumer of petroleum products in the nation and the largest consumer of motor gasoline and jet fuel.
Much of the imported oil comes from foreign countries but California receives a good portion of its oil from Alaska, one of those states with a severance tax but no property tax on the oil in the ground.
If a severance tax is passed in the Golden State, ironically, through the price of gasoline, consumers will be paying both the California severance tax and a portion of the Alaska severance tax as well.
A decade ago, Governor Schwarzenegger proposed a 9.9% oil severance tax to help rescue the state budget during the Great Recession. At the time, a study indicated such an increase would make California the number one state in oil production taxes, doubling what the companies paid and shelling out 40% more in oil production taxes than the next highest state.
Oil companies in the Golden State pay corporate income taxes, property taxes and sales taxes on their business. Not all oil producing states assess all these taxes, nor are the tax rates the same as high income, high sales and high corporate tax California.
Two years ago, the Los Angeles Economic Development Corporation issued a report on the economic impact of the California oil and gas industry. The report found “the industry’s direct output of more than $111 billion generates more than $148 billion in direct economic activity, contributing 2.7 percent of the state’s GDP and supporting 368,100 total jobs in 2015, or 1.6 percent of California’s employment. Additionally, the oil and gas industry generates $26.4 billion in state and local tax revenues and $28.5 billion in sales and excise taxes.”
What happens to government coffers if production is reduced dramatically?
While the goal of some environmentalist might be satisfied with reduced production, it is doubtful the state’s economy could withstand the shock.