Betting Against Oil

Los Angeles — It is hard to find positive attributes in a proposition imposing a new tax on oil produced in California that will go before the state’s voters in November. Yet, Phil Angelides, his long political career at stake in next Tuesday’s Democratic primary for governor, chose last week to endorse this dubious measure.

Angelides, state treasurer of California and an experienced professional politician, decided to bet that coming out against Big Oil would offset the dangers of a proposal almost certain to hit the pocketbooks of ordinary Californians. What’s more, nobody rules out the possibility that Republican Gov. Arnold Schwarzenegger may join Angelides in supporting the oil initiative despite his no-new-taxes pledge.

California led the national tax revolt in 1978 by passing Proposition 13, which slashed property taxes. Twenty-eight years later, the Golden State will be watched closely as a test for the political effectiveness of betting against unpopular oil interests despite the downside in public policy. With Big Oil and Silicon Valley facing off against each other in expensive campaigns, the referendum will be watched by the rest of the country.

The Clean Alternative Energy Act would impose a severance tax on California-produced oil (comprising 12 percent of all U.S. production) as high as 6 percent, with the expected $380 million a year revenue devoted to producing alternative fuels. That kind of industrial policy excites the interest of Silicon Valley.

The measure purports to bar oil producers from passing the tax on to consumers and other users. But the California Legislative Analyst’s Office (operating under the Democratic state attorney general’s office) in the report on the initiative asserted "it is unclear the extent to which" this prohibition can be enforced. The report questions how in the world the state Board of Equalization could determine whether or not any price increase in fuels should be traced to payment of the severance tax.

That is not the only problem foreseen in the report by Elizabeth G. Hill, the state legislative analyst. The severance tax could reduce property tax, income tax and gasoline tax revenues. The report continued that the tax "could result in a reduction in economic activity reflected . . . in a reduction in jobs."

The official state report did not get into the political questions raised by the oil initiative’s multi-millionaire sponsors: motion picture producer Steven Bing and Silicon Valley venture capitalist Vinod Khosla (both of whom sponsored the 2004 stem cell research initiative in California). Khosla is a major investor in firms engaged in biofuels, solar power and fuel cells — alternative energy that the oil initiative is supposed to finance.

Angelides, now running even with State Controller Steve Westly in the Democratic primary for governor, might be expected to keep his hands off anything so prickly as the oil initiative. But Angelides has come under attack by Westly for receiving $500,000 in political contributions from oil companies. That includes California-based Chevron, which is a major donor to Californians Against Higher Taxes, organized to fight the oil initiative. By supporting the tax, Angelides can say he is not in the embrace of Big Oil. So, he gathered prominent environmentalists in Santa Monica May 22 and, overlooking the Pacific Ocean, declared he was striking a blow for the environment by taxing oil.

The risk for Angelides, if he is nominated, is that he can be accused of depressing the economy and raising gasoline prices. Yet, Republicans are not certain Schwarzenegger will take advantage of this weakness. Democratic activists chuckle over how rapidly the former actor has moved left since being wiped out on his reform ballot propositions last year, and Republican activists are appalled. With Schwarzenegger surrounded by Democrats (including his wife), nobody rules out that he will violate his tax pledge.

As Schwarzenegger found last year, it is easier to get a "no" vote than a "yes" vote on California ballot propositions. Furthermore, it will be hammered home for the next five months that the oil initiative will mean higher prices and a slower economy. Even so, anger at the oil industry may override all those considerations when Californians vote in November. At least, that’s what Phil Angelides is betting.