Daniel Simmons and Michael Keegan

People are increasingly frustrated with politics because too often candidates promise more than they can deliver. The proponents of Proposition 87 are guilty of the same thing, making big claims about the measure that in reality do not measure up.

Proposition 87’s proponents want to “make big oil pay for cleaner energy.” To do this, they are proposing raising taxes on oil producers by $4 billion and then creating an authority to spend that money on alternative energy projects. While it is tempting to want to increase taxes on oil companies, the problem is that consumers will bear the brunt of the increased taxes. Because the measure mandates that $4 billion be spent, taxpayers likely pick up the tab if the tax does not generate sufficient revenue. Supporters say that won’t happen, but since the tax is tied to the price of oil, falling prices will generate less money, leaving taxpayers holding the bag.

Proposition 87 tries to prohibit oil companies from passing on the price of the tax to consumers. There is little reason to believe that this will actually happen, unless California can suspend the laws of economics. Attorney General Bill Lockyear’s official summary of the proposal states that the prohibition against passing the tax on to consumers will be difficult to administer and economic factors will likely limit this prohibition. Why? Because Economics 101 teaches us that taxes have both direct and indirect costs. By raising taxes on oil producers, Proposition 87 makes oil produced in California more expensive. Since the price of crude oil is the largest factor in the price of gasoline at the pump, consumers will most likely bear the cost of the tax.

Increasing the price of domestic oil will lead to the use of more foreign oil, despite Proposition 87’s backers claim to the contrary. Increasing the price of domestic oil through additional taxation makes foreign oil more price-competitive.

That’s not the only economic problem with Proposition 87. According to Taxing Energy, a book recently published by the Independent Institute, a 6 percent tax on production, as Proposition 87 imposes, would reduce the remaining economic life of existing wells in California by three years and would reduce the remaining production of existing wells by 10.5 percent. The book’s authors note that the tax would reduce the number of new wells drilled in California by 6.5 to 7.0 percent. All of these factors point to less domestic oil production and more reliance on foreign sources of oil.

Daniel Simmons and Michael Keegan

Daniel R. Simmons is the Director of the Natural Resources Task Force at the American Legislative Exchange Council.

Michael Keegan is Director of the Tax & Fiscal Policy Task Force and the Commerce, Insurance & Economic Development Task Force at ALEC.

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