BILL ANALYSIS
AB 9 x3
Page A
Date of Hearing: March 12, 2008
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 9 x3 (Nunez) - As Amended: March 11, 2008
SUBJECT : Oil severance tax: income and corporation taxes:
petroleum surtax.
SUMMARY : This bill imposes a 6% severance tax on certain oil
producers for the privilege of severing oil from the ground or
water in California. This bill levies a 2% surtax on that
portion of taxable income or net income, respectively, in excess
of $10 million, of taxpayers engaged in the petroleum industry.
Specifically, this bill :
1)Enacts the Oil Severance Tax Law, which would impose, on and
after July 1, 2008, an oil severance tax on any producer at a
rate of 6% for the privilege of severing oil from the ground
or water in California for sale, transport, consumption,
storage, profit, or use. The oil severance tax will be
assessed on each barrel of oil severed and will be calculated
based on the gross value of each barrel. Specifically:
a) Defines a "producer" as any person or entity that does
any of the following:
i) Acquires oil from the ground or water in California
in any manner;
ii) Owns, controls, manages, or leases any oil well in
the ground or water in California;
iii) Produces or extracts in any manner any oil by taking
it from the ground or water in California;
iv) Acquires the severed oil from a person or agency
exempt from property taxation under federal or state law;
or
v) Owns any royalty or other interests in any oil or
its value, whether the oil is produced by him, her, or
it, or by some other person on his, her, or its behalf by
lease, contract, or other arrangement.
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b) Provides that two or more producers that are
corporations and are owned or controlled directly or
indirectly by the same interests, as specified, are
considered a single producer for the purposes of this tax.
c) Defines "oil" as petroleum, or other crude oil,
condensate, casing head gasoline, or other mineral oil that
is mined, produced, or withdrawn from below the surface of
the soil or water in this state.
d) Defines "production" as the total gross amount of oil
produced, including the gross amount attributable to a
royalty or other interest.
e) Defines "gross value" as the sale price at the mouth of
the well in the case of oil, including any bonus, premium,
or other thing of value paid for the oil. If oil is
exchanged for something other than cash, or if there is no
sale at the time of severance, or if the relationship
between the buyer and seller is such that the consideration
paid, if any, is not reflective of the true value or market
price of the oil subject to the tax, then the value of that
oil shall be determined by the State Board of Equalization
(BOE) based on the cash price paid to producers for like
quality oil in the vicinity of the well.
f) Exempts from the severance tax all oil owned or produced
by political subdivisions of the state, including that
subdivision's proprietary share of oil produced under any
unit, cooperative, or other pooling agreement. However,
any person who acquires the severed oil from a political
subdivision of the state shall be subject to the oil
severance tax that otherwise would be required.
g) Exempts from the severance tax oil produced by a
"stripper well" in which the average value of oil as of
January 1 of the prior year is less than $50 per barrel.
Defines the term "stripper well" as a well that has been
certified by BOE as an oil well incapable of producing an
average of more than 10 barrels of oil per day during the
entire taxable month.
h) Prohibits oil producers from passing the oil severance
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tax through to consumers by way of higher prices for oil,
gasoline, or diesel fuel. Requires BOE to monitor and, if
necessary, investigate any instance where producers or
purchasers of the oil have attempted to gouge consumers by
using the tax as a pretext to materially raise the price of
oil, gasoline, or diesel fuel.
i) Imposes the oil severance tax in addition to any ad
valorem property tax or business license tax that may
otherwise be imposed.
j) Authorizes BOE to enforce provisions of the oil
severance tax in accordance with existing procedures of the
Fee Collections Procedures Law, as provided.
aa) Provides that all revenues derived from the
imposition of the oil severance tax shall be appropriated
to the Superintendent of Public Instruction for allocation
to school districts and county offices of education for the
2008-09 fiscal year (FY), and each subsequent FY, for the
purpose of mitigating the impact of the 2008-09 budget
reductions on layoffs of school employees.
1)Imposes a 2% petroleum surtax on that portion of taxable or
net income, whichever is applicable, in excess of $10 million
of a taxpayer that is engaged in business activities in the
petroleum industry. The surtax is imposed in addition to any
other tax and will apply to taxable years beginning on or
after January 1, 2008. Specifically:
a) Defines the phrase "taxpayer engaged in business
activities in the petroleum industry" as a taxpayer that
has more than 50% of its gross business receipts from one
or more qualified business activities. In the case of a
unitary group required to be included in a combined report,
the 50% gross business receipts test will apply at the
group level.
b) Defines the phrase "gross business receipts" as those
gross receipts from sales and activities that do not yield
nonbusiness income for California tax purposes and includes
gross business receipts of a pass-through entity that are
separately stated to the investors or owners.
c) Defines the phrase "qualified business activities" as
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petroleum producing, refining, wholesale and retail
activities, as described in specific sections of the North
American Industry Classification System.
d) Provides special rules for investors in pass-through
entities and specifies that a taxpayer that meets the 50%
gross business receipts test at either the entity or
investor level is deemed to be engaged in business
activities in the petroleum industry.
i) Requires a pass-through entity that operates a
qualified business activity to separately state the
investor's share of the gross business receipts, the net
income subject to the surtax, and the net income of the
entity for purposes of aggregating the investor's income
from business activities in this petroleum industry
pass-through entity with all other petroleum industry
pass-through entities in which the investor holds an
interest.
ii) Defines "pass-through entity" as any partnership or
S corporation.
iii) Defines "investor" as a partner or shareholder of
the pass-through entity.
e) Provides that all revenues derived from the imposition
of the petroleum surtax shall be appropriated to the
Superintendent of Public Instruction for allocation to
school districts and county offices of education for the
2008-09 FY, and each subsequent FY, for the purpose of
mitigating the impact of the 2008-09 budget reductions on
layoffs of school employees.
f) Allows the Franchise Tax Board (FTB) to prescribe
appropriate rules and regulations to implement the
provision of the petroleum surtax law.
2)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Requires oil producers to pay to the Department of
Conservation a regulatory fee of $0.07023 per barrel of oil
produced to fund the department's regulatory programs. Oil
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taken from federal offshore waters is exempt.
2)Authorizes a 1.0% ad valorem property tax, to be imposed by
counties, on the full cash value of property where the value
of the property includes underlying gas and mineral rights
and, with respect to oil in the ground, "proved reserves".
3)Imposes a fee of $0.05 per barrel of oil on persons owning
crude oil when it is received at a marine terminal from within
the state. This fee is collected by the marine terminal
operator. The fee is also imposed on operators of pipelines
transporting oil into the state across, under, or through
marine waters.
4)Imposes a sales or use tax on the gross receipts from the
retail sales of motor vehicle fuel and diesel fuel.
5)Imposes an excise tax of $0.18 per gallon on the removal of
motor vehicle fuel or diesel fuel at the refinery or terminal
rack, upon entry into the state, and upon sale to an
unlicensed person.
6)Imposes a tax on taxable or net income, whichever is
applicable, earned by a taxpayer at rates designated by
statute, regardless of the type of business from which the
income is earned. Existing law grants tax incentives for
certain business activities in the form of various tax
expenditures. The petroleum industry currently receives
special tax treatment in the form of an enhanced oil recovery
credit, the use of percentage depletion, and special expensing
of intangible drilling and development costs.
In addition, multistate and multinational corporations engaged
in business activities related to the production, refining, or
processing of oil or gas are exempted from using an
apportionment formula with a double-weighted sales factor.
Taxpayers engaged in an extractive business activity, as
defined by Revenue and Taxation Code, Section 25128, apportion
their business income to California using a three-factor
formula, which is the average of the payroll, property, and
single-weighted sales factor.
California has no history of enacted legislation imposing a
state-level oil severance tax or a petroleum surtax.
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FISCAL EFFECT : This bill is estimated to generate the following
revenues:
Oil Severance Tax
State : Based on the preliminary data provided by BOE, Committee
staff estimate that, at current price levels, a 6% severance tax
levied beginning July 1, 2008 will raise about $970 million in
FY 2008-09 and $960 million in FY 2009-10. These estimates
assume about 190 million barrels of annual production subject to
the tax and an average price of about $85 per barrel for oil
extracted in California. The price of California crude oil is
normally 15% less than the often-quoted benchmark prices for
light crude oil because California crude oil is heavier and more
expensive to refine. Revenues from the severance tax will
depend on future levels of oil production and prices of oil
extracted from within California.
The severance tax may reduce revenues that the state currently
receives from production on state lands, which could reduce
state tideland revenues by approximately $30 million.
Local : The severance tax will reduce the value of oil in the
ground and potentially reduce its assessed property value for
local property tax purposes. The magnitude of property tax
reductions is estimated to be in the range of $10 million
annually.
Petroleum Surcharge Tax
FTB staff estimate that the surtax on petroleum profits will
result in a revenue gain of $230 million in FY 2008-09, $220
million in FY 2009-10, and $200 million in FY 2010-11.
COMMENTS :
1)The author states that, "AB 9 x3 generates $1.2 billion in new
revenue and makes sure California gets our fair share. AB 9
x3 sets a 6% severance tax on oil extracted from the ground or
water in California and places a 2% windfall profits tax on
oil companies. That will not solve the budget problem, but it
makes a big difference for education. While oil companies are
posting record profits, California is the only oil producing
state in the nation that does not tax oil that is owned,
leased, or extracted within its boundaries. Twenty one other
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states levy a severance oil tax at rates ranging from 2% to
15% on oil producers. Most of those states spend more per
pupil on education than California."
2)The purpose of this bill is to raise revenues to mitigate the
impact of the 2008-09 budget reductions on school employees.
Proponents note that this bill taxes a non-renewable state
resource, which should be used for the benefit of California
residents. Proponents also note that California is the third
largest oil-producing state, and is the only major
oil-producing state, without an oil severance tax. The oil
severance rates imposed by other states are summarized below
in the table provided by BOE.<1>
----------------------------------
| Texas | 4.6% |
|----------------+-----------------|
| Alaska | 9.9% |
|----------------+-----------------|
| California | 0 |
|----------------+-----------------|
| Louisiana | 12.5% |
|----------------+-----------------|
| New Mexico | 3.8% |
|----------------+-----------------|
| Oklahoma | 7% |
|----------------+-----------------|
| Wyoming | 6% |
|----------------+-----------------|
| Kansas | 4.3% |
|----------------+-----------------|
| North Dakota | 6.5% |
|----------------+-----------------|
| Montana | 9.3% |
|----------------+-----------------|
| Colorado | 2% to 5% |
---------------------------
<1> According to BOE, only those states that produced in excess
of 10,000 barrels of oil are listed. Sources: Severance Taxes
on Petroleum in California and other States. Greg Nemet and
Daniel M. Kammen, Prepared 12/20/05 by Energy and Resources
Group, Goldman School of Public Policy, University of
California, Berkeley; Summary of Severance, Ad Valorem and Total
Oil and Gas Tax Rates of IOGCC Member States (October 2002),
prepared by Interstate Oil and Gas Compact Commission.
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|----------------+-----------------|
| Mississippi | 6% |
|----------------+-----------------|
| Utah |3% to |
| |5% |
----------------------------------
3)What Taxes Do Oil Producers Currently Pay? Oil producers pay
the state personal or corporate income tax, whichever is
applicable, on profits earned in California. Oil producers
also pay a regulatory fee to the Department of Conservation.
This fee is used to fund a program that, among other things,
oversees the drilling, operation, and maintenance of oil wells
in California. Additionally, property owners in California
pay local property taxes on the value of both oil extraction
equipment as well as the value of the recoverable oil in the
ground.
4)How Will This Bill Impact Consumers? This measure provides
that producers shall not be allowed to pass on the cost of
this bill's severance tax to consumers. Moreover, BOE is
charged with enforcing this prohibition. Committee staff note
it may be both difficult and costly to enforce this
prohibition. In addition, this bill does not specify
penalties for noncompliance. Nevertheless, the Legislative
Analyst's Office noted in its 2006 report on Proposition 87,
which would have imposed a similar oil severance tax, that
market forces could ensure that the oil severance tax would
not be passed on to consumers. Because California oil
refiners have many options for purchasing crude oil in the
global oil market, California oil producers will have to
maintain competitive prices to retain their share of the
market. Otherwise, oil refiners facing higher-priced oil from
California producers could, at some point, find it
cost-effective to purchase additional oil from non-California
suppliers, whose oil would not be subject to this bill's
severance tax.
5)How Will This Bill Impact Property and Income Tax Revenues?
Local property taxes paid on oil reserves would likely decline
under this measure, to the extent that the imposition of the
severance tax reduces the value of oil reserves in the ground.
In addition, oil producers most likely would be able to deduct
the severance tax from earned income, thus reducing their
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state income tax liability. The extent to which this measure
would reduce state income taxes paid by oil producers would
depend on various factors, including whether or not an oil
producer has taxable income in any given year, the amount of
such income apportioned to California, and the tax rate
applied to such income.
6)How will the Revenues Derived from the Imposition of the Oil
Severance Tax and the Petroleum Surcharge be Used? This
measure declares that the revenues derived from the oil
severance tax and the petroleum surcharge shall only be
appropriated to the Superintendent of Public Instruction for
allocation to school districts and county offices of education
for the 2008-09 FY, and each subsequent FY thereafter, for the
purpose of mitigating the impact of the 2008-09 budget
reductions on layoffs of school employees.
7)Committee staff note that prior legislative sessions have
addressed the issue of imposing a special tax on businesses.
Specifically:
a) AB 2442 (Klehs), introduced in the 2006 legislative
session, imposed a surtax at the rate of 2% on net income
in excess of $10,000,000 that is apportioned to California
and arises from business activities in the petroleum
industry. AB 2442 failed passage on the Assembly Floor.
b) AB 673 (Klehs), introduced in the 2005 legislative
session, imposed a 2.5% tax on the windfall profits of
petroleum producers and refiners. AB 673 failed passage on
the Assembly Floor.
c) ABx1 128 (Corbett) and ABx2 2 (Corbett), both introduced
in the 2001-02 legislative session, were identical bills
that would have imposed a tax on the windfall profits of
electrical energy companies during the electricity crisis
in 2001-2002. ABx1 128 was held by the Assembly
Appropriations Committee; ABx2 2 failed passage on the
Assembly floor.
d) SBx1 1 and SBx2 1 (Soto), introduced in the 2001-02
legislative session, imposed a windfall profits tax on
sellers of electricity and provided that the amount
collected would be refunded to individuals that filed a tax
return. SBx1 1 was held by the Assembly when the first
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extraordinary session closed; SBx2 1 failed passage on the
Assembly Floor.
e) SB 1777 (Burton), introduced in the 1999-2000
legislative session, imposed a Petroleum Windfall Profits
Tax on certain taxpayers engaged in petroleum refining. SB
1777 was held in the Senate Rules Committee.
f) SB 14 (Thompson), introduced in the 1995-1996
legislative sessions, imposed a Petroleum Windfall Profits
Tax on certain taxpayers engaged in petroleum refining. SB
14 failed passage in this committee.
g) AB 336 (Villaraigosa), introduced in the 1995-1996
legislative session, imposed a 6% oil severance tax on
certain oil producers. AB 336 died in this committee.
h) AB 1693 (Margolin), introduced in the 1993-1994
legislative session, imposed an oil severance tax on
certain oil producers at a rate of 6% of gross market
value. AB 1693 failed to pass out of this committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Federation of Teachers, AFL-CIO
California School Employees Association
California Teachers Association
Opposition
California Chamber of Commerce
California Independent Oil Marketers Association
California Independent Petroleum Association
California Manufacturers & Technology Association
California Taxpayers' Association
Cal-Tax
Western States Petroleum Association
Analysis Prepared by : Oksana Jaffe and M. David Ruff / REV. &
TAX. / (916) 319-2098