What would happen if California imposed a brand new tax on a barrel of oil? According the supporters of Proposition 87, an energy initiative on November’s ballot, it would feel good. After all, oil is to blame for a lot of problems. Even with prices dipping down lately, it still costs a small fortune to fill your gas tank, it probably came from an unfriendly foreign country, and it’s bad for the environment. But aside from its therapeutic benefits, what impact would this initiative really have?
Prop. 87 hopes to reduce California’s dependence on foreign oil and jump-start renewable fuels research by, in the words of the ad campaign, “making big oil pay.” This would entail a tax on companies that produce oil in-state. According to proponents, the estimated $4 billion extracted by the tax would be dedicated to research and development on alternative energy.
Unfortunately, this proposition would create more than just momentary good feelings. It would also result in higher gas prices and even more dependence on foreign oil. California crude oil supplies more than 10 percent of total U.S. production, providing 37 percent of the state’s oil demand. Taxing that supply would have the swift and predictable effect of raising the cost of every drop of gas. Despite language in the initiative that prohibits producers from passing the cost of the tax on to consumers, the effect is the same. Prop. 87 is a tax on production, not profits, therefore the market itself will raise prices, thus hitting consumers.
It will be more expensive than ever before to buy gas in California, and in a Prop. 87 future, you could be fairly sure you were buying it from a foreign provider. As California drilling and refineries struggle to adjust to the new tax burden, non-U.S. oil companies will fill the gap in production.
In addition to raising gas prices, Prop. 87 would create yet another bureaucratic institution. Once the state scrapes its target of $4 billion out of the pockets of California consumers, someone has to spend it. Under this plan, that would be 40-50 political appointees operating outside the budget review process and exempt from the checks and balances that apply to other agencies.
This new agency would seek breakthroughs in alternative energy and renewable fuels —- a worthy goal, to be sure. But also a goal better achieved by private enterprises already innovating in the field. With sky-high oil prices and rabid consumer demand for green technology, a marketplace already exists in California for clean, efficient energy. And by subsidizing a state program with taxpayer dollars to compete in the same market with entrepreneurs, Prop. 87 may actually drive energy innovation out of the state. Worst of all, the proposition contains no metrics for success —- this group can keep spending your tax dollars year after year, with no end in sight.
And let’s not forget the litigation. While it often falls to the courts to sort out the details of these propositions, 87 would become a truly historic legal mess. The initiative isn’t even clear on what rate the oil will be taxed at. While it calls for a tax of up to 6 percent on each barrel of oil, it does not specify if regulators should use a “standard rate” —- producing $4.20 for every $70 barrel of oil — or a marginal rate, which would vary based on the price of a barrel and produce less revenue. If you like the idea of lawyers and judges determining the future of California’s energy policy, this is the way to do it.
So what really happens when you tax a barrel of oil? The barrel just sits there. And somewhere in California, a consumer pulls out a wallet or purse and picks up the tab.
Alpine resident Matt Schumsky is a real estate developer and the California field coordinator for FreedomWorks, a Washington, D.C.-based think tank.
He lives in Alpine and can be reached at email@example.com