Informational Hearing

Proposition 87: Alternative Energy. Research, Production, Incentives.
Tax on California Oil Producers. Initiative Constitutional Amendment and Statute.

State Capitol, Room 4202
September 12, 2006
1:30 p.m.

I. Opening Comments

II. Legislative Analyst’s Office

• Brendan McCarthy, Fiscal & Policy Analyst (PDF)
• Brad Williams, Director, Fiscal Forecasting and Budget Overview

III. Yes on Proposition 87

• Shelley Luce, Science Director
  Yes on 87 Campaign
   
• Nidia Bautista, Representative
  Coalition for Clean Air
   
• Nathan S. Lewis, Professor of Chemistry
  California Institute of Technology
   
• Lenny Goldberg, Representative
  California Tax Reform Association

IV. No on Proposition 87

• Dominic DiMare, Vice President of Governmental Relations
  California Chamber of Commerce
   
• Anita Mangels, Spokeswoman
  Californians Against Higher Taxes
   
• Teresa Casazza, Representative
  California Taxpayers' Association (Cal-Tax)

State Board of Equalization Legislative and Research Division
California Budget Project (PDF)

 

Joint Informational Hearing

Senate Energy, Utilities & Communications and Revenue & Taxation Committees
Assembly Natural Resources, Revenue & Taxation and Utilities & Commerce Committees

Proposition 87
OVERVIEW

Summary

Proposition 87 establishes a severance tax on oil produced within California. The purpose of the tax is to collect $4 billion to spend on projects and research with the goal of reducing petroleum consumption by 25% over 10 years. Petroleum use reduction would be achieved by funding alternative transportation fuels, energy efficiency and renewable energy. Funds could be awarded directly from tax revenues, from the proceeds of bonds pledged against future tax revenues, or a combination of the two. Funds would be continuously appropriated (not subject to legislative budget oversight) and excluded from Proposition 98 for purposes of calculating minimum education funding.

The Severance Tax

A “severance tax” is an excise tax on the production or extraction of a natural resource. Proposition 87 would impose such a tax (referred to as an “assessment” in the draft) on producers of oil from wells in California.

The proposed severance tax would be levied at graduated rates, depending on the price of oil at the wellhead. The tax would be 1.5% of gross value for oil priced at $10 to $25 per bbl; 3% for oil priced at $25.01 to $40; 4.5% for oil priced at $40.01 to $60, and 6% for oil priced at $60.01 or more. It is probably reasonable to suppose that for the near future the tax will be 6%. But it is not clear whether the various portions of the price of oil would have separate tax rates (i.e., $30 / bbl oil would be taxed at 0% X $10 + 1.5% X $15 + 3% X $5), or whether a single tax rate would apply (i.e., $30 / bbl oil would be taxed at 3% X $30). The drafting is imprecise and would have to be interpreted either by follow-up legislation (requiring a 2/3 vote, according to the terms of the proposition) or by a regulation of the Board of Equalization (BOE) – the agency responsible for administering the tax.

It is also not clear whether production from state or federal lands would be subject to the tax. The Legislative Analyst Office (LAO) scores the revenue from the tax from $225 million to $485 million, depending on whether the “marginal rate” or the single rate tax method is applied and whether or not production from state and federal lands is included.

LAO also indicates that imposition of the tax would reduce local property tax revenue by “a few million dollars” annually (by reducing the profitability, and therefore the assessed value) of oil reserves. And it would reduce state corporation tax revenue by about $10 million annually, as the severance tax would be a deductible expense for tax purposes. Finally, depending on whether production on state lands is subject to the severance tax, state lands revenue to the General Fund could be reduced by $7 to $15 million.

Proposition 87 provides that the tax “shall not be passed on to consumers…” It provides for BOE to investigate whether a producer or subsequent purchaser “has attempted to gouge consumers by using the assessment as a pretext to materially raise the price of oil, gasoline or diesel fuel.” But the proposition makes no attempt to enforce this mandate. And if a producer wishes to simply raise prices without any “pretext,” it would presumably be free to do so.

The severance tax would be subject to a “sunset” of sorts. It would be repealed as soon as expenditures pursuant to provisions of the proposition, not including principal or interest on debt relating to the Clean Alternative Energy Act, exceeded $4 billion. LAO indicates that the sunset could be as early as 10 years, or longer if bonds are issued (i.e., from 10 years to several decades).

The Clean Alternative Energy Program

Under Proposition 87, proceeds of the severance tax generally would be allocated as follows:

• 57.5% Gasoline and diesel use reduction – Alternative fuel vehicles, production, stations, and other “infrastructure,” as well as grants and loans for private research.
   
• 26.75% Research and innovation acceleration – Renewable energy and energy efficiency research and facilities at California universities.
   
• 9.75% Commercialization acceleration – Introduction of petroleum reduction and renewable energy technologies.
   
• 2.5% Vocational training for community college students.
   
• 3.5% Public education and administration.

The expenditure of funds for these purposes would be governed by the Energy Alternatives Program Authority, which is reconstituted from an existing state authority, substantially altered to carry out the purposes of Proposition 87. The process and standards for selecting beneficiaries is not well-defined in the measure and the actual use of funds would depend largely on the priorities of the Authority.

The Authority would be composed of nine members – the Secretary of CalEPA, the Chair of the Energy Commission, two additional gubernatorial appointees, the Treasurer, a venture capitalist appointed by the Controller, a university energy expert appointed by the Assembly Speaker, a business school dean or professor appointed by the Senate Rules Committee, and a consumer advocate appointed by the Attorney General.

The Authority would be a state agency, but unique in the sense that, while it would use the taxing and borrowing authority of the state, it would not be subject to prevailing standards regarding personnel, contracting, public participation, conflict of interest, and legislative oversight. The Authority would have up to 51 appointees (six appointed directly to the Authority and up to 45 appointed by the Authority to advisory review committees) and an unspecified number of employees. Appointees would not receive a salary, but would be eligible for per diem and expenses. Employees would receive salaries set by the Authority, which would be exempt from Department of Personnel Administration standards governing state employees. While the measure prohibits Authority members from directly receiving funds from the Authority, it appears to permit awards to entities in which a member of the Authority has a financial interest, so long as that Authority member doesn’t participate in the decision regarding the award.

It’s not clear why these exemptions are necessary, given that the Authority’s main business would be to dispense awards for projects which are similar to those currently funded by programs administered by state employees at agencies such as the Energy Commission and the Air Resources Board. Given the overlap with existing state programs and the possibility that an existing agency, such as the Energy Commission, could administer the Clean Alternative Energy Program with greater efficiency and accountability, it’s not clear that the creation of a new agency is warranted.