California Oil Severance Tax, AB 1326 and Our Troubled Budget and Tax Systems

An editorial from NBC (5/5/11) on another proposal for an oil severance tax in California caught my attention and I posted a comment there. The proposal, AB 1326, calls for a 12.5% oil severance tax in California. Most states have such a tax and California does not.

The tax is justifiable for a few reasons - it is an appropriate charge for extraction and California has an ambitious goal to reduce greenhouse gas emissions.

I find the problem with the proposal is that the tax is earmarked to fund higher ed by establishing the California Higher Education Endowment Corporation (CHEEC) to handle allocation of the funds among California's three higher education institutions. Why? Do we need another bureaucracy? We already have bodies to oversee higher education budgets - the legislature and the Boards of Trustees of the three higher education institutions.

Unless a tax has a direct connection to an activity, such as is the case with gasoline excise taxes to fund highway construction and maintenance, taxes should to into the General Fund (GF). The GF should then be used to fund programs that benefit the public, such as education - both K-12 and higher education.

But, part of the reason for the AB 1326 approach, I believe, is to get around the Prop 98 rule that a specified portion of the GF goes to K-14. So, we are creating a new problem to address an old problem - where does it end?

We would never tolerate this type of budget restrictions on ourselves. For example, would you live with a requirement that the money you make on Monday goes for rent, Tuesday's goes for food and entertainment, Wednesday's goes for retirement funding, etc.? So, if you need more money for rent, you can't dip into earnings from another day, you'd just have to get a better paying job or a second job for Monday. Or, if your earnings for one day goes down, you'd have to spend less on that day's allocated expenditure. That's odd, but that is the California budget system.

If Prop 98 is leading to more oddities of budgeting, let's fix that. There are other mechanisms to ensure that what we want funded gets funded. We learned about that in 8th grade civics class.

And another bureaucracy is created to be sure the oil companies do not pass the tax along to consumers. Well, corporations are just entities - ultimately, all taxes are paid by individuals. Taxes paid by corporations are paid by some combination of customers, employees and investors. So, AB 1326 is saying that the severance tax should be paid for by employees and investors. Seems odd, but worse yet, a mechanism is put in place to be sure that happens. Here it is:

"The tax imposed by this part shall not be passed through to consumers by way of higher prices for oil, natural gas, gasoline, diesel, or other oil or gas consumable byproducts, such as propane and heating oil. The board shall monitor and, if necessary, investigate any instance where producers or purchasers of the oil or gas have attempted to gouge consumers by using the tax as a pretext to materially raise the price of oil, natural gas, gasoline, diesel, or other oil or gas consumable by products, such as propane and heating oil."

It appears that the "board" is the same one that oversees allocation of the tax revenues. And, while some people might think it is investors who should pay, those investors include retirement fund and mutual fund investments of ordinary citizens (not just billionaires).

Obviously, this all hits a strong chord for me - it is just so convoluted and unnecessary. Let's fix the system rather than make it more complicated, non-transparent and illogical.

What do you think?