California and National Elections

Big Money Battles Over Oil Tax

BERKELEY- As fundraising rockets past $130 million and polling data shows a narrowing gap in voter preference, Proposition 87 may be the biggest show in the state this election season.

Voters seem to be paying attention.

“It’s really the only initiative on the ballot that they’ve been following,” said Mark Baldassare, director of research at the Public Policy Institute of California. A Field poll released in October showed that 72 percent of likely voters had seen or heard about Prop. 87.

Prop. 87 would tax oil companies as much as 6 percent on each gallon of oil produced in the state in order to raise $4 billion. The proposition would set up an authority to spend those revenues on companies and programs developing alternative fuels and efficient technologies with the goal of reducing California’s petroleum use 25 percent by 2017.

The state is ranked fourth among oil-producing states after Alaska, Texas, and Louisiana, according to the Department of Conservation.

While Prop. 87’s opponents claim to embrace its overarching goals—including decreased fossil fuel consumption and increased use of alternative energy—they are critical of the strategy that the proposition’s authors have outlined in the measure.

With Election Day just days away, supporters and opponents of Prop. 87 are engaged in a heated battle for votes.

Both sides have run a variety of print, radio, and television ads to convince the electorate to vote their way. The Yes on 87 campaign touts the measure as the path to increased energy independence and cleaner air. The No on 87 campaign links passage to increased gas prices and more bureaucracy.

The No campaign’s ads have been exceptionally effective, in part because they are based on deception said Dan Kammen, a professor at the University of California at Berkeley’s Energy and Resources Group and a co-author of the measure. The No ads confuse voters into thinking that the proposed oil tax would be passed on to consumers, he said. The proposition specifically prohibits oil companies from passing it on.

The No campaign has made similar accusations against the Yes campaign’s ads.

“They need to look at their own practices before alleging deceptive ads,” said Nick DeLuca, a spokesman for No on 87.

The Yes on 87 campaign has hoodwinked voters by conflating the need for new energy options with the need for a tax on oil extraction and a new administrative authority to spend those revenues, he said.

“I think it’s entirely right for someone who considers themselves an environmentalist to decide [Prop. 87] is not a good idea,” DeLuca said.

Both sides have raised a combined $148.6 million, more than any other proposition campaign in California history.

The Yes campaign has raised $56.9 million, according to records filed with the California Secretary of State. No on 87 has raised $91.7 million.

Kammen and other supporters of Prop. 87 point to oil companies as the drivers behind the opposition. Chevron, based in San Ramon, has donated $38 million. Aera Energy, jointly owned by Shell and ExxonMobil, has donated another $32.8 million. Their contributions make up 77 percent of No on 87’s funds.

“We’re not going to be played for suckers again by the oil cartel,” said former vice president Al Gore at a recent Yes on 87 rally in Berkeley.

“There’s no secret where anybody’s money comes from,” said DeLuca, who emphasized that the issue for voters is Prop. 87 itself, not whether voters like the financial backers of one side or another.

“The fact is that almost all of the money on the other side comes from a single person,” he added.

That single person is Stephen L. Bing, a Hollywood producer, philanthropist, and major Democratic donor. He has donated $49.6 million to the Yes on 87 campaign, 82 percent of its total funds.

Other major contributors to the campaign include John L. Doerr, Vinod Khosla, and William R. Hearst III. All three are partners at the prominent Silicon Valley venture capital firm Kleiner, Perkins, Caufield & Byers. Since that company is interested in alternative energy, opponents have criticized their donations because their investments may benefit if the proposition passes.

There are a couple of reasons why so much money is in play for this single initiative, said Tim Hodson, executive director of the Center for California Studies at California State University, Sacramento.

One is the sheer expense of running a media campaign in California. Another is that California tends to set trends for the nation. “So if you don’t like those things, you want to kill them in California…[I]t’s high stakes, it’s expensive, and people are going to spend whatever it takes to achieve their goals,” he said.

Besides venture capitalists and Bing, Yes on 87 campaign supporters include the American Lung Association, prominent Hollywood figures like Robert Redford and Tom Hanks, and many high-profile Democrats, notably Gore and Bill Clinton, who have appeared at rallies and in ads for the proposition.

Democratic gubernatorial candidate Phil Angelides supports the proposition, while incumbent governor Arnold Schwarzenegger opposes it, though he has not taken a strong public stance.

That is a calculated move on the governor’s part, said Hodson. Vocally opposing Prop. 87 would enable Democrats to paint Schwarzenegger as anti-environment after he’s done a “superb job” of appearing more environmentally friendly than Angelides, Hodson said.

New York Times columnist Tom Friedman recently appealed to the governor for his support. “C’mon, Arnold, just do it. No one will remember you for sparing Exxon from a tax hike,” he wrote last month.

The No on 87 campaign, while funded primarily by energy companies, also has the support of the California Chamber of Commerce, several firefighter and law enforcement associations, and many public education administrators. More than 40 newspapers have editorialized against Prop. 87, as well.

The opposition from public safety organizations and educators stems from the potential for Prop. 87’s oil tax to reduce other state and local tax revenues that might fund their programs.

According to a report by the non-partisan state Legislative Analyst’s Office, statewide losses would probably not exceed a few million dollars for local property taxes, $10 million in state income taxes, and $15 million in state oil revenues.

Meanwhile, the amount of the oil tax itself is unclear. It may be levied as a single flat rate of up to 6 percent per barrel, or as a marginal rate starting at 1.5 percent and progressing up to 6 percent, according to the Legislative Analyst’s Office. The Board of Equalization and the judiciary would have to resolve the tax rate, it said.

“You know this thing is going to go to court because of the oil companies,” said John Ellwood of the Goldman School of Public Policy.

The oil tax would also go directly into a special fund, not into the state’s General Fund, making it exempt from spending rules like the minimum education funding stipulations created by Prop. 98—another reason groups like educators oppose Prop. 87.

The state General Fund could certainly use the $4 billion that Prop. 87 is designed to generate, acknowledged Kammen. “But California is facing a unique situation in regard to global warming,” he said.

California has passed two landmark laws to address climate change in recent years. The first is the 2002 law regulating greenhouse gas emissions from vehicles. The second is the California Global Warming Solutions Act, signed by Gov. Schwarzenegger last month, which requires state greenhouse gas reductions to 1990 levels by 2020.

“Prop 87 is providing the resources and the muscle to do what the state is committed to do,” said Kammen.

And because of that, any new revenues from energy should go directly into research on finding new energy sources, he said. “It’s always been clear that’s the right way to do it.”

A new California clean energy authority would handle those revenues. It would invest in measures that demonstrably reduce fuel use and help the state meet greenhouse gas targets, Kammen said. These include clean-energy programs for homes, plug-in hybrid vehicles, and mass transit.

“California has the chance to build the next Silicon Valley around energy,” he said.

But those $4 billion will be in the hands of an unaccountable bureaucracy whose only mandate is to spend $4 billion, critics claim. “We get to watch what this agency does, what we don’t get is any control over it,” said DeLuca.

Hodson expressed similar concerns. “…[Y]ou’re going to set up a fund where you move it from all the normal budgetary oversight procedures that any tax revenue is subject to. You’re going to have a tax commission that’s large and unwieldy that’s going to make decisions about how this money will be spent, and without the oversight or participation of elected officials. So who’s accountable?”

“The problem with 87 is like a lot of millionaire-plaything-type initiatives: it’s a good idea wrapped in a mechanism that is fundamentally contemptuous of the regular processes of government,” he said.

Californians will still have higher gas prices, despite the provisions barring oil companies from passing on the tax, claims the No on 87 campaign. DeLuca described two reasons for this: the tax will decrease in-state production and California will have to import more oil to make fill the gap.

“While the initiative may change the laws of the state of California, it can’t change the laws of economics,” he said.

Kammen doesn’t buy that argument. For one thing, he says, calculations indicate that if Prop. 87 passes and the tax is enacted, profit per barrel will drop from 42 percent to 38 percent.

“The profits are so high, it’s worth it to keep pumping,” he said.

And the price of gasoline won’t change, anyway, according to Severin Borenstein, director of the University of California Energy Institute.

“Oil companies often remind us that the price of oil is set in a world market and they are right when they say that,” he wrote in comments for the media that he posted on his web site. “They are wrong when they say that taxing oil produced in California would raise the price of California oil and, thus, the price of California gasoline.”

“I would rather see an increase in the gasoline tax, which would make it clear to consumers that using gasoline creates real external effects, in the form of pollution, climate change, and increased geopolitical tensions,” he wrote.

Ellwood agreed that consumers need to pay the “true cost” of energy. But he also believes that Prop. 87 will lead to increased gas prices, and bring consumers one step closer to paying that cost and reducing fossil fuel consumption.

“What the folks who proposed [Prop. 87] tried to do is mush together the ends and the means,” said DeLuca. “They’ve chosen a particular means that is deeply flawed to achieve an end that everyone agrees about.”

California voters are beginning to recognize those flaws, he said.

A Field poll released Nov. 2 showed that 40 percent of likely voters surveyed supported Prop. 87, while 44 percent opposed it. (The margin of error is +/- 3.5 percent.)
Just a month earlier, a poll showed that 44 percent of likely voters supported the measure and 41 percent opposed it. In July, a poll indicated that 52 percent of likely voters were liable to vote for Prop. 87, and 31 percent were against it.
But voters are also realizing that California lacks an oil tax, unlike other major oil states, Kammen noted.

“And it’s bad policy not to, because that oil is a resource that belongs to all Californians,” said Kammen. “We actually get more revenue from hunting licenses.”

“If [Prop. 87] doesn’t pass, the severance tax will eventually pass,” he said.

Kammen was reluctant to speculate on whether Prop. 87 would pass, like other campaign participants and observers.

“If there’s a good Democratic turnout, it will pass,” said Hodner. “If there’s a poor Democratic turnout and you see McClintock being elected lieutenant governor and Poizner being elected insurance commissioner, then I think it will probably go down.”

And while observers like Ellwood and Borenstein are generally critical of the proposition process—Borenstein called it “out of control—and tend to vote against initiatives, they are treating Prop. 87 unlike most.

Borenstein has not decided how he will vote, but is evaluating Prop. 87 separate from his own concerns about the system.

Ellwood has made up his mind: “This is the first initiative I’m going to vote for in a long time. I’m going to have to violate my rule against voting for all initiatives except for the initiative that abolishes other initiatives.”