California Follows Florida's Oil Folly

Todd Shriber
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Last week in this space, Florida's reluctance to allow offshore oil drilling was discussed and the point was made that although Florida's coastline is not likely to turn into the next Gulf of Mexico or Prudhoe Bay, any oil extracted from Florida's waters puts the U.S. in a better position than it would be without that oil. After all, it is domestically produced oil that means revenue for Florida and Uncle Sam, new jobs and less money flowing out the door to pay for imported crude. Only time will tell what will become of drilling proposals in Florida, but it is likely that they will fail and that is too bad.

Add another sun-soaked state, California, to the list of states that just do not get the energy business. This ignorance comes at the peril of the state. Most U.S. residents that are not Californians have a narrow view of the largest state's economy and that is not unreasonable. Hollywood and tourism are thought to be the state's biggest economic engines and, to be sure, those are important industries, but few people realize California is the nation's biggest agriculture state. Dairy products and cheese? Forget Wisconsin, California is tops when it comes to those products as well.

Even fewer folks realize that California is the nation's third-largest oil producer behind Alaska and Texas. Chevron (CVX), the second-largest U.S. oil company, makes its home in northern California. The company is the largest company based in California and the state's largest private sector employer. Do not forget that Occidental Petroleum (OXY), with its market cap of more than $66 billion, also calls California home, so it is safe to say that the oil business is fairly important to California's economy.

And California, like Florida, misses that point. In many ways, California's offenses are worse than Florida's. You may have seen some stories on cable or national news about college students at California universities protesting tuition increases. Certainly, it is encouraging to see young people make use of their constitutional rights to protest and the events have been pretty tame. The tuition hikes are being bandied about because the state faces a budget deficit of around $23 billion, give or take a billion here or there depending on what estimate you pay attention to.

In many ways, California's massive budget deficit, which makes Greece look like a pillar of fiscal responsibility, is absurd. After all, California has the highest sales tax in the U.S. and one of the three or four highest state income taxes. Of course these taxes are being collected from the largest pool of taxpayers in the U.S., so in theory, the state should have no budget problems. Alas, California politicians never got the memo that when you raise taxes, tax collectors collect LESS revenue. This has been proven at the national level with almost every tax increase in U.S. history.

So what is California's answer to rising tuition? Why it is increased taxes on the oil industry. Rather than allow further oil and gas exploration off its coast, something that California has stood in the way of in almost Florida-esque fashion, the state wants to raise taxes on oil producers. The California Department of Finance, a nonpartisan agency, released a report yesterday that said the state should restart drilling off the coast of Santa Barbara and that said drilling would generate $1.8 billion for the state over the next 14 years.

Simply put, California's economy, the largest in the U.S., is not what it once was. Any new jobs, regardless of industry, would be a welcome sign for the state. Of course, energy industry jobs are usually well-paying, but that is a point for another day. New taxes on the other hand, would not be welcomed, nor would they have the desired impact. The income and sales taxes were raised just a few years ago and the budget situation has gotten progressively worse in California, not better.

California's oil and gas production declined in 2009 from 2008's levels, so it might be wise for the state to embrace companies like Chevron and Occidental rather than scorn them. New energy investment equals new jobs and that equals more folks paying California's absurd income tax. New taxes, regardless of who pays them, are an old California policy that will not help the college students. Rather, Chevron and Occidental will not be feeling the pain of these new taxes (if passed) alone. Their misery will have plenty of company in the form of every tax-paying Californian.