BILL ANALYSIS
AB 656
Page 1
Date of Hearing: January 11, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 656 (Torrico) - As Amended: January 4, 2010
2/3 vote. Urgency. Fiscal committee.
SUBJECT : California Higher Education Endowment Corporation:
oil and gas severance tax
SUMMARY : Enacts the Oil and Gas Severance Tax Law to fund
direct classroom instruction at the California Community
Colleges, the California State University, and the University of
California. Specifically, the tax-related provisions of this
bill :
1)Impose, on and after January 1, 2010, an "oil" and "gas"
severance tax on any "producer" for the privilege of severing
oil or gas from the earth or water in California for sale,
transport, consumption, storage, profit, or use. The tax
shall be applied equally to all portions of the product's
"gross value" and imposed at the rate of 12.5% of the gross
product.
2)Define "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produced, or withdrawn from below the surface of the soil or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.
3)Define "gas" as all natural gas, including casing head gas,
and all other hydrocarbons not defined as oil.
4)Define a "producer" as a person who does any of the following:
a) Takes oil or gas from the earth or water in California
in any manner;
b) Owns, controls, manages, or leases any oil or gas well
in the earth or water in California;
c) Produces or extracts in any manner any oil or gas by
taking it from the earth or water in California;
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d) Acquires the severed oil or gas from a person or agency
exempt from property taxation under federal or state law;
or,
e) Owns a royalty or other interest in oil or gas or its
value, whether the oil or gas is produced by the owner or
by another on the owner's behalf.
5)Provide 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.
6)Define "gross value" as the sale price at the mouth of the
well, including any bonus, premium, or other thing of value
paid for the oil or gas, as determined by a rolling 30-day
average daily value. If oil or gas is exchanged for something
other than cash, 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 indicative of the
true value or market price, then the value of the oil or gas
shall be determined by the State Board of Equalization (BOE)
based on the cash price paid to the producer for like quality
oil or gas in the vicinity of the well.
7)Exempt from the severance tax oil or gas owned or produced by
any political subdivision of the state, including that
political subdivision's proprietary share of oil or gas
produced under any unit, cooperative, or other pooling
agreement. A "political subdivision of the state" is defined
to include "any local entity, as defined in Section 900.4 of
the Government Code."
8)Exempt from the severance tax oil or gas produced by a
stripper well in which the average value of oil or gas is less
than 3/4ths of the average gross value of the product as of
January 1 of the prior year. A stripper well, in turn, is
defined 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.
9)Impose the oil and gas severance tax in addition to any ad
valorem property tax or business license tax that may
otherwise be imposed.
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10)Provide that the oil and gas severance tax shall not be
passed through to consumers by way of higher prices for oil,
natural gas, gasoline, diesel, or other oil or gas consumable
byproducts, such as propane and heating oil. Moreover, BOE
shall monitor and, if necessary, investigate any instance
where producers or purchasers have attempted to gouge
consumers by using the tax as a pretext to materially raise
the price of oil or natural gas.
11)Charge BOE with administering the severance tax in accordance
with the Fee Collection Procedures Law, as provided. BOE
shall, upon appropriation, be reimbursed for costs incurred in
administering the tax.
12)Create the California Higher Education Fund (Fund), from
which moneys shall be continuously appropriated to the
California Higher Education Endowment Corporation. All taxes,
interest, penalties, and other amounts collected through the
severance tax shall be deposited into the Fund.
13)Take immediate effect as an urgency statute "to quickly
mitigate the impacts of funding reductions to institutions of
higher education . . . ."
EXISTING LAW :
1)Requires oil producers to pay the Department of Conservation a
fee of $0.0880312 per barrel of oil produced to fund the
department's regulatory programs. Oil 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 an Oil Spill Prevention and Administration Fee of up
to $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 retail
sales of motor vehicle fuel and diesel fuel.
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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, as applicable, earned
by a taxpayer at rates designated by statute. 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.
FISCAL EFFECT : Committee staff estimate that this bill would
raise roughly $1.8 billion in fiscal year (FY) 2010-11, and
roughly $2.0 billion in FY 2011-12. It should be noted,
however, that the severance tax will reduce the value of oil in
the ground and potentially reduce its assessed property value
for local property tax purposes.
COMMENTS :
1)The author states, "AB 656 creates the California Higher
Education Fund that would be funded by a new 12.5% oil and
natural [gas] severance tax. This tax would raise nearly $2
billion annually in new revenue." The author goes on to
state, "The fund would be administered by the California
Higher Education Endowment Corporation (created by this bill)
that would annually allocate the revenue to the three college
systems based on the following formula: 50% to CSU, 25% to UC,
and 25% to Community Colleges."
2)Proponents state, "We believe AB 656 will help ensure more
students have access to higher education and the nursing
field. In these challenging economic times, it is tough to
meet the needs of our population, but using an oil severance
tax is a smart decision to support California's long term
future." Proponents go on to state, "At this time, California
is the only oil producing state that does not have a severance
tax. It is likely that California's budgetary needs will be
challenging for sometime [sic] in the future and the creation
of [a] smart sensible tax such as a severance tax can mitigate
the potential negative realities for California's higher
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education students."
3)Opponents state, "As representatives of California's leading
business and taxpayer associations, we are writing to express
our opposition to an oil severance tax proposal that will
penalize California companies and consumers. It may also
result in higher fuel costs, increase our dependence on
imported foreign oil and destroy thousands of California
jobs." Opponents go on to state, "We understand these are
difficult times for the state budget and funding for our
higher education system, but they are also difficult times for
California consumers and taxpayers. At a time when the state
is facing a budget crisis and families are losing jobs in
historic proportions, this proposed severance tax would
further this hardship with higher fuel costs."
4)BOE's staff analysis raises the following implementation
concerns:
a) This bill does not provide enough lead-time to implement
a new tax program. To effectively implement this bill, BOE
would need to notify and register producers, develop
relevant computer programs, hire and train staff, create
necessary forms and schedules, and answer taxpayer
inquiries. These functions should take place before the
tax becomes operative. BOE staff estimates that it would
take a minimum of six months to implement this tax.
b) This bill would require BOE to perform multiple duties
outside its purview of tax administration, which could pose
problems given BOE's lack of relevant expertise.
c) Imposing the proposed tax on a gross value amount that
changes daily would complicate reporting and likely result
in reporting errors, thus requiring additional BOE
resources for audit and compliance functions.
5)Committee Staff Comments:
a) 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
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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.
b) 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 notes 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 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.
c) 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, producers most likely would be able to deduct
the severance tax from earned income, thus reducing their
state income tax liability. The extent to which this
measure would reduce state income taxes paid by producers
would depend on various factors, including whether or not a
producer has taxable income in any given year, the amount
of such income apportioned to California, and the tax rate
applied to such income.
d) How Will the Tax Revenues be Used? : This bill is
designed to provide an additional funding source for
California's public institutions of higher education.
However, this bill also includes a provision stating that a
portion of the funds made available to the University of
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California shall be allocated annually to provide
"supplemental funding for the operations of the Charles R.
Drew University of Medicine and Science." It is not
entirely clear to Committee staff why this private
institution is being singled out for preferential
treatment.
e) Prior Legislation : Committee staff note that prior
legislative sessions have addressed the issue of imposing a
special tax on businesses. Specifically:
i) 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.
AB x3 9 failed passage on the Assembly Floor.
ii) AB 2442 (Klehs), introduced in the 2005-06
legislative session, would have 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.
iii) AB 673 (Klehs), introduced in the 2005-06
legislative session, would have imposed a 2.5% tax on the
windfall profits of petroleum producers and refiners. AB
673 failed passage on the Assembly Floor.
iv) 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 2001-02. ABx1 128 was held by
the Assembly Appropriations Committee; ABx2 2 failed
passage on the Assembly floor.
v) SBx1 1 and SBx2 1 (Soto), introduced in the 2001-02
legislative session, would have 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 extraordinary session closed; SBx2 1
failed passage on the Assembly Floor.
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vi) SB 1777 (Burton), introduced in the 1999-2000
legislative session, would have imposed a Petroleum
Windfall Profits Tax on certain taxpayers engaged in
petroleum refining. SB 1777 was held in the Senate Rules
Committee.
vii) SB 14 (Thompson), introduced in the 1995-96
legislative sessions, would have imposed a Petroleum
Windfall Profits Tax on certain taxpayers engaged in
petroleum refining. SB 14 failed passage in this
committee.
viii) AB 336 (Villaraigosa), introduced in the 1995-96
legislative session, would have imposed a 6% oil
severance tax on certain oil producers. AB 336 died in
this committee.
ix) AB 1693 (Margolin), introduced in the 1993-94
legislative session, would have 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.
f) Double Referral : This bill was double-referred with the
Assembly Committee on Higher Education, which passed the
bill out on a 5-3 vote on July 7, 2009. For a more
comprehensive discussion of the bill's provisions relating
to higher education, please refer to that committee's
analysis.
g) Suggested Amendments :
i) Currently, this bill calls for the severance tax to
be applied equally to all portions of the product's gross
value and imposed at the rate of 12.5% of the gross
product. It is unclear to Committee staff why the bill
includes language applying the tax "equally to all
portions." Would not the tax rate apply to the gross
value of the product, as defined? In addition, the bill
does not include a definition for "gross product," which
should be defined.
ii) To address BOE's concerns regarding insufficient
start-up time, Committee staff suggests amending the bill
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to delay its operative date to the first day of the first
calendar quarter beginning more than six months after the
bill is enacted. This would provide BOE with sufficient
time to successfully implement the bill and would be
consistent with the quarterly reporting proposed by the
measure.
iii) This bill tasks BOE with certifying "stripper wells"
exempt from taxation. Given BOE's lack of expertise in
this field, the author may wish to amend the bill to
require the Department of Conservation's Division of Oil,
Gas, and Geothermal Resources to make this certification
instead.
iv) This bill defines a "political subdivision of the
state" to include any "local entity" as defined by
Government Code (GC) Section 900.4. GC Section 900.4,
however, defines the term "local public entity."
(Emphasis added). As such, Committee staff suggests
inserting the word "public" after "local" on page 10,
line 18.
v) The bill's definition of stripper wells currently
includes only oil wells. Does the author wish to include
gas wells? If so, amendments should be taken to make
this intent clear.
vi) On page 6, line 34, after "improperly" insert "used"
or similar verbiage.
REGISTERED SUPPORT / OPPOSITION :
Support
California Nurses Association/National Nurses Organizing
Committee
Opposition
Alliance of Contra Costa Taxpayers
California Business Roundtable
California Chamber of Commerce
California Independent Oil Marketers Association
California Independent Oil Producers Agency
California Independent Petroleum Association
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California Manufacturers & Technology Association
California Metals Coalition
California Taxpayers' Association
Contra Costa Council
Industrial Environmental Association
Kern County Board of Supervisors
Kern County Taxpayers Association
NFIB - California
Orange County Taxpayers Association
Regional Legislative Alliance
Small Business Action Committee
Valley Industry and Commerce Association
Western States Petroleum Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098