By Gary Walker

Municipal, county and state governments, as well as the Unites States Congress, are on a continuous search to identify new revenue-generating sources as they grapple with looming budget deficits. One California legislator, Assemblyman Pedro Nava (D-Santa Barbara) thinks the Legislature can make a dent in its budget shortfall by charging oil companies operating in the Golden State a tax on oil and gas.

Nava is the sponsor of Assembly Bill 1604, also known as the Oil Industry Fair Share Act. If passed, AB 1604 would empower the state government to collect a 10% tax on the value of every barrel of oil produced in the state.

Several oil producing states, including Alaska, Wyoming and Texas, the headquarters of Plains, Exploration and Production, charge oil companies taxes on oil extraction. PXP operates in the Inglewood Oil Field on the Culver City border and is embroiled in a lawsuit with the city government and public interest groups composed of homeowners in Windsor Hills, Baldwin Hills and Culver City.

The legal action was filed subsequent to the passage of a set of land use regulations passed by county Board Of Supervisors in November 2008 that form the blueprint for the operational guidelines for oil exploration by PXP. The oil company contends that the new county ordinance is stronger that the prior regulations, but the plaintiffs argue that the environmental and safety standards are insufficient.

On Aug. 9, the City Council voted to reinstate a municipal moratorium on oil drilling after PXP submitted plans to acquire drilling permits in Culver City in last year. The oil company has resumed drilling wells within county limits in Los Angeles.

The oil industry, not surprisingly, opposes Nava’s proposed legislation. “We already pay an ad valorem property tax, which is like an extraction tax, as well as corporate and sales taxes,” said Rock Zierman, chief executive officer of the California Independent Petroleum Association. While he acknowledged that other high oil-producing states pay extraction fees, Zierman pointed out that they are lower that what Nava’s bill would require.

The electorate has had the opportunity to require oil companies in the past to pay severance and opted not to do so, Zierman added.

“The voters rejected taxing oil companies four years ago and we hope that they’ll reject [AB 1604] in November,” the oil industry executive said.

Zierman was referring to Proposition 87, a 2006 ballot initiative that would have diverted taxes derived from oil and gas production into funds for alternative fuels.

There are indications that the public may be open to taxing oil firms in California. An Aug.11 Los Angeles Business Journal survey found that 57% of those polled believe that California should implement an oil extraction tax on petroleum companies.

“California oil companies are getting a free ride. Right now, California is the only major oil-producing state that does not charge a severance tax on oil extraction,” Nava noted earlier this year.

Zierman said if AB 1604 becomes law, Californians would continue to depend on foreign oil instead of domestically produce petroleum, which would be contrary to what state and national leaders and environmental organizations are espousing. “It could cost the state jobs, as well as making it very expensive to keep drilling and produce oil,” he said. “And as demand goes up, prices would go up too.”

Sandra Kallander, a Culver City Libertarian, is opposed to the idea of raising taxes on oil companies operating in the state. “Generally, if you want to encourage something, such as creation of jobs, making energy available inexpensively to others who create jobs and provide goods and services, or reducing our dependence on foreign oil, you might subsidize it, but you wouldn’t tax it,” she said. “As a Libertarian, I would do neither, because subsidies are paid for by taxation, too, and taxation is theft.”

Robert Zirgulis, a Realtor and substitute teacher with the Culver City Unified School District believes Nava’s proposal has merit. A vocal supporter of what he calls environmentally safe oil drilling, he said the tax could be used to assist school during a time of dire economic conditions in the state.

“Therefore I am in full support of an oil extraction tax that could help our schools,” said Zirgulis, who was ran for a seat on the city council in April.

He called the council’s Aug. 9 decision to reinstate the municipal moratorium on oil drilling “unfortunate” and accused them of “pandering to the vocal anti-oil fanatics and neglecting the broader interests of the citizens of Culver City.”

Culver City Chamber of Commerce President Steven Rose said that while the city government should take actions to protect its residents, the municipal moratorium on oil drilling actually covers a very small portion of the oilfield. “What the public should understand is that 23 - 27 wells are in Culver City,” he noted. “The vast majority of the issues with the wells are in county land.”

Zirgulis said he is considering bringing his own lawsuit against the city government.

“I am seriously contemplating legal action against the city for depriving me and over 700 oil lease holders of potential oil royalties from environmentally safe oil drilling that would be done 10,000 feet under our city,” he said. “The council has already wasted more than $1 million in legal fees while they are running deficits and taking money out of the reserve fund.”

Kallander, who owns the oil rights under her home and was not in favor of the moratorium, equates fees for oil extraction as stealing from the public. “Who really pays this tax?” she asked. “Anyone who favors a tax on oil companies is favoring theft of money from investors who own oil stocks and from all of the rest of us who use oil and gas in our cars and in our homes for heating. The cost will be added to everything we buy.”

Culver Crest homeowner John Kuechle, who has been arguably one of the most involved hillside residents in the legal action against PXP, said he hasn’t studied the proposal enough to have formed a definite opinion, but pointed out the possibility that increased revenue could make a government agency less likely to want to regulate an oil company’s production and perhaps its safety and environmental standards — two of his biggest concerns with PXP. “Ideally, you would want the government to play the role of a neutral arbiter,” he said. “And although I’m not typically someone who thinks raising taxes is always a good idea, to the extent that it might bring California in line with others states, it might be worth considering,” Kuechle added.

Rose said that what the nation should do is take a much broader, long-term look at weaning itself away from its addiction to oil. “In the United States, we need to do a Manhattan Project for oil consumption,” Rose said, referring to the World War II-era scientific initiative led by physicist Robert Oppenheimer, which resulted in the development of the atomic bomb.

“It should include how we get off foreign oil because it affects both our foreign and fiscal policies.”

Kallander feels that AB 1604 would have a disproportionate effect on lower-income citizens.

“Taxes on energy are especially hard on the poor, who often have to commute longer distances or live in colder climates,” she said.

Kallander takes a more conservative approach to the budget dilemma. “I would reduce regulations to the minimum and encourage economic investment in our state. Even more effective would be to reduce taxes. Raising any tax is a really stupid idea,” she asserted.

State Sen. Curren Price (D) said he understands that there is a large segment of the public — as well as many of his Senate colleagues — who frequently adopt a strident stance on increasing revenue through taxation. But during a recession, no idea can be discarded without further discussion, he added, especially in light of the fact that severe cuts have been made to health and social services as well as education.

“Times are tough,” Price noted. “When times are tough as a legislator you have to look at different things to generate revenue — even if they might be unpopular.”

A two-thirds vote of the Legislature is required for the passage of AB 1604.