California budget

James Rufus Koren, Staff Writer
Posted: 06/26/2010 07:10:53 AM PDT

This year, oil companies have pumped 29.5 million barrels of oil from Kern County. An additional 3.4 million have come from Los Angeles County.

In San Bernardino County, the total is just 274 barrels, pumped by two tiny oil operations in the Chino Hills area – the hub of the county’s barely existent oil industry.

“We’re getting about four barrels a day out of Chino Hills,” said John Duhon, one of five partners in Padre Oil Co., which operates five active wells in the county. “We’re very small – probably the smallest there is.”

Padre Oil is not Chevron, Valero or BP. It’s a legitimate mom-and-pop oil company. And because of its small size, Duhon worries that a proposal to add a new tax to oil in California could dry

“We’d probably just shut down,” he said. “It would take what teeny bit of profit we get every once in awhile.”

The proposed tax, worth 6 percent of the market value of each barrel of oil extracted, would make it “hard to be profitable,” Duhon said.

And Republican lawmakers say the tax could drive up gasoline prices.

“It’s going to add to the cost of producing fuel,” said state Sen. Bob Huff, R-Walnut. “That will be passed along to the consumer. You’re not punishing big oil – you’re punishing people buying gas.”

But economists say that’s not true – oil is sold on a worldwide market, and a new tax in California won’t change worldwide gas prices. Duhon, too, said producers don’t control the price of oil, making it impossible to increase the sale price to cover a new tax.

Democratic lawmakers say the new tax – called an oil severance tax – will bring in hundreds of millions in revenue and put California’s oil taxes in line with those of other major oil-producing states, all of which charge a severance tax.

Huff and other Republican lawmakers have said that while California doesn’t have a severance tax, it taxes oil differently than other states.

“We tax it while it’s in the ground,” Huff said.

That’s true, said M. Mason Gaffney, an economist at UC Riverside. Unlike many other states, the chief oil tax in California has long been a basic property tax – essentially taxing property owners not just on the value of their land but also the value of the underlying oil reserves.

But the value of that oil, and the land, is protected by Proposition 13, a state measure that limits how much property taxes can grow. That means, Gaffney said, the taxable value of oil in California is much lower than the actual value.

In January 2000, crude oil was selling for an average price of about $24 per barrel. Today, the price is about $67. And over the past few years, the price has been as high as $134 per barrel.

But despite the fluctuations and the overall jump in oil prices, Eric Endler, who tracks the value of mining land for the San Bernardino County Assessor’s Office, said the county is collecting about the same amount in property taxes from oil wells today as it did 10 years ago.

Proposition 13 cut property taxes around the state, capped property taxes at 1 percent and prevented property tax bills from increasing by more than 2 percent per year.

“Nobody said word one about oil when they were campaigning for Prop. 13,” Gaffney said. “All they talked about were homeowners.”

And so, whether the market value of oil is at $40 per barrel or $140 per barrel, the taxable value of oil land is based on Proposition 13 value, not market value.

A severance tax would get around Proposition 13 and assess the value of oil as it is sold, Gaffney said.

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