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Joe Sparano: Severance Tax on Oil Production is Bad for Consumers

Despite repeated rejections by voters and the Legislature, a job-killing idea is back again

Assemblyman Pedro Nava, D-Santa Barbara, wants to make California oil production the most heavily taxed in the nation by imposing a nearly 10 percent tax on every barrel of oil produced in the state. This idea isn’t new; it has been rejected repeatedly by the Legislature and the voters for good reasons.

Joe Sparano
Joe Sparano

According to a recent analysis by the consulting firm LECG, a severance tax like Nava is proposing would result in the loss of more than 9,800 high-paying jobs across California. Our state already has an unemployment rate above 11.5 percent and has seen 900,000 jobs disappear since the current recession began.

This would be a severe blow to many of the nearly 10,000 hard-working men and women whose jobs in Santa Barbara and San Luis Obispo counties depend on the oil industry there, as well as on their families and communities.

According to LECG, the oil industry is responsible for $4.6 billion in economic activity in the two counties, provides $721 million in labor income, and pays between $192 million and $252 million in taxes to the region, not including property taxes.

The rationale behind this tax proposal demonstrates a lack of understanding about global energy markets and California’s energy situation.

One seriously flawed assertion is that a portion of the oil produced in California is exported. This is incorrect.

According to the Energy Information Administration, or EIA, in 2008 a total of 2,000 barrels of crude oil was exported from the West Coast of the United States — an area that includes Alaska.

In that same time period, California oil wells — including the wells currently off the coast — produced 240 million barrels of oil that went to the state’s refineries. Those refineries imported another 404 million barrels of crude oil in 2008 to meet the California’s enormous demand for energy.

It would make neither economic sense nor common sense to export oil from a state that today imports more than 60 percent of the oil it needs to keep its economy moving.

Despite claims that the proposed tax will not affect consumers negatively, a reputable team of economic analysts has concluded that this tax would result in higher fuel prices.

A study by LECG’s William Hamm, former head of California’s nonpartisan Legislative Analyst’s Office, and Jose Alberro, a leading energy economist, concluded: “Because the transportation, distribution and refining cost of importing oil are greater than the corresponding costs associated with California oil production, consumers will pay higher gasoline prices as a result of the severance tax.”

Severance tax supporters complain that oil companies don’t pay their fair share in taxes and fees. That is simply untrue. LECG’s analysis confirms that California oil production is already taxed at a rate comparable to the top 10 U.S. oil production states, when all of the various types of taxes are included.

According to an analysis by the American Petroleum Institute, based on publicly available information from the EIA, major U.S. oil companies paid more than 40 percent of their net income in income tax expenses in 2007. That’s much higher than the 26.7 percent paid by all manufacturing companies.

And, EIA reports that between 2005 and 2007, major energy producing companies paid or incurred more than $242 billion of income tax expenses.

Analyses by highly qualified economists and government agencies show us that a severance tax on oil is a bad idea for consumers and bad policy for California.

This latest proposal will punish California with lost jobs, higher consumer prices and increased dependence on imported oil. It deserves to be rejected.

— Joe Sparano is president of the Western States Petroleum Association. The Sacramento-based organization represents the petroleum industry in California and five other Western states.

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