Monday, August 17, 2009

Yeah, why not?

LA Times has a great article on why California, the only oil producing state to not have an oil severance tax, needs to have one: A California tax on oil drilling? Why not?

There's a few no-brainer points it raises. First, that no matter what, the oil is going to be drilled anyways, so we might as well join every other oil producing state (including Sarah Palin's Alaska, who has a 25% oil severance tax) and tax oil companies for extracting and profiting from our natural resources:

Let's be candid about the rationale for the severance tax. States levy it because they can: The oil's not going anywhere. Oil companies can't pack it up and move it to a state where rates are lower. It creates wealth -- enormous wealth at times of elevated market prices, like now -- and any jurisdiction in need of funds to cover services it provides to its residents has a perfect constitutional right to claim a piece of it, as it claims a percentage of the value of real estate and income (earned, unearned and inherited).
And second, despite the fears that the oil companies have successfully played on the public back when an oil severance tax was proposed in the form of Prop 87, the costs of the tax would not be passed onto consumers at the pump:
The big question is who pays the tax. The public's main fear about Proposition 87 was that the industry would pass it on to consumers in the form of higher gas prices at the pump. The oil companies played on this fear ruthlessly. The point had a certain shallow logic, since all California crude is refined in-state and almost all the refined output is sold here, too.

To undermine that argument, the measure's drafters outlawed any such pass-through. No one was really sure how to enforce the provision -- who really knows why gas prices rise or fall? In any case it was nothing but campaign window-dressing, for the drafters and the critics undoubtedly know that the very notion that oil companies could pass this through is flawed.

That's because the price of crude is set by the worldwide market or, more pertinent to California's situation, by the market for grades similar to ours, such as Alaskan crude. Severance taxes are more or less built in to the market price, and a California tax's contribution to the total would be negligible, and probably invisible.

As the leading oil economist Severin Borenstein of UC Berkeley told me last week, California producers couldn't raise their prices to cover the tax, because California refineries have too many other options for the purchase of crude.

"California refineries can buy from anywhere in the world, and they do," he says. Indeed, California oil drillers sell their crude for the market price even when their production costs would allow them to offer a discount. (Only 38% of the state's crude supply comes from within our borders, with 13.4% coming from Alaska and the rest from overseas.) "Producers would have to absorb the tax," Borenstein says.
So why don't we start start taxing Big Oil for profiting from one our natural resources, and invest that money into a segment of California that easily returns $4 for every $1 invested into it? That's right, I'm talking about California's public higher education, and I'm talking specifically about Assembly Bill AB 656, which would use an oil severance tax to generate nearly $1 billion in revenue for the California State University, University of California, and Community College systems. Get with it California!