BILL ANALYSIS
AB 1604
Page A
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1604 (Nava) - As Amended: February 17, 2010
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Taxation: Oil Industry Fair Share Act
SUMMARY : Imposes, on and after January 1, 2011, for the
privilege of severing oil from the earth or water in this state
for sale, transport, consumption, storage, profit, or use, a tax
on all producers at the rate of 10% of the gross value of each
barrel of oil severed. Specifically, this bill :
1)Defines "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. If there is no sale at the time of
severance, "gross value" means the sale price when the oil is
sold, including any bonus, premium, or other thing of value
paid for the oil. If oil is exchanged for something other
than cash, 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 State Board of
Equalization (BOE) shall determine the value of the oil based
on the cash price paid to producers for like quality oil in
the vicinity of the well.
2)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produced, or withdrawn from below the surface of the soil or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.
3)Defines a "producer" as a person who does any of the
following:
a) Takes oil from the earth or water in California in any
manner;
b) Owns, controls, manages, or leases any oil well in the
earth or water in California;
c) Produces or extracts in any manner any oil by taking it
AB 1604
Page B
from the earth or water in California;
d) Acquires the severed oil 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 its value,
whether the oil is produced by the owner or by another on
the owner's behalf.
4)Provides that the oil tax shall be in addition to any ad
valorem taxes imposed by the state or any of its political
subdivisions, or any local business license taxes that may be
incurred.
5)Provides that the oil 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
may monitor and investigate any instance where producers or
purchasers have attempted to gouge consumers by using the tax
as a pretext to materially raise prices.
6)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.
7)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 $30 per barrel. 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.
8)Exempts from the severance tax oil owned or produced by the
state and any political subdivision's proprietary share of oil
produced under any unit, cooperative, or other pooling
agreement.
9)Provides that any person that fails to pay any tax within the
time required shall pay, in addition to the amount of tax
owed, interest at the rate of 1.5% per month (or fraction
thereof) from the date on which the tax became due to and
including the date of payment. Moreover, payments on
delinquent taxes shall be applied as follows:
AB 1604
Page C
a) First, to any interest due on the tax;
b) Second, to any applicable penalties; and,
c) Third, to the tax due.
10)Requires each producer to prepare and file with BOE a return
on or before the last day of the calendar month following the
calendar quarter to which it relates, together with a
remittance for the amount of tax due for that period.
11)Charges BOE with administering the severance tax in
accordance with the Fee Collection Procedures Law, as
provided.
12)Authorizes BOE to prescribe, adopt, and enforce emergency
regulations relating to the administration and enforcement of
the tax.
13)Provides that BOE shall deposit all taxes, penalties, and
interest collected in the General Fund (GF).
14)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Requires oil producers to pay the Department of Conservation
(DOC) 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 tax on taxable or net income, as applicable, earned
AB 1604
Page D
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 : The BOE estimates that this bill would raise
roughly $634 million in fiscal year (FY) 2010-11, and roughly
$1.4 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:
California, the third largest oil producing state in the
nation, is the only major oil producing state that does not
charge an oil severance tax. As a result of serious budget
shortfalls over the last few years, the people of
California have seen their children's classrooms become
more crowded, the number of police and fire fighters
reduced, care for the disabled and elderly cut, more
children left without health insurance, community clinics
closed, state parks closed, and numerous other cutbacks
that affect all of us. While California's unemployment
rate has risen to nearly 12%, oil companies continue to
make billions in profits. Some oil investors have seen the
state's economic downturn and budget shortfalls as an
opportunity to take advantage of a desperate situation and
push for more drilling off our coast. With all of the
problems we face, it is time for oil companies to pay their
fair share. We need to join all of the other major oil
producing states and charge a severance tax so that all
Californians can benefit from this finite natural resource.
2)Proponents state:
California is the only major oil producing state that does
not charge a severance tax. California produces
215,700,000 barrels of oil from inland and state tideland
wells making it a major producer. Assuming current oil
AB 1604
Page E
prices of $70 a barrel, the severance tax will raise
approximately $1.5 billion for the [GF]. Given the
international structure of oil pricing and the relatively
small share which California contributes to production, the
tax will have no impact on consumer prices.
3)Opponents state that AB 1604 "will burden Californians with
higher fuel costs, increase dependence on imported oil and
destroy thousands of California jobs." In addition, opponents
state, "Increases in operating expenses, particularly
transportation fuels and energy costs, have already led to
businesses downsizing or closing, and to the loss of jobs in
our state. A new oil tax will further harm our
already-struggling economy and, according to [the Law and
Economics Consulting Group], would destroy almost 10,000
California jobs."
4)BOE notes the following in its staff analysis of this bill:
a) It is unclear whether this bill, as currently drafted,
would provide BOE with sufficient time to implement the new
severance tax. To effectively implement this bill, BOE
would need to notify and register producers, develop
specialized computer programs, hire and train key staff,
create necessary forms and schedules, and answer taxpayer
inquiries. These functions should take place before any
tax goes into effect. Moreover, BOE staff estimate that it
would take a minimum of six months to implement the new
severance tax. As a result, BOE suggests amending this
bill to provide for a delayed operative date, whereby the
bill would become operative on the first day of the first
calendar quarter commencing more than six months after this
bill is enacted.
b) It is unclear how refund payments and ongoing
administrative costs would be funded. While this bill
provides that all taxes, interest, and penalties collected
would be deposited in the GF, it does not specify how
payments for refunds or BOE's administrative costs would be
funded. AB 1604 should be amended to address these issues.
c) 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. These
AB 1604
Page F
duties include enforcement of the consumer price gouging
prohibition, and certification of both stripper wells and
inactive wells. To this end, BOE suggests amendments
requiring the DOC's Division of Oil, Gas, and Geothermal
Resources to certify stripper wells and notify BOE of its
findings. BOE also suggests amendments requiring the DOC
to share information regarding wells determined to be
hazardous or inactive.
d) BOE notes that, under this bill, the severance tax does
not apply to oil owned or produced by the state. Moreover,
the tax does not apply to any political subdivision's
proprietary share of oil. BOE notes, "This exemption seems
to imply that oil produced by the state or any political
subdivision, as defined, would be permanently exempt from
the tax as the oil changes ownership." However, this bill
also includes within the definition of "producer" any
person who acquires oil from a person or agency exempt from
property taxation under federal or state law. Since land
owned by the state is exempt from property tax, BOE
questions whether this measure is intended to impose the
severance tax upon any person that acquires oil from the
state as a "producer."
e) This bill requires any person that fails to pay any tax
within the time required to pay interest at the rate of
1.5% per month, or fraction thereof, from the date on which
the tax becomes due to and including the date of payment.
The Fee Collection Procedures Law, under which the
severance tax would be administered, imposes interest at
the modified adjusted rate per month established under
Revenue and Taxation Code Section 6591.5. For the 2010
calendar year, this rate is set at 7% for deficiencies.
Due to the conflicting interest rate provisions, BOE
suggests amendments clarifying which interest rate will
prevail.
f) This bill would apply the severance tax "equally to all
portions" of the gross value of each barrel of severed oil.
It is unclear, however, why the tax would apply "equally
to all portions" or what this language intends to
accomplish.
5)Committee Staff Comments:
AB 1604
Page G
a) What Taxes Do Oil Producers Currently Pay? : Oil
producers pay the state personal or corporate income tax,
as applicable, on profits earned in California. Oil
producers also pay a regulatory fee to the DOC. 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.
b) How Does California's Taxation of Oil Production Compare
to Other States? : California is the nation's third largest
producer of oil behind Alaska and Texas. In addition,
California is the only major oil producing state that does
not charge a severance tax. Opponents of this measure,
however, argue that California's oil resources are already
among the most heavily taxed in the country and that
imposing a severance tax on oil would make California's
combined tax burden on oil production the highest in the
nation. To test this assertion, this Committee asked staff
at the Franchise Tax Board and BOE to calculate the
combined tax burden per barrel of oil in both California
and Texas. After accounting for regulatory fees,
applicable severance taxes, property taxes, and income and
franchise taxes, this analysis found that California's
combined tax burden on oil production was $4.22 per barrel
in 2008. In Texas, by contrast, the combined tax burden on
oil production was more than three times higher at $14.33
per barrel. Moreover, if California were to impose the 10%
severance tax this bill proposes, California's combined tax
burden per barrel would still be slightly less than in
Texas. BOE's analysis does rely on certain assumptions.
<1> The analysis suggests that a severance tax would not
make California's combined tax burden on oil production the
highest in the nation.
--------------------------
<1> BOE staff note the following assumptions in connection with
their analysis: (1) The average 2.57% property tax rate used to
calculate the combined tax burden in Texas includes all 254
counties; (2) The calculation relies on the assessed value of
oil and gas reserves because data for oil reserves alone are not
available; and (3) To obtain the combined rate per barrel, the
calculations depend on the number of barrels extracted in a
given year, which can be driven by external factors.
AB 1604
Page H
c) How Will This Bill Impact Consumers? : This measure
provides that the cost of the severance tax shall not be
passed on to consumers. Moreover, BOE is charged with
enforcing this prohibition. Committee staff notes that 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.
d) 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.
e) How Will the Tax Revenues be Used? : Under this bill,
all severance tax revenues would be deposited into the GF.
f) Related Legislation : Committee staff note the following
related bills:
i) AB 656 (Torrico), introduced in the current
legislative session, would impose an oil and gas
severance tax at 12.5% to fund higher education. AB 656
AB 1604
Page I
has been double-referred to the Senate Education
Committee and the Senate Committee on Revenue and
Taxation.
ii) 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.
iii) 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.
iv) 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.
v) 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.
vi) 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.
vii) 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.
AB 1604
Page J
viii) 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.
ix) 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.
x) 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.
g) Technical Amendments :
i) On page 2, line 16, delete "in the case of oil";
ii) On page 4, line 10, replace "as a" with "for the";
iii) On page 5, line 8, replace "person" with "producer";
iv) On page 5, line 37, insert "and" after "part,"; and,
v) On page 5, line 38, replace "person" with
"producer".
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
California Communities United Institute
California Federation of Teachers
California Labor Federation
California Nurses Association
California School Employees Association, AFL-CIO
California State PTA
California Tax Reform Association
AB 1604
Page K
California Teachers Association
Congress of California Seniors
21 individuals
Opposition
Agricultural Council of California
American GI Forum of California
Associated Builders and Contractors of California
Associated General Contractors
Black Business Association
California Black Chamber of Commerce
California Business Properties Association
California Business Roundtable
California Chamber of Commerce
California Farm Bureau Federation
California Grocers Association
California Hispanic Chamber of Commerce
California Independent Oil Marketers
California Independent Petroleum Association
California Independent Producers Association
California League of Food Processors
California Manufacturers & Technology Association
California Metals Association
California Retailers Association
California Service Station and Repair Association
California Small Business Alliance
California Taxpayers' Association
California Trucking Association
Carson Black Chamber of Commerce
Chambers of Commerce Alliance, Ventura & Santa Barbara Counties
Consumers First
Greater Bakersfield Chamber of Commerce
Howard Jarvis Taxpayers Association
Independent Oil Producers Association
Industrial Environmental Association
Kern County Board of Supervisors
Kern County Taxpayers Association
Regional Black Chamber
San Diego County Taxpayers Association
San Diego Urban Economic Corporation
Small Business Action Committee
Valley Industry and Commerce Association
Western States Petroleum Association
27 individuals
AB 1604
Page L
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098