McGeorge School of Law

Proposition 87

Proposition 87:
Alternative Energy. Research, Production,
Incentives. Tax on California Oil Producers.

By

Stephanie Lee
JD, McGeorge School of Law, University of the Pacific
to be conferred May, 2007
B.A., Psychology and Economics, University of British Columbia, 2002

 

Copyright © 2006 by University of the McGeorge School of Law


Table of Contents

I. Executive Summary
II. The Law
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion


I. Executive Summary

Proposition 87 seeks to establish a $4 billion program, the primary goal

of which is to reduce petroleum consumption by 25%, with research and production incentives for alternative energy, alternative energy vehicles, energy efficient technologies, and for education and training. These goals will be funded by a tax on producers of oil extracted in California.

Currently, the key tax on the California oil industry is the corporation income tax. Mitch Kunce & William E. Morgan, Taxation of Oil and Gas in the United States 1970-1997, 45 Nat. Resources J. 77, 93 (2005). The property tax is administered at the county level and includes surface property, equipment, and the estimated value of mineral reserves. Id. There is no production tax, also known as severance tax, in California. Id. Proposition 87 purports to levy a severance tax on oil production in this state.

If approved by the voters, Proposition 87 will impose a tax of 1.5% to 6.0% (depending on oil price per barrel) on California oil producers. California Official Voter Information Guide, Analysis of Proposition 87 (Secretary of State, 2006). The tax would not apply to oil wells that produce less than ten barrels of oil per day, unless the price of oil is above $50 per barrel at the source. Id. The proceeds of the severance tax, a tax on the extraction of the oil, would be deposited in a new fund created by the measure, the California Energy Independence Fund. Id. An existing body in the state government, the California Alternative Energy and Advanced Transportation Financing Authority would be reorganized into a new California Energy Alternatives Program Authority (Authority). Id. One of the Authority’s responsibilities is to award funds to encourage the development and use of alternative energy technologies. Id.

This is not the first time California’s electorate has considered taxing oil companies to finance alternative energy. In 1980, a similar measure Proposition 11, attracted wide interest but ultimately lost at the polls by 55 percent. Post-gazette, Venture firms push for California oil tax, http://www.post-gazette.com/pg/06270/725463-28.stm (Oct. 9, 2006).

The proponents argue that the measure makes oil companies pay their fair share, while the opponents maintain that the measure will raise prices at the pump. Both agree, however, that there is a need to advance alternative energy. The disagreement is whether Proposition 87 will achieve this end.

II. The Law

A. Background on California Oil Production

In 2004, California’s oil production totaled 268 million barrels of oil, an average of approximately 733,000 barrels per day. California Official Voter Information Guide, Analysis of Proposition 87 (Secretary of State, 2006). California’s 2004 oil production represented approximately 12 percent of U.S. production, making California the third largest oil producing state, behind Texas and Alaska. Id. Since 1985 at its peak, California’s oil production has declined by 2 to 3 percent per year. Id. In 2005, California oil production supplied approximately 37 percent of the state’s oil demand. Id. Alaska production supplied approximately 21 percent and foreign oil supplied 42 percent. Id.

In 2005, 674 million barrels which included oil produced in California as well as outside the state were delivered to oil refineries in California. Id. Virtually all of the oil produced in California is delivered to California refineries. Id. Approximately 67 percent of the total oil refined in California goes to transportation fuels production.

B. Existing Law

Taxes imposed on the U.S. oil industry can be classified into three broad categories and are based on the resource that the tax is effecting – income, property and production. Kunce, 45 Nat. Resources J. at 78. Because taxes alter the choices made by oil and gas firms required to pay them, they are said to have “non-neutral effects.” Id. One reason these alterations may occur is because when a tax is imposed on firms, their behavior distorts so as to shift all or part of the tax burden to other firms or individuals. Id. All three categories of oil taxes distort decisions of the firm. Id. at 79.

In the short-run, a corporate income tax levied on the profits (total revenue minus total costs) of the oil firm will not directly increase production costs. Id. An increased rate of production initially is expected with a property tax on oil and gas reserves. Id. In contrast, a production or severance tax will reduce production because it increases the costs of production and consequently affects the amount of extraction from the oil and gas reservoir. Id.

In the long run, the general effect of any of the three types of taxes is to reduce the value of net revenue in the oil or gas firm, therefore reduce the level of investment in areas such as exploration, development, extraction, and the transportation/refining process. Id. In comparing the three types of taxes, income taxes are less discouraging to exploration costs than production and property taxes. Id. Because production taxes are not incurred until the oil is extracted and property tax is based on the estimated value of the reserves in the location, whether developed or not, property tax liability would be expected to reduce exploration more so than a production tax. Id. at 81. Thus, property taxes cause the highest losses or excess burden, followed by production taxes, and corporation income taxes. Id.

The key tax on the oil industry in California is the corporation income tax. California Official Voter Information Guide, Analysis of Proposition 87 (Secretary of State, 2006). The Department of Conservation (which regulates the production of oil in the state) also imposes a regulatory fee on California oil producers that is assessed on production, with the exception of production in federal offshore waters. Id. This regulatory fee is used to fund a program that oversees the drilling, operation, and maintenance of oil wells in California. Id. The property tax includes the taxing of surface property, equipment, and the estimated value of mineral reserves and is administered at the county level. Kunce, 45 Nat. Resources J. at 93. Property owners in California pay local property taxes on the value of both oil extraction equipment (such as drills and pipelines) as well as the value of the recoverable oil in the ground. California Official Voter Information Guide, Analysis of Proposition 87 (Secretary of State, 2006). Currently, there is no severance tax in California. Kunce, 45 Nat. Resources J. at 93.

C. The Effects of Proposition 87

Proposition 87 sets out to accomplish a variety of goals pertaining to the reduction of fuel consumption. The impact of the measure ultimately, however, may be contrary to the initiative’s objectives.

1. Proposed Changes

The Official Summary prepared by the Attorney General asserts that Proposition 87, an initiative constitutional amendment and statute, will establish a $4 billion program funded by a tax on producers of oil in California with goals that include research and production incentives for alternative energy, alternative energy vehicles, energy efficient technologies, and for education and training. The measure prohibits producers from passing the tax on to consumers. It reorganizes and establishes the new California Energy Alternatives Program authority and prohibits changing the tax while indebtedness remains. California Official Voter Information Guide, Official Title and Summary of Proposition 87 (Secretary of State, 2006).

a. The Tax

Proposition 87 would impose a severance tax on oil production in California, beginning in January 2007, to generate revenues to fund the $4 billion in alternative energy programs. California Official Voter Information Guide, Analysis of Prop 87 (Secretary of State, 2006). As discussed above, a severance tax is a tax on the production of any mineral or product taken from the ground. The new Authority, discussed below, shall be directed by the measure to spend $4 billion for specified purposes within ten years of adopting strategic plans to implement the measure. Id.

The severance tax would not apply to federal offshore production beyond three miles from the coast. Id. In addition, the severance tax would not apply to oil wells that produce less than ten barrels of oil per day, unless the price of oil at the well head is above $50 per barrel. Id. At current prices and levels of production, the tax would apply to about 200-230 million barrels of oil produced annually. Id.

b. Tax Rate Structure

The measure states that the tax would be “applied to all portions of the gross value of each barrel of oil severed as follows:” Id.

  • 1.5 percent of the gross value of oil from $10 to $25 per barrel;
  • 3.0 percent of the gross value of oil from $25.01 to $40 per barrel;
  • 4.5 percent of the gross value of oil from $40.01 to $60 per barrel; and
  • 6.0 percent of the gross value of oil from $60.01 per barrel and above.

    c. Pass-through Prohibition

Proposition 87 asserts that it would be “impossible for the big oil companies to ‘pass along’ costs to consumers in the form of higher gas prices at the pump because oil prices are set on the global market without regard to regional or local costs or assessments.” California Official Voter Information Guide, Text of Proposed Laws of Prop 87 (Secretary of State, 2006). The California State Board of Equalization is charged with enforcing this prohibition against passing on the cost of the tax. Id.

d. Tax Revenues to be Deposited in New Special Fund

The proceeds of the severance tax would be deposited in a new fund created by the measure, the California Energy Independence Fund. Id. These revenues would not be eligible for loan or transfer to the state’s General Fund and would be continuously appropriated and thus, not subject to the annual state budget appropriation process.

e. Reorganized State Entity to Spend the Tax Revenues

Proposition 87 would reorganize the California Alternative Energy and Advanced Transportation Financing Authority (CAETFA) into the new California Energy Alternatives Program Authority (Authority). Currently, the CAETFA is responsible for financing facilities that use new energy sources and technologies, and also finances development of advanced transportation technologies. California State Treasurer’s Office, California Alternative Energy and Advanced Transportation Financing Authority, http://www.treasurer.ca.gov/caeatfa/introduction.asp (accessed Oct. 10, 2006). The board of the CAETFA is made up of five members which include the Treasurer, the Director of the Department of Finance, the State Controller, Chairperson of the Energy Commission and the President of the Public Utilities Commission. Id. A board made up of nine members would govern the reorganized Authority and replace the existing CAETFA board. Id. This new board would include the Secretary for Environmental Protection, the Chair of the State Energy Resources Conservation and Development Commission, the Treasurer, and six members of the public who have specific program expertise in: economics, venture capital, public health, energy efficiency, entrepreneurship, and consumer advocacy. Id. The tasks of the Authority are to develop strategic plans and award funds to encourage the development and use of alternative energy technologies.

f. Allocation of Funds

The measure also describes how the funds generated from the severance tax must be allocated. After first covering debt-service costs and expenses to collect the tax, the revenues will then be deposited in each calendar month to the newly created California Energy Independence Assessment Fund as follows:

  • 57.5 % to Gasoline and Diesel Use Reduction Account - for incentives for the purchase of alternative fuel vehicles, incentives for producers to supply alternative fuels, incentives for the production of alternative fuel infrastructure, and grants and loans for private research into alternative fuels and alternative fuel vehicles.
  • 26.75% to Research and Innovation Acceleration Account – for grants to California universities to improve the economic viability and accelerate the commercialization of renewable energy technologies and energy efficiency technologies.
  • 9.75% to Commercialization Acceleration Account – for incentives to fund and accelerate the production and distribution of petroleum reduction, renewable energy, and alternative fuel technologies and products.
  • 3.50% to Public Education and Administration Account – for public education campaigns, oil market monitoring, and general administration.
  • 2.50% to Vocational Training Account – for job training at community colleges to train students to work with new alternative energy technologies.

California Official Voter Information Guide, Analysis of Prop 87 (Secretary of State, 2006).

2. Fiscal Impact

The measure is predicted to have five broad impacts on the economy: (1) a decline in local property taxes; (2) lower income and corporate taxes for oil producers; (3) a reduction in General Fund revenues from oil production on state lands; (4) a reduction in gas and diesel excise taxes; and (5) administrative costs. Id.

Under the measure, local property taxes paid on oil reserves would decline to the extent that the imposition of the severance tax reduces the value of oil reserves in the ground and its assessed property value for tax purposes. This reduction would likely not exceed a few million dollars statewide annually. Id.

Oil producers’ tax liability under the personal income tax or corporation tax will be reduced because they will be able to deduct the severance tax from earned income. The extent to which the measure would reduce state income tax paid by oil producers would depend on whether or nor an oil producer has taxable income, the amount of such income that is apportioned to California, and the tax rate applied to such income. This reduction would likely not exceed $10 million statewide annually. Id.

The state receives a portion of the revenues from oil production on state lands, including oil produced within three miles of the coast. The severance tax would potentially reduce state General Fund revenues by $7 million to $15 million annually. Id.

To the extent that the programs funded by the measure are successful in reducing the use of oil for transportation fuels, it would reduce to an unknown extent the amount of gasoline and diesel excise taxes paid to the state and the sales and use taxes paid to the state and local governments. Id.

The administrative costs to carry out the measure are hard to predict because programs of the size and type to be overseen by the California Energy Alternatives Program Authority have not been undertaken before in the area of transportation fuels. The provisions of the measure would allocate 2.5 percent of revenues for general administration costs which would set aside on average about $5 million to $12 million annually for administration. Id.

By increasing the cost of oil production, the severance tax could reduce production, reduce investment in new technologies to expand production, and modestly increase the cost of oil products to Californians. On the contrary, using revenues from the severance tax to invest in new technologies may spur economic development in California to the extent that new technologies supported by the measure are developed and/or manufactured in the state. Id.

III. Drafting Issues

A. Ambiguity

In applying the severance tax, the measure would distribute the tax proportionately depending on the gross value of each barrel of oil. For example, there will be a 1.5 percent tax on oil with a gross value from $10 to $25 per barrel whereas a 6.0 percent tax on oil with a gross value of $60.01 per barrel and above. According to the report of the legislative analyst, the wording of the provision regarding the application of the tax rates could be interpreted in two different ways. On one hand, it could be interpreted such that the tax would be applied on a single rate basis on the full gross value of the barrel. For example, if the gross value is $70 per barrel, the tax would be applied at a rate of 6.0 percent on the full $70, yielding a tax of $4.20 per barrel. In contrast, the tax could be interpreted to apply on a marginal rate basis similar to the income tax. For example, if the gross value is $70 per barrel, the first $10 is not taxed, the value from $10 to $25 is taxed at 1.5 percent (accordingly to the measure’s tax structure), and so on, yielding a different tax amount of $2.17 per barrel.

There is no indication from the proponents of Proposition 87 as to how the provision should be interpreted. Even Californians familiar with the ambiguity issue of the tax rate structure have no way to determine how the Proposition is going to be interpreted if approved. Because this is an ambiguity of substance and of a key provision of the measure, it will most likely be challenged should the proposition pass.

Proposition 87 is also unclear as to whether the severance tax would apply to oil production on state-owned lands or federal-owned lands in the state. The measure makes no indication as to whose lands the severance tax would be applicable to. The text of the initiative only defines “oil” as “petroleum, or other crude oil, condensate, casing head gasoline, or other mineral oil that is mined, produced, or withdrawn from below the surface of the soil or water in this state.” Whether the severance tax applies to oil production on state-owned lands (which includes offshore production within three miles of the coast) or production on federal lands in the state makes a difference when considering potential fiscal impacts. In resolving a statutory ambiguity, a court would begin by examining the plain language of the statute, then looking to any outside evidence of the intended meaning of the provision. By looking at just the plain language of the measure, a court could reasonably conclude that the measure applies to oil production on state-owned and federal-owned lands.

B. Severability

Proposition 87 contains a severability clause which purports to allow provision(s) to be severed from any portions of the initiative if later found to be invalid. The severability clause states:

SEC. 21. If any provision of this Act or the application thereof to any person or circumstances is held invalid, including subdivision (c) of Section 42004 of the Revenue and Taxation Code and subdivision (c) of Section 26054 of the Public Resources Code, that invalidity shall not affect other provisions or applications of this Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

The California Supreme Court has enumerated three criteria for upholding valid provisions in a measure after portions of it have been ruled unconstitutional. Gerken v. Fair Pol. Practices Commn., 6 Cal. 4th 707 (1993). The severable provision(s) must be (1) grammatically, (2) functionally, and (3) volitionally separable. Id.

It is unlikely that the provisions of the measure would be able to be severed without failing one of the three criteria of the severability test. It would be difficult to grammatically sever most of the provisions of the measure because the language is broad and covers many subjects. The defect would not be cured by simply removing any word or group of words.

For the functional test to be met, the remaining measure from which the invalid parts have been severed must be complete in itself. “The remaining provisions must stand on their own, unaided by the invalid provisions nor rendered vague by their absence…” People’s Advocate, Inc. v. Superior Court, 181 Cal.App.3d 316, 332 (1986). Proposition 87 is unlikely to be functionally severable because the measure must be read as a whole and each provision is dependent on other parts of the measure.

Finally, the volitional test is met when there is no reason to suppose the invalid provision was so critical to the enactment of Proposition 87 that the measure would not have been enacted in its absence. Gerken, 6 Cal.4th at 716. This measure was designed to achieve various goals regarding alternative energy and reduction of energy consumption with the taxation of oil producers. If one of the provisions is deemed invalid, the whole measure will lose its purpose. For example, if the severance tax, the reorganization of the Authority, or the tax structure itself was to be deemed invalid, there would be no way for the measure to achieve its end, financing the $4 billion dollar fund. Accordingly, Proposition 87 would not meet the volitional, as well as the grammatical and functional tests

IV. Constitutional Issues

A. Federal Constitution

Because Proposition 87 will likely have a significant impact on the state’s economy, if it is approved by voters the opponents may challenge both the severance tax itself and the pass-through prohibition on Federal Constitution grounds. Legal challenges to state statutes imposing severance taxes on mineral production have focused on Commerce Clause and Supremacy Clause challenges. The U.S. Supreme Court has acknowledged that these statutes are constitutional under the Commerce and Supremacy Clauses of the Constitution and have upheld severance taxes.

1. The Severance Tax Itself And the Commerce Clause

The U.S. Supreme Court has held constitutional state severance taxes, and has established that such taxes must be evaluated under the test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). Under the test in Complete Auto Transit, the state tax does not offend the Commerce Clause if it “is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to services provided by the State. Id. at 292.

A Montana severance tax under review in the Supreme Court was held constitutional. There, the Court stated that there was no dispute that the tax satisfied the first two prongs of the Complete Auto Transit test in that there was “a substantial, in fact, the only nexus of the severance of [the mineral] is established in [the state].” Cmmw . Edison Co. v. Mo., 453 U.S. 609, 617. Nor was there any question regarding apportionment or potential multiple taxation with regards to the second prong. Id. According to the Court, “the severance can occur in no other state” and “no other state can tax the severance.” Id. The Court further rejected appellants’ arguments that the severance tax was invalid under the third and fourth prong. Even if 90% of the taxed mineral is shipped to other states, there is not real discrimination since the tax is computed at the same rate regardless of the final destination of the mineral and the tax burden is borne according to the amount consumed, not according to any distinction between in-state and out-of state consumers. Id. at 626. Finally, the tax was in proper proportion to appellants’ activities within the State. Id. Against this background, a constitutional challenge under the Commerce Clause against the severance tax imposed by Proposition 87 will likely be unsuccessful.

2. The Pass-through Prohibition And Other Constitutional Challenges

Opponents may also challenge Proposition 87 on the basis that the measure’s pass-through prohibition which prohibits oil producers to pass on the cost of the severance tax to consumers is unconstitutional. However, under established U.S. Supreme Court precedent, pass-through prohibitions are valid.

a. Supremacy Clause

Challenges to pass-through prohibitions in the past have dealt with whether the prohibition was preempted by federal law. The outcome of a Supremacy Clause challenge would likely turn on how a court determines the prohibition affects commerce within or between the states. In reviewing an Alabama pass-through prohibition, the U.S. Supreme Court held it was not preempted by federal law insofar as it applied to the producer of gas in intrastate commerce, or business within a state. Exxon Co. v. Exchange Oil & Gas Co., 462 U.S. 176, 187 (1983). The Court stated that Congress has provided that federal authority does not deprive the states of the power to create a price ceiling for intrastate producers. Id. at 186. The Court reasoned that since a State may establish a lower price ceiling, it may also impose a severance tax and forbid sellers from passing it through to their purchasers. Id.

On the other hand, the Court also concluded that the pass-through prohibition was preempted by federal law insofar as it applied to sales of gas in interstate commerce, or business from a state to another state. The Court held that the Alabama pass-through prohibition trespassed upon federal authority over wholesale sales of gas in interstate commerce because under the federal government’s authority, it is to determine reasonable rates that will permit the company to recover its costs of service and a reasonable return on its investment. Id. Therefore, the provision interfered with the federal government’s authority to “regulate the determination of the proper allocation of costs associated with the sale of natural gas to consumers.” Id.

b. Contracts Clause

The Alabama pass-through prohibition also survived constitutional challenges based on the Contracts Clause. The U.S. Supreme Court recognized that by barring companies from passing the tax onto their purchases, the pass-through prohibition invalidated pro tanto (only to that extent) the purchasers’ contractual obligations to reimburse appellants for any severance taxes. Id. at 190.

According to the Court, however, “a statute does not violate the Contracts Clause simply because it has the effect of restricting, or even barring altogether, the performance of duties created by contracts entered into prior to its enactment.” Id. The Court reasoned that the Contracts Clause does not deprive the States of their “broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result.” Id.

In another Contracts Clause challenge to a statute empowering the State commission to set the rates that could be charged by individuals or corporations offering to transport oil by pipeline, the Supreme Court asserted that just because some of the contracts were entered into before the statute as adopted is a fact that is not material. Id. at 193. “If the Contract Clause does not prevent a State from dictating that price that sellers may charge their customers, plainly it does not prevent a State from requiring that sellers absorb a tax increase themselves rather than pass it through to their customers.” Id. at 194.

c. Equal Protection Clause

Proposition 87’s pass-through prohibition may also give rise to an equal protection challenge. To trigger a heightened standard of review for an alleged equal protection clause violation, the plaintiff must show that the state action is intentionally discriminating against a class with a history of being discriminated against, or a suspect class. City of Cleburne v. Cleburne Living Centers, 473 U.S. 432 (1985). Social and economic regulatory legislation does not typically infringe fundamental constitutional rights, therefore it will be upheld against equal protection challenge if there is any reasonable conceivable state of facts that could proved a rational basis for the classification. FCC v. Beach, 508 U.S. 307 (1993). An equal protection challenge of Proposition 87 will likely be unsuccessful given that the pass-through prohibition does not adversely affect a fundamental interest. Exxon Co. v. Exchange Oil & Gas Co., 462 U.S. 176, 195 (1983). Nor is the classification under the prohibition based upon a suspect criterion. Id. Therefore, it need only be tested under the lenient standard of rational basis which the Courts has traditionally applied in considering equal protection challenges to regulation of economic and commercial matters. Id. Under this standard, a statute will be sustained if the legislature could have reasonably concluded that the challenged statute would promote a legitimate state purpose. Id.

B. California Constitution

The single-subject rule requirement of the California Constitution states that “an initiative measure embracing more than one subject may not be submitted to the electors or have any effect.” Cal. Const. art II, § 8 (d). The California Supreme Court as taken a broad approach using the “reasonably germane” test, which states, “the single-subject provision does not require that each of the provisions of a measure effectively interlock in a functional relationship. It is enough that the various provisions are reasonably related to a common theme or purpose.” Senate v. Jones, 21 Cal.4th 1141 (1999).

Proposition 87 will most likely comply with the single-subject rule. The measure seeks to establish a $4 billion dollar program which will be funded by severance taxes levied on California oil producers and controlled by the newly organized California Energy Alternatives Program Authority. On its face, Proposition 87 has many different provisions amending different sections of the constitution and statutes. However, the provisions of the measure are all to the common theme of reducing California’s petroleum consumption by 25% and implementing research and production incentives for alternative energy, alternative energy vehicles, energy efficient technologies, and for education and training. The measure seems to meet the broad requirement of the single subject rule.

V. Public Policy Considerations

A. Proponents’ Arguments in Favor of Proposition 87

Proponents of Proposition 87 argue that the measure will benefit the economy of California by creating new jobs, technologies and industries. By injecting $4 billion into the clean energy economy, the proponents assert that the technologies that are supported through Proposition 87 will become the national and international standard for advanced fuel economy. The measure will also fund a $100 million statewide vocational training program to keep California’s workforce competitive by training new workers and retraining workers for new jobs. It will specifically provide tuition grants for low income students and fossil fuel energy workers who want to transition to clean alternative energy jobs. Yes on 87, (accessed September 14, 2006)

One of the proponents’ main arguments in support of the measure is that the oil companies are prohibited from passing the cost to the consumers. They support this contention by asserting that the California Attorney General has confirmed that the measure will make it illegal for oil companies to raise gas prices to pass along the cost to consumers. Id. They also stress that the proposition would make oil companies pay their fair share so working families and government can use alternative fuels. Additionally, Proposition 87 will provide cash rebates to consumers to make cleaner and cheaper-running vehicles more accessible. Id.

The proponents maintain that if the proposition passes, it will benefit education in California through almost $2 billion in direct funding by generating additional General Fund revenues resulting from the $4 billion tax in the oil industry. Id. This in turn will mean that Proposition 87 will help school districts and local government agencies buy cheaper and cleaner running school buses, mass transit buses, waste disposal trucks and other vehicles. Id. As stated in the text of the initiative, 57.5%, or $2.3 billion, of Proposition 87 funds will be dedicated to the Gas and Diesel Reduction Account that will finance vehicle retrofits and purchases. Id.

An obvious argument for passing Proposition 87 is the reduction of air pollution from cars that run on diesel and gasoline consequently reducing lung disease and other serious threats to California’s public health. The proponents assert that if the measure passes, California’s use of gas and diesel will be reduced by 25% over the next 10 years. In addition, the measure would make cleaner fuels and vehicles more accessible and would offer incentives for consumers and state and local governments to buy vehicles that use less gas and diesel. Yes on 87, (accessed Sept. 14, 2006)

B. Opponents’ Arguments Against Proposition 87

Opponents of Proposition 87 claim that the measure would drive up prices for gasoline, diesel, and jet fuel. No on Oil Tax, http://nooiltax.com/keyfacts/factsheet.htm (last updated Oct. 11, 2006). They assert that California’s oil is already among the highest taxed in the country and if approved by voters, Proposition 87 would make California by far the highest taxed state in the nation. Id. Opponents argue that the higher taxes on in-state oil production would reduce in-state oil production and increase California’s dependence on foreign oil. Id. Increasing the state’s dependence on foreign oil will also add significant new transportation and distribution costs to each barrel of oil. Id.

Despite the proponents’ promises, the opponents say that Proposition 87 will lead to higher fuel prices for all Californians. No on Oil Tax, http://nooiltax.com/keyfacts/economists.htm (last updated Oct. 11, 2006). They assert that the proponents falsely claim that oil producers in California can be taxed without causing consumers to pay more for oil, and that higher fuel prices hurt everyone. Opponents say that drivers will have to pay more at the pump. Businesses will have to pay more to transport their good via trucks and airplanes, which comes back again to consumers in the form of higher prices.

Opponents argue that Proposition 87 authorizes a new state bureaucracy with 50 political appointees to tax and spend, year after year, even if they are making no progress advancing alternative energy use or reducing petroleum use. No on Oil Tax, http://nooiltax.com/keyfacts/factsheet.htm (last updated Oct. 11, 2006). They contend that this allows them to operate outside the state budget review process and the normal checks and balances that govern other agencies. Id. They also claim that the measure lets the newly organized agency sell billions of dollars in bonds they may not be able to repay, which could force a state bailout at taxpayer expense. Id. Moreover, opponents argue that Proposition 87 does not even require that the Authority spend all the new taxes in California, much less in the U.S. Id.

Opponents contend that Proposition 87 will cut existing revenues to schools, public safety and local governments. They rely on the state’s independent Legislative Analyst reports to support that the proposed initiative would reduce local property tax revenues and general fund revenues. Opponents argue that this means future tax increases or cuts to education, public safety, health care, local government and transportation services.

VI. Conclusion

If approved by the voters in November 2006, Proposition 87 will amend the California Constitution, the Public Resources Code and the Revenue and Taxation Code. Proponents believe that the initiative will make oil companies pay their fair share for cleaner energy and cleaner air. They maintain that these taxes will not pass on to the consumers. Alternatively, opponents assert that the measure would shrink California’s oil supply, increase dependence on foreign oil, and result in higher gasoline prices. If Proposition 87 does attain voter approval, opponents will likely pursue legal action to challenge it. Oil companies are already paying for multimillion dollar campaigns against the enacting of Proposition 87. With a goal of $4 billion funded principally by taxes on oil producers, it is likely that they will challenge any part of the proposition that provides an opportunity to do so.