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ALTERNATIVE ENERGY. RESEARCH, PRODUCTION, INCENTIVES. TAX ON CALIFORNIA OIL PRODUCERS.
Initiative Constitutional Amendment and Statute.

QUESTION

Should California establish a $4 billion Clean Alternative Energy Program to reduce California's oil and gasoline consumption by 25 percent through incentives for alternative energy, education, and training?

BACKGROUND

In 2005, California produced an estimated 230 million barrels of oil, approximately 12 percent of U.S. production. California is the third largest oil-producing state, behind Texas and Alaska. Virtually all oil produced in California is delivered to California refineries. California oil production peaked in 1985 and has declined an average of two percent to three percent per year since then. In 2005, California supplied 37 percent of the state's oil needs, Alaska supplied 21 percent, and foreign oil 42 percent.

Oil producers pay the state corporate income tax on profits earned in California, and they pay a regulatory fee, which in 2006-07 will generate total revenues of $14 million. Property owners pay local property taxes on the value of oil drilling equipment and on the value of recoverable oil in the ground.

PROPOSAL

Oil producers would pay a variable 1.5 percent to six percent severance tax on oil extracted in California to fund research and production incentives for alternative energy, alternative energy vehicles, efficient technologies, education and training. The program would be administered by a reorganized California Energy Alternatives Program Authority (the Authority) that would raise and spend $4 billion to reduce petroleum consumption in California by 25 percent within ten years. The proposal prohibits oil producers from passing the tax on to consumers. However, oil refiners could purchase additional oil from non-California suppliers, whose oil would not be subject to the tax.

The Authority would allocate funds from the tax as follows:

• 57.5 percent for incentives to: purchase alternative fuel vehicles; encourage producers to supply alternative fuels; create alternative fuel infrastructure (fueling stations); provide research grants and loans for alternative fuels and vehicles.
• 26.75 percent for grants to California universities to improve the economic viability and commercialization of renewable energy and energy efficiency technologies.
• 3.5 percent for public education campaigns, oil market monitoring and general administration (roughly 2.5 percent of total revenues for administrative costs).
• 2.5 percent to train students at community colleges to work with new alternative energy technologies.
• 9.75 percent for incentives to fund the start-up costs and accelerate the production and distribution of petroleum reduction, renewable energy, energy efficiency, and alternative fuel technologies and products.

FISCAL EFFECT

• The proposed tax could raise about $225 million to $485 million annually, depending on how the measure is interpreted. Actual revenues will depend on oil prices and oil production in the state.
• In order to raise $4 billion in ten years, the Authority could sell bonds that would be paid back with future severance tax revenues.
• The severance tax would expire once the Authority has spent $4 billion and any bonds it issued are paid off. The variables mean the term of the tax could last from less than ten years to several decades.
• Administrative costs are unknown.
• Local property taxes paid on oil reserves would decline to the extent that the tax reduces the value of oil reserves in the ground and related assessed property values. The Legislative Analyst estimates the property tax loss likely would be a few million dollars annually statewide.
• Oil producers could deduct the tax from their earned income and thus reduce their state income tax liability. The Legislative Analyst estimates the tax loss likely would not exceed $10 million annually statewide.
• Indirect economic impacts on California from the tax would be mixed. Increasing the cost of oil production could reduce production and investment in new technology to expand production. On the other hand, investments in new technologies developed and manufactured in the state could spur economic development.

WHAT A YES OR NO VOTE MEANS

A YES vote means the state would impose a tax on California oil production to support $4 billion in expenditures to develop and promote alternative energy technologies and reduction of petroleum use.

A NO vote means the state would not impose a tax on oil production to fund these activities.

SUPPORTERS SAY

• California is the third-largest oil producing state and the only state that does not collect an oil extraction fee. Oil companies pay billions of dollars in drilling fees in Texas, Louisiana and Alaska.
• California is the number one oil-consuming state. Fifty percent of the state's imported oil comes from Saudi Arabia and Iraq.
• California consumers pay among the highest gas prices in the nation.
• California air quality is the second worst in the nation. Pollution from gas powered vehicles is responsible for hundreds of thousands of cases of asthma and lung disease each year
• Prop. 87 prohibits oil companies from raising gas prices to pass the tax on to consumers.
• It provides consumers with rebates to buy clean cars and use clean energy.
• It will make oil companies pay for cleaner energy, create thousands of jobs, and reduce air pollution.

OPPONENTS SAY

• Prop. 87 is not the way to advance needed energy alternatives.
• It would spend $4 billion to fund a new state bureaucracy of 50 political appointees that is not required to produce results or be accountable to taxpayers
• It allows the Authority to operate outside the state budget review process and the normal checks and balances that govern other agencies.
• It allows the sale of billions of dollars in bonds it may not be able to repay and could force a state bailout at taxpayer expense.
• Prop 87 does not require all the new taxes to be spent in California, much less in the U.S.
• Economists report that higher taxes on in-state oil production would reduce in-state oil production and increase dependence on oil from the Middle East.

SUPPORT AND OPPOSITION

Ballot arguments in support are signed by Laura Keegan Boudreau, CEO, American Lung Association of California; Winston Hickox, Former Secretary, California Environmental Agency; Jamie Court, President, Foundation for Taxpayer and Consumer Rights; Dr. Mario Molina, Nobel Prize in Chemistry, Univeristy of California, San Diego; Tim Carmichael, President, Coalition for Clean Air

Ballot arguments in opposition are signed by Larry McCarthy, President, California Taxpayers' Association; Daniel Cunningham, President, California Small Business Alliance; Marian Bergeson, Past President, California School Boards Association; Kevin R. Nida, President, California State Firefighters' Association; Ray Holdsworth, Past Chair, California Chamber of Commerce; Allan Zaremberg, President, Californians Against Higher Taxes

Other supporters included: Americans for Energy Independence, California Farmers Union, Coalition for Clean Air, California League of Conservation Voters, The Foundation for Taxpayer and Consumer Rights, National Wildlife Federation, Natural Resources Defense Council, Planning and Conservation League, Public Citizen, Sierra Club, Union of Concerned Scientists

Other opponents included: Air Transport Association of America, Inc., Association of Energy Service Companies (California Chapter), Automobile Club of Southern California, California Black Chamber of Commerce, California Business Roundtable, California Chamber of Commerce, California Hispanic Chamber of Commerce, California State Firefighters Association, California Trucking Association, California Women for Agriculture

FOR MORE INFORMATION

Supporters

Californians for Clean Energy, 323-782-1045, www.yeson87.com

Opponents

Californians Against Higher Taxes, No on 87, 650-340-0262, www.noOilTax.com

Web Resources

Analysis by the Legislative Analyst's office

Voter Information Guide (ballot pamphlet)

Reports of campaign expenditures for ballot measures