BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
SB 1017 (Evans) - Oil and Natural Gas Severance Tax
Amended: May 14, 2013 Policy Vote: Education 5-3, G&F
5-2
Urgency: No Mandate: Yes
Hearing Date: May 19, 2013 Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 1017, an urgency measure, 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 a
revenue gain of $1.6 billion in 2015-16.
The increased revenues would trigger higher spending on K-14
education, pursuant to Proposition 98, likely in the hundreds of
millions of dollars or more annually. 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.
Costs to create and staff the California Higher Education
Endowment Corporation are unknown.
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
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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
and natural gas. None of these are an "oil severance tax" or a
tax on extraction. Existing taxes 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 $0.1426683 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. Current
law imposes an Oil Spill Prevention and Administration Fee
of $0.065 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: Current law assesses the value of the
property and the "proven reserves" as real property at the
time of purchase. The property is taxed at the 1 percent
rate, pursuant to Proposition 13, and is only reassessed
upon change of ownership and property improvement.
Corporation 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
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law, taxpayers may deduct up to 100 percent (oil and gas)
of the net income for resource depletion such as oil
extraction. California conforms to federal law to
encourage taxpayers 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
percent 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, as oil prices have exceeded the specified
amount.
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).
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 $0.395 per gallon, and on
July 1 of this year it will be $0.36. Federal law imposes
an additional per gallon tax on gasoline and diesel fuel of
$0.184 and $0.244, 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.
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,
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or produced in California and transported on a proprietary
pipeline.
Proposed Law: This bill would create the Oil Severance Tax Law
and effective July 1, 2015 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 DOC. The tax is administered by the BOE with input
on the price of oil and natural gas from the DOC.
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.
Revenues would be deposited into the California Higher Education
Fund (CHEF). Additionally, the bill would create the California
Higher Education Endowment Corporation (CHEEC) in state
government, and would require that all proceeds, less refunds
and costs of administration, be continuously appropriated to
CHEEC. Local jurisdictions would receive allocations to offset
any loss of local property tax revenue resulting from the
imposition of the severance tax, as specified. The remainder
would be disbursed as follows:
50 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.
25 percent is dedicated to the Department of Parks and
Recreation for the maintenance and improvement of state
parks.
25 percent to the California Health and Human Services
Agency.
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).
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Related Legislation:
SB 241 (Evans), introduced in the current legislative
session, would have imposed a 9.5 percent tax on oil and a
3.5 percent tax on natural gas. SB 241 was held in this
Committee.
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
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
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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
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
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guarantee by a minimum of several hundred million dollars per
year. However, only bill's allocations to the community colleges
would be applied toward the higher guarantee. 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.