January 31, 2012
Pursuant to Elections Code Section 9005, we have reviewed the
proposed statutory initiative measure concerning an oil and natural gas
severance tax (A.G. File No. 11‑0096, Amdt. #1S).
Background
Taxation of Oil and Natural Gas in California.
Oil and natural gas producers pay state income taxes. Oil
producers also pay a regulatory charge on production in the state or in
state waters. Also, property owners pay local property taxes on the
value of both extraction equipment such as drills and pipelines and
underground oil and gas reserves.
Higher Education Funding. The State
Constitution gives the power to appropriate (that is, authorize the
spending of state funds) to the Legislature. The Legislature determines
each year how much state tax funding to appropriate to the California
State University (CSU), the University of California (UC), and
California community college districts. Proposition 98 (1988) sets a
minimum amount to be provided from state and local funds for school and
community college districts each year, but this guarantee does not apply
to UC and CSU. By a two-thirds vote of the Senate and the Assembly, the
Legislature may suspend the Proposition 98 minimum funding guarantee in
any given year.
Proposal
Oil and Gas Severance to Be Taxed at 12.5 Percent.
Starting July 1, 2013, this measure would impose a severance
tax of 12.5 percent on the value of all oil and natural gas extracted in
California or its state offshore waters, which extend out three miles
from the coastline. Oil and natural gas produced in federal waters would
be exempt from the tax. The tax would be administered by the State Board
of Equalization.
Measure Prohibits Pass Through of Tax to Consumers.
The measure states the severance tax may not be passed through
to consumers in the form of higher prices for oil, natural gas, or
related products. The State Auditor (a non-partisan state official that
reviews the management of public programs) shall monitor and investigate
such price increases. The Superintendent of Public Instruction (a
statewide public official) would be able to instruct the State Auditor
to undertake such investigations.
Increased General Fund Revenues. Two-thirds
of the severance tax revenues would be deposited into the state’s
General Fund. General Fund revenues are available to be appropriated for
any public purpose. Pursuant to Proposition 98, approximately 40 percent
to 50 percent of these new revenues would go to an increased minimum
funding guarantee.
Funding for Higher Education. This measure
places the remaining one-third of the severance tax revenues into the
newly created California Higher Education Fund (CHEF). This fund would
be continuously appropriated as follows:
- 50 percent to the CSU system.
- 25 percent to the UC system.
- 25 percent to California community colleges districts.
Financial Aid Requirements. At least
10 percent of the money allocated to CSU would have to be used to
increase grants available to California students attending its campuses.
The CSU would be required to allocate part of its portion of the CHEF to
campuses with nursing programs in the counties determined to have the
most need.
Possible Limits on Future Funding Levels for Higher
Education. The measure states that money from the CHEF
must be used to supplement, not supplant, existing levels of state
funding for CSU, UC, and community college districts collectively.
Fiscal Effects
Severance Tax Revenues. Initially, the
proposed severance tax would likely generate annually around
$3 billion—$2 billion for the General Fund and around $1 billion for the
CHEF. A wide range of revenues, however, is possible due to the normal
fluctuation in oil and gas prices. Of the General Fund revenues, roughly
half would increase the minimum guarantee, likely resulting in
additional state funding for schools and community colleges. The
remaining General Fund revenues would be available to spend on any
public purpose.
Increased Administrative Costs. The state
would have increased costs associated with the administration of the
severance tax. These likely would total several million dollars
annually.
Other Fiscal Effects. Relatively minor
economic changes related to the severance tax likely would result in
reductions of other state and local revenues such as property and income
taxes—perhaps totaling in the low tens of millions of dollars per year.
For example, an oil company with lower profits would pay less tax.
Summary of Fiscal Effects. This measure
would have the following major fiscal effects:
- Increased state revenues of about $3 billion per year initially,
with two-thirds (about $2 billion) going to the state General Fund
and one-third (about $1 billion) allocated to specific higher
education purposes.
- Of the General Fund revenue increase, roughly half would likely
go to higher funding for schools and community college districts,
with the remainder available for any state purpose.
Return to Propositions
Return to Legislative Analyst's Office Home Page