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Monday, November 06, 2006

Proposition 87 – I vote NO

I agree with the intent but not the implementation.

I promised to take a look at Proposition 87 (Prop 87) after seeing the end of Mr. Khosla’s keynote presentation at Solar Power 2006. California’s General Election is on Tuesday, November 7, 2006.

Prop 87 requires California oil producers to pay an extraction fee known as a severance tax on each barrel of oil pumped from the ground. The $4 Billion generated from the severance tax would finance a program to reduce petroleum consumption in California by 25 percent within ten years through incentives for alternative energy, education, and training and be governed by a new California Energy Alternatives Program Authority. Prop 87 spells out how the funds are allocated.

Impartial nonpartisan analysis of Prop 87 is available from the Legislative Analyst’s Office and the League of Women Voters of California Education Fund or read the text of the proposed law. Biased viewpoints can be found at YES on 87 and NO on 87.

In my opinion, Prop 87 will result in higher gas prices for Californians in the near term because the severance tax will be passed along to consumers despite sections in the proposition disallowing this practice. The progressive nature of the Prop 87 severance tax would create even higher gas prices when oil is over $60 per barrel. Also, Prop 87 will discourage domestic California oil production and encourage oil imports from the Middle East and Alaska. More imported oil from the Middle East will increase dependence on foreign oil, =not decrease it=. Prop 87 is slanted towards the development of “clean” alternative fuels and vehicles though it gives lip service to renewable energy and energy efficiency. The California Energy Alternatives Program Authority would create a new bureaucracy rife with conflicts of interest, exemption from government checks and balances, lacking accountability, and consisting of an eclectic board from government and business.

Editorials from the Mercury News, the San Francisco Chronicle, and the San Diego UNION-TRIBUNE have advised California voters to reject Proposition 87. And see the NO on 87 site here for a complete editorial roundup from almost every major newspaper in California lining up against Prop 87.

Besides siding with the NO on 87 side of this proposition, I have a better proposal to achieve the aims based on sound economics. I would impose a hefty $1.00 per gallon gas (diesel or fuel) tax. Since California uses about 16 billion gallons of gasoline per year, this would generate $16 Billion in revenue while discouraging gas consumption and flattening demand growth for oil. As a regressive tax, the $1.00 gas tax should be ramped by 25 cents per year over four (4) years to mitigate the shock to consumers. Furthermore, my gas consumption tax would be structured to encourage the use of alternative fuels as follows:

Alternative Fuel/Gas MixGas Tax
less than 25%$1.00
at least 25%$0.75
at least 50%$0.50
at least 75%$0.25

While revenues from the tax could be invested in research, development, and plant construction for alternative fuels and renewable energy technologies, the revenues could also fund deficit reduction, education, or reduce other taxes in California. This simple structure would bring powerful economic forces into play by creating and encouraging alternatives to oil and establishing a model for the rest of the country to follow.

See Raise the Gas Tax by N. Gregory Mankiw and Raise the Gasoline Tax? Funny, It Doesn’t Sound Republican (NYTimes registration required) for more information on the proponents and benefits of higher gas taxes.

GP Note: I am not a California resident, so I won’t be voting on Prop 87. But I have lived and voted there…


Blogger Daniel said...


You bought the fossil lobby's propaganda, unfortunately so did Californians.

You argue that prop 87 was bad because it would raise the cost of gas. Does gas cost more in states that have a royalty/extraction fee?

According to the oil companies testimony in Congress there is a world market that sets the price of oil independent of individual (companies) cost of producing/extracting it. At least that is what they say to avoid a windfall profit tax. But then they talk out the other side of their mouth in CA when they say an extraction tax will increase their costs and this will lead to higher oil/gas prices there. Which is it? world market or local?

I do agree that higher extraction fees (in isolation) will tend to decrease the attractiveness of oil extraction in CA leading to more imports. But CA is not in isolation, many countries (in latin america in particular) have radically raised their extraction tax/fees recently. This means that CA is now a relatively more attractive place to pull oil from. An increases tax/fee would have simply made it a bit less relatively more attractive.

If CA couldn't push through the equivalent of $0.25/gal tax (according to your numbers) what makes you think they will turn around and push a $1/gal tax?

11:55 AM  
Blogger Edgar A. Gunther said...

Thanks for your comment, but why the negative statement about my view? I will refrain from the snappy retort.

Many folks agree with the idea behind Prop 87, but the proposal was too complex and without the proper checks and balances. I believe the proposed board to allocate the $4B raised by the new severance tax would have been a huge boondoggle.

It made no economic sense to believe the tax would not be passed on, against the law or not. I was not opposed to Prop 87 because it would raise gas prices. Increased prices are good, they lower demand. I take exception with the YES on 87 camp insisting it would not raise gas prices and codified passing the tax on as illegal. Why not let gas prices rise and lower consumption? I am indifferent to California increasing their severance tax, but I object to faulty economic arguments.

Passing the $1.00 gas tax into law will be a tough road. But, the political climate is changing, and energy issues are at the forefront. Politicians don’t mind increasing taxes, if they get to spend them! I think a tiered tax levered to alternative fuel content is a powerful tool to incentivize alternative fuels in low and high priced oil markets. Maybe California can lead again here or we will need to wait for a new Administration and Congress in 2008?

There is a lot of positive sentiment toward the objectives of Prop 87 in California. If the California legislature could take quick action, they could capitalize on this by enacting the gas tax in their next session.


3:50 PM  

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