On June 16, the legislative joint budget committee passed a series of recommendations on how to close the state’s $20 billion plus budget deficit.  Among the recommendations was a 9.9% oil severance tax effective October 1, 2009.  It is estimated it would raise about $1.1 billion annually at current oil prices.  It is expected that these recommendations will be turned into a budget bill that will be voted on next week by both houses.  The only carve out is for stripper wells (less than 10 boe/d) when the price is less than $30 (for whatever crude the stripper produces).  There are no other exemptions.

 

The budget bills, as well as any tax increases, continue to require a 2/3 vote.  Republicans have continued to oppose all tax increases, particularly industry-specific ones like the severance tax.  In March, they agreed to a $12.5 billion increases in income and sales tax rates.  Since then, many of the members that voted for those increases are now subject to recall elections.  New votes on taxes are unlikely.

 

The Democrats could still try to pass a “revenue-neutral” tax increase.  They believe they can circumvent Prop 13’s 2/3 vote threshold if the total package is revenue-neutral.  They tried that in January, eliminating the tax on gasoline and backfilling it with the severance tax.  They then instituted a “gas fee” to backfill the lost gas tax revenue since fees only require a majority vote.  The Governor vetoed that proposal.

 

If such a maneuver were used now, several avenues of action are available.  First, industry could introduce a referendum on the fee package.  Once qualified, the state would not be allowed to collect the fees until the voters decided its fate some three months down the road.  Based on the recent May 17 special election on taxes, it would be a hard a sell to raise fees.  Second, industry could sue the state for violating Prop 13.  Third, industry could introduce an initiative that might clarify the protections of Prop 13 or might put a budget alternative before the voters that better reflects public sentiment on how to close this budget deficit.  A severance tax has three times been reject by California voters and dozens of times by the legislature.  CIPA advocates continue to meet with legislators to express the devastating impacts such a tax would have on jobs, the environment, local tax revenues, and energy security.