Oil Severance Tax Administration Should Shift to Tax Agency

The Governor’s budget includes a request for $10.6 million in the budget year from the General Fund for DOC for an additional 83 positions to administer a proposed oil severance tax. The oil severance tax would be 9.9 percent of the gross value of each barrel of oil extracted in California. Below, we discuss how the oil severance tax should be administered, and at what funding level, should the Legislature enact such a tax.

DOC Currently Regulates Oil and Gas Production in the State. The Division of Oil, Gas, and Geothermal Resources (DOGGR) within DOC regulates oil, gas, and geothermal well operations throughout the state. The division issues production permits and oversees the drilling, operation, maintenance, as well as the plugging and abandonment of wells. The DOGGR also provides detailed production reports on oil and gas output in the state.

Proposed Legislation Tasks DOC With Administration of the Oil Severance Tax. The Governor’s budget plan includes proposed changes in statute that would assign DOC with the task of administering the oil severance tax. The proposed legislation gives DOC the authority to develop regulations, hire staff, and certify which oil–producing wells are to be exempted from the tax. The statutory language appropriates $6.8 million from the General Fund to DOC in the current year for these administrative costs. Funding for these costs in 2009–10 would be appropriated in the annual budget act.

Governor’s Budget–Year Proposal for Oil Severance Tax Administration. The budget requests 83 new positions for a new oil severance tax administration unit within DOGGR, of which 42 positions would be permanent and 41 would be three–year, limited–term positions, at a total cost in 2009–10 of $10.6 million from the General Fund.

The DOC proposal was developed, and its costs estimated, based upon past work by DOC in administering its beverage container recycling program and DOGGR’s experience in working with oil producers. In developing its budget request, however, DOC did not consult with BOE, a body that administers a large number of special fees and taxes on behalf of various state agencies. In our view, BOE would have been a reasonable alternative agency for the administration to have considered in evaluating how the tax should be administered and the costs and staffing required for such an endeavor. This is because of BOE’s longstanding focus on, and technical expertise in, tax administration, and because of the potential efficiencies from consolidating activities for collection of a new tax with similar processes already in place at BOE.

DOC’s Funding Request Substantially Higher Than BOE’s Estimates to Do the Job. The BOE provided us with an updated estimate for its costs to administer an oil severance tax proposal very similar to the one proposed by the Governor—one proposed in Proposition 87, an unsuccessful voter initiative on the November 2006 ballot. The updated BOE estimate is that its costs to administer such a tax would be $4.2 million in the first year, with an ongoing cost of $2.9 million. The ongoing funding level is $7.7 million below DOC’s budget–year request for funding to administer the Governor’s proposed tax.

Reject DOC Request for Additional Positions. Given the substantial savings that could be achieved by having BOE administer the oil severance tax, we recommend that the Legislature choose this option if it decides to enact an oil severance tax. Accordingly, we recommend that the Legislature reject DOC’s request for additional positions and General Fund support. The funding level (and related position authority) for BOE’s administration should be set at a level to reflect BOE’s lower costs. We also note that the Governor’s proposed legislation specifies that the costs to administer the oil severance tax are to be funded from the oil severance tax revenues. A budget appropriation for the administrative costs should be consistent with any such statutory direction.