Divided Over Taking Both Sides

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As you can see from the article about Occidental Petroleum Corp. on page 1 of this issue, there’s a spirited debate in Sacramento about whether California should impose a so-called severance tax on oil.

On the one hand, the pro-tax crowd says it would be “moral” to tax oil that comes out of California’s ground and off its shores. Such a tax would sure help the state in its hour of desperate need budgetwise. But the anti-tax crowd says a severance tax would discourage the oil industry and kill jobs in California. That would only hurt the state.

This is an important matter, and now is the time for people of conscience to take a brave stand.

But not me. I stand on both sides of this issue.

Why so ambivalent? Well, because each side in this debate makes a sound case.

Let’s take the pro-tax argument first. Their main point is that everyone else does it. Indeed, all the other big oil-producing states (California is No. 3) tax the value of oil as it is sucked out of the ground. So California would not put itself at a competitive disadvantage if it imposed the same tax as other oil states.

Beyond that, it is perfectly reasonable moral, some say for any state to tax the value of its natural bounty and use that money to help its people.

Take Texas. It has long imposed an oil severance tax. Thanks to it, that state has generously bankrolled its university system and has no personal income tax on wages. California has been a chump all these years not to have done something similar.

But let’s look at the argument of the anti-tax crowd. They make a very good point in that California is already a high-tax state, with very high corporate income tax rates as well as sales tax rates, etc. If the state added the proposed oil severance tax of 9.9 percent on the value of oil extracted from the state, that would make California a punitive state taxwise on oil producers.

The oil industry’s supporters say the severance tax would kill maybe 10,000 jobs in California along with all the tax-generating activities of those people and their companies. In the article in this issue, Occidental Petroleum said that if the tax is imposed, the company would reconsider its decision to ramp up its drilling here.

You could dismiss all that as the usual industry posturing, except there is evidence to suggest they’re right. Louisiana the fourth largest oil producing state a couple of weeks ago voted to chop in half its severance tax rate of 12.5 percent. The reason: Drilling has slowed fairly dramatically largely because of that very high rate. A lower rate will encourage oil production, thereby helping that state’s overall economy.

So the anti-tax people have a good point: A severance tax of nearly 10 percent will chase away oil producers. But the pro-tax people are right, too: California has every right to impose such a tax.

If I were king for a day, I would impose a severance tax. I don’t pretend to know if the correct tax rate would be 2 percent or 4 percent or 6 percent, but you can be sure it would not be 9.9 percent.

I may not have taken a firm stand, but at least I didn’t pull the switcheroo that Gov. Arnold Schwarzenegger did. He proposed the big severance tax last winter. Now he’s against it. At least I’ve been straddling the fence all along.


Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected].

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