With oil still spewing into the Gulf of Mexico from the wreckage of a BP oilrig, speaking well of oil drilling seems like a losing proposal. The ruptured oil well has caused a great deal of harm to ecosystems and wildlife, and it has also considerably harmed BP and the economy in general. No wonder Big Oil has become a dirty word.
California has taken major steps to stop offshore oil drilling, and there’s currently a ban on the practice. This doesn’t mean, however, that we don’t greatly appreciate their business.
Not only do Californians continue to buy the products that depend on oil, but we’re also quite willing to make oil companies pay for a variety of services through taxation.
There has been a push recently by Representative Albert Torrico (D-Fremont) to enact a new 12.5 percent oil severance tax on offshore oil drillers. This means that any oil extracted from the earth is subject to immediate taxation. He has correctly pointed out that California is the only oil producing state that does not have such a tax. The money raised by this new tax would be tied directly to funding education. With the high profits that oil companies make, this sounds like a bonanza.
The idea of funding education while sticking it to Big Oil sounds too good to be true, and it probably is. There are several notable dangers that could harm not only the California economy, but also the future of education funding.
While it is true that California is alone in its lack of a severance tax, California oil companies do indeed pay a wide range of other taxes including property and corporate taxes. Adding a 12.5 percent severance tax would make California oil drillers among the most heavily taxed in the nation.
While I am sure that few people sympathize with oil companies for being heavily taxed, the effect of those taxes will have a financial impact on average Californians. A major problem with corporate taxes is that they are passed on to the consumer. Corporations collect the taxes, but the funding comes from people who buy their products.
Torrico’s bill exclaimed that this severance tax wouldn’t be passed on to the consumer. There is, however, no way to enforce this. Oil companies will always try to maximize their profits. Imposing new taxes could cause them to fire employees and increase the price of oil. Wage and price controls have a poor history of creating shortages and long lines at the gas pump. I’m sure nothing of that sort will be proposed.
Impact of high oil prices will mean more than just high prices when you fill up your gas tank. Owners of big, gas-guzzling SUVs might recognize the change most directly, but high oil prices raise the cost of all kinds of products.
Anything bought and sold that’s been carried by trucks or oil-producing vehicles could become more expensive. This includes produce and food products as well as other common household items.
Just a few years ago my parents had their carpet cleaned when oil prices were peaking. Normally the total expense was around $200. The incredibly high gas prices at the time provoked the carpet cleaning company to slap on an extra $60 surcharge in order to cover the cost of driving around their truck. This situation caused both parties to lose; my family had to pay out more to have our carpets cleaned and the small carpet cleaning company will lose business because the extra $60 charge will drive some customers away.
Another, perhaps overlooked, problem with this new oil severance tax is its direct link to education. Oil drilling has been decreasing significantly, and new laws have been created to further limit the practice. If education funding is tied directly to these taxes it might lead to a short term boost of education revenue, but what about 10 years from now? Becoming dependent on oil severance tax revenues while also trying to drive out oil drillers seems like a bad mix of policies for the future of the state.
Politicians who champion a tax on one of the most loathed businesses in California could become future advocates for Big Oil.
The unpredictability of future oil production and consumption could produce wild swings in revenue. This is, of course, one of the problems that we are facing today. Tax revenue might be coming in smoothly at first, but hit a bump in the road and we drive ourselves off a fiscal cliff.
JARRETT STEPMAN has won the victory over himself. He loves Big Oil. If you want to tell him what you think of Big Oil send him a comment at jstepman@ucdavis.edu.
