BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
SB 241 (Evans) - Oil and Natural Gas Severance Tax
Amended: May 7, 2013 Policy Vote: G&F 5-2
Urgency: No Mandate: Yes
Hearing Date: May 20, 2013 Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 241 would impose a severance tax on the
extraction of oil and natural gas. The proposed new tax would be
administered and collected by the Board of Equalization (BOE).
Fiscal Impact: BOE estimates that this measure would result in
revenue gains of $814 million in 2013-14 and $1.5 billion in
2014-15.
The increased revenues would trigger higher spending on K-14
education, pursuant to Proposition 98, likely in the hundreds of
millions of dollars. However, the bill stipulates that net
proceeds from the tax ultimately get deposited into a special
fund. The result of this will be a cost pressure (equivalent in
size to the increased Proposition 98 spending) to fund General
Fund non-Proposition 98 spending, which would otherwise get
squeezed (See Staff Comments).
BOE administrative costs related to this bill are substantial,
potentially in the low millions of dollars. These costs include:
taxpayer identification, notification and registration;
regulation development; manual and publication revisions; tax
return design; computer programming; return, payment, and refund
claim processing; audit and collection tasks; staff training;
and public inquiry responses.
Background: A severance tax is levied on natural resources as
they are extracted or "severed" from the ground, and is
typically a flat percentage of the resource's market value.
California is the only one of the top ten oil-producing states
that does not levy a severance tax on oil; however, it is also
one of the few states that taxes oil reserves as property.
Current law imposes various taxes, fees and assessments on oil
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and natural gas. None of these are an "oil severance tax" or a
tax on extraction. Existing taxes and exceptions include:
Regulatory Assessment. The Division of Oil, Gas, and
Geothermal Resources of the Department of Conservation
(DOC) imposes a fee on each barrel of oil and each 10,000
cubic feet of natural gas produced. Producers of oil and
gas are required to pay the fee, which is currently at a
rate of $0.1062988 per barrel or 10,000 cubic feet of
natural gas. The fees are assessed for purposes of
financing the regulatory work of the division.
Oil Spill Prevention and Administration Fee. Existing
law also imposes an Oil Spill Prevention and Administration
Fee of $0.05 per barrel on crude oil when it is received at
a marine terminal from within the state. The fee is also
imposed on operators of pipelines transporting oil in the
state across, under, or through marine waters. This fee is
administered by BOE and deposited into the Oil Spill
Prevention and Administration Fund.
Oil Spill Response Fee. The BOE also collects an oil
spill response fee paid by specified marine terminal
operators, pipeline operators and refiners in an amount not
exceeding $0.25 per barrel of petroleum product or crude
oil. The fees are deposited into the Oil Spill Response
Trust Fund, which is capped at $50 million, at which point
collection ceases; the fund is currently at its maximum
level.
Property tax: Existing state law assesses the value of
the property and the "proven reserves" as real property at
the time of purchase (plus 2% annual growth in value). The
property is taxed at the 1% Proposition 13 protected rate.
According to Proposition 13, the land is only reassessed
upon change of ownership and property improvement.
Corporate tax. Oil companies are taxed at the state
corporate tax rate of 8.84% of profits or net income.
Percent Depletion Allowance: Under state and federal
law, taxpayers may deduct up to 100% (oil and gas) of the
net income for resource depletion such as oil extraction.
California conforms to federal law to encourage taxpayers
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to explore and develop oil, gas and other mineral
resources.
Enhance oil recovery costs: Certain independent oil
producers are allowed a nonrefundable credit equal to 5% of
the qualified enhanced oil recovery costs for projects
located in California with restrictions on barrel prices
($48 in 2010). The credit hasn't been available since 2005
because oil prices have been too high.
Sales and Use Tax. Only the local portion of the sales
and use tax is collected on gasoline (2.5% of the overall
state rate plus up to 2% of locally imposed taxes). The
"gas tax swap" essentially traded the sales tax on gasoline
for the excise tax (see below). The BOE must increase or
decrease the excise tax annually to match what the sales
tax would have been. As of July 1, 2011 until July 1,
2015, the state and local sales and use tax rate for diesel
fuel is 5.38%.
Excise Taxes. Existing law imposes a $0.18 per gallon
excise tax on each gallon of gasoline sold in the state of
California. In addition, state law, known as the "gas tax
swap," imposes an additional excise tax on gasoline that
adjusts annually to equal the amount of state sales tax
that the state would charge on gasoline sales if they were
subject to the sales tax. Currently, the total excise tax
paid on a gallon of gasoline is $0.36 per gallon, and on
July 1 of this year it will be $0.39.5. Existing law also
imposes a use fuel tax at a rate of $0.09 per gallon on
blended fuels, such as ethanol, which are those that are
not more than 15% gasoline in content. The use fuel tax is
collected at the point of retail sale. Federal law imposes
an additional per gallon tax on gasoline and diesel fuel of
$0.18.4 and $0.24.4, respectively.
Royalty payments. State law assesses royalty payments
between 16-50% for deposit into the State Lands Commission
for oil extraction on state lands.
Local oil severance taxes. At least three jurisdictions
have imposed local oil severance taxes: Long Beach, Signal
Hill and Beverly Hills.
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Natural Gas Surcharge. The Public Utilities Commission
(PUC) sets different natural gas surcharges throughout the
state that vary by location and provider. The surcharge is
applied to all consumption except natural gas used to
generate power for sale, resold to end users, used for
enhanced oil recovery, utilized in cogeneration technology,
or produced in California and transported on a proprietary
pipeline.
Proposed Law: This bill would create the Oil Severance Tax Law
and would impose a tax on any operator for the privilege of
extracting oil or natural gas. The bill sets the tax rates at
9.5 percent per barrel of oil and 3.5 percent per unit of
natural gas, based on an average price as determined by the DOC.
The tax is administered by the BOE with input on the price of
oil and natural gas from the DOC.
Specifically, the bill would require that on or before December
1st and June 1st of each year, the DOC shall determine the
average price per barrel of California oil and the average price
for natural gas for the six-month period ending October 31st and
April 30th, respectively. The DOC shall base its determination
on California's price for oil and gas as determined by the
United States Energy Information Administration's (EIA) First
Purchase Report for both oil and gas.
The bill also defines "stripper well" as a well that has been
certified by the DOC as incapable of producing more than 10
barrels of oil per day. Stripper wells are exempt to the extent
that they maintain their status with the DOC.
SB 241 would create the California Higher Education Fund (CHEF)
and requires that all proceeds, less refunds and costs of
administration, be deposited in the General Fund and then into
the CHEF as follows:
90 percent, in equal shares, to the Regents of the
University of California, the Trustees of the California
State University, and the Board of Governors of the
California Community Colleges.
5 percent is dedicated to the Department of Parks and
Recreation for the maintenance and improvement of state
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parks.
5 percent is dedicated to a reserve account which shall
only be used in a disaster as proclaimed by the Governor.
The bill provides that the taxes imposed by this act are
"General Fund proceeds of taxes" and must therefore be dedicated
to Proposition 98 (Section 8 of Article XVI of the California
Constitution). Additionally, the bill stipulates that any local
property tax reductions that may result from the imposition of
the severance tax shall be reimbursed from its proceeds.
Related Legislation:
AB 1326 (Furutani), introduced in the 2011-12
legislative session, would have imposed a 12.5 percent tax
on oil and gas severed. AB 1604 was held in this Committee.
AB 1604 (Nava), introduced in the 2009-10 legislative
session, would have imposed an oil severance tax on
producers at the rate of 10% of the gross value of each
barrel of oil severed. AB 1604 was held in this Committee.
AB 656 (Torrico), introduced in the 2009-10 legislative
session, would have imposed an oil and gas severance tax at
12.5% to fund higher education. AB 656 failed to progress
beyond the Senate Committee on Education.
ABx3 9 (Nunez), introduced in the 2007-08 legislative
session, would have imposed a 6% oil severance tax and 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. ABx3 9 failed passage
on the Assembly Floor.
Staff Comments: There are several policy rationales that could
be made for a severance tax: First and most frequently cited is
the idea that the current generation should compensate future
generations for the irretrievable loss of a nonrenewable natural
resource. Second, a severance tax falls on an immobile factor of
production. Since oil fields cannot relocate to another state,
taxes have less of an effect on business production decisions as
long as owners can earn a reasonable rate of return on their
investments. The Legislative Analyst's Office has noted
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previously that while a severance tax discourages new
exploration to some extent, it tends to affect production less
than other business taxes do, especially over the first ten
years or so that it is in effect. The other rationales are that
oil production should, like other economic activities, share in
the funding of public goods, and that oil production creates
certain negative side-effects (like environmental problems) that
should be paid for by producers.
However, the intergenerational fairness rationale only works,
for example, if the State were to deposit the revenue from the
severance tax into a permanent fund and spend only the interest
on this fund every year. In this way, the resource would
continue to generate income for future generations, cushioning
the blow to the State from the loss of associated income,
property, and sales tax revenue long after the oil is used up. A
true severance tax also would apply to nonrenewable resources
other than oil and natural gas, such as nonfuel minerals. In
contrast, using revenue from a severance tax to pay for current
expenses increases the volatility of the revenue system. Both
the severance tax and the other revenues stemming from the oil
industry disappear after the oil is gone, and there is no
remaining revenue stream to compensate future generations for
the loss of the oil.
A key assumption underlying the BOE revenue estimate is the
forecasted price of oil, which can be quite volatile. As
national macroeconomic forecasts are periodically updated to
reflect new employment, output, and other key data, the
forecasted price of oil can change significantly, which in turn
would impact the revenues raised by this measure. As an order of
magnitude, if the price of oil averages $5 more/less per barrel
than we assume, the resulting revenues would be about $80
million higher or lower.
Additionally, when BOE developed its revenue estimate, it lacked
the necessary data to back out on-shore oil and gas production
on state or local government owned lands, as well as
stripper-well production. Consequently (assuming no change in
oil prices) the BOE estimate can be considered an upper bound.
Oil and gas producers would be able to deduct the severance tax
from earned income, thereby reducing their state income or
corporation tax liability. The extent of reduced state income
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taxes paid by producers is also unknown. The impact depends on
various factors, including whether or not a producer has taxable
income in any given year and the amount apportioned to
California.
The bill as currently written would raise the Proposition 98
guarantee by several hundred million dollars per year, but the
bill states in Section 42147 that "all taxes, interest,
penalties and other amounts?shall be deposited first into the
General Fund and then in into CHEF." Assuming no increase in
overall budgetary spending, result of the existing language
would be that General Fund non Proposition 98 spending would be
"crowded out."
Staff recommends the continuous appropriation in the bill, as it
serves to reduce legislative oversight.
Under the California Constitution, the State must reimburse
local agencies for costs it mandates. Any local government costs
resulting from this bill would not be state-reimbursable because
it expands the definition of a crime.