Monday, February 19 , 2018, 2:22 pm | Partly Cloudy 57º

 
 
 
 

Oil Severance Tax Idea Should Be Used to Fuel Economic Development

Drilling deeper into county's exploration of tax hike revenue brings up more questions than answers.

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Joe Armendariz

Various factors can and will raise and lower the price of gasoline in the near term and beyond. At a hearing on this subject on May 13, the Santa Barbara County Board of Supervisors asked for more information about the merits of soliciting voter approval of a local oil severance tax, and also directed staff to meet with several interested parties, as shown below.

The following discussion summarizes those meetings.

1. Comments from Environmental Coalition — Meeting of May 15 (participants included representatives of the Environmental Defense Center, the League of Women Voters, Citizens Planning Association, Get Oil Out, Santa Barbara Channel Keeper and the Community Environmental Council).

  • Some members of the group expressed concern that application of an oil severance tax to new production that would require future approval by county decision makers would incentivize those decision makers to approve such projects, regardless of environmental impacts. Most members appeared to support a severance tax that did not apply to new production not yet approved by county decision makers. One suggested applying it to all development within the next five years, and not applying to any new production approved after five years.
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  • Some members thought the oil severance tax should be earmarked for uses that ultimately reduce dependence on fossil fuels. Earmarks for alternative transportation, alternative energy and implementation of Assembly Bill 32 were offered.
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  • Some members were interested to see how a severance tax would compare to other sources of revenue that the county receives from oil development; that is, property taxes and CREF.
  • 2. Comments from Santa Barbara County Taxpayers Association representatives — Meeting of May 16.

     

  • This topic has not yet gone before the Taxpayers’ Association board, so thoughts expressed below are those of individuals.
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  • If County pursues an oil severance tax, it should treat it as a capital asset that can be monetized and converted into another asset; that is, what can be done with the tax to generate more revenue in the future. Consideration along this line should be given to asking how this tax might help county government to grow the local economy beyond the service sector. One suggested use offered was investment into public transportation (e.g., as a subsidy). The Taxpayers’ Association is unlikely to support an oil severance tax as general revenue.
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  • The Taxpayers’ Association might consider supporting an oil severance tax if it is packaged so it can withstand sound economic and fiscal policy tests, restricted to uses that bring a return on investment, and is approved by two-thirds of the voters. Within these parameters, it may be acceptable for the county to take a cut to help it resolve forthcoming fiscal needs while earmarking some for things such as alternative transportation, specific educational programs like those offered at Dos Pueblos High’s Engineering Academy, and placing some of the revenues into an endowment to generate more revenue.
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  • Regarding the per-barrel amount of an oil severance tax, it was suggested that the county identify its revenue needs and set the per-barrel tax accordingly.
  • 3. Comments from SEIU 620 representative — Meeting of May 21.

     

  • The representative of SEIU 620 recognizes that the county has a large number of needs, which will require funding.
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  • He expressed concern about seeking voter approval of an oil severance tax that is timed for a special election, or is structured as a special tax, because the required two-thirds approval of the electorate in these cases increases the risk of a failed ballot measure.
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  • Believes tax should be structured to address future services as well as designated projects.
  • 4. Some preliminary comments from California Independent Petroleum Association representative.

     

  • Other states that charge up to $14 per barrel severance tax are charged by states, not counties or cities. No county in California charges a severance tax on oil. Cities in California that exercise an oil production tax do not charge anything near $14 per barrel. Other states that impose an oil severance tax have different and, sometimes complicated tax treatments, making a comparison difficult without details. Additionally, California imposes taxes or tax rates that other states may not.
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  • The NYMEX price of West Texas Intermediate heavily influences oil prices in Santa Barbara County, but the latter is not set by global markets. Local regulatory and market factors also influence local crude prices, including extent to which a producer hedges prices or is locked into a long-term contract at a price different than daily market price.
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  • Need to consult with mineral-right owners, as well as producers.
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  • Higher costs of production could disincentivize future oil production in the county, which would reduce county revenues.
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  • Any consideration of an oil severance tax should not be for general-fund purposes and should not carry an annual adjustment for inflation. Any such tax should provide a reasonable floor representing a price of oil at which the tax is phased out should oil prices decline.
  • Click here for a primer on gas prices.

    Joe Armendariz is executive director of the Santa Barbara County Taxpayers Association.

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