Taxes & Spending

California Should Reject $4-Billion Prop. 87 Energy Boondoggle

Along with all the decisions on candidates, voters across the country will be asked to weigh in on many ballot measures this fall. Taxpayers will have big stakes riding in a large number of these measures, but in one—Proposition 87 in California—there are important questions of both tax and spending policy at stake.

Proposition 87 will raise $4 billion in state revenue through new taxes on in-state oil extraction. In turn, the money will be used to fund a board that will dole out funds to alternative energy products and companies.

Tax Bite Falsehood

Regarding the measure’s big tax bite, Proposition 87’s backers say they will make it illegal for companies to pass these levies on to consumers. Supporters want to make citizens believe the taxes will come out of the hides of oil company executives. That is the first of many falsehoods underlying Proposition 87.

It is unfathomable how anyone in Sacramento will determine that any particular increase in gas prices is due to energy companies’ passing on part of the cost of higher taxes. But even if the state government’s economists claim to be able to divine this—and such a claim survives the likely avalanche of legal challenges—that will simply mean that shareholders and employees will pay the costs of this tax.

The millions of California residents who have either stock portfolios or 401(k)s invested in the energy sector would take a hit. Similarly, to the extent that state pension funds are invested in energy companies, all taxpayers will have to make up the slack of decreased earnings.

Not only is the tax scheme bad news, but the plans to spend the money will likely mean very low economic and social return (even by government standards).

Sometime in the future, as oil reserves become harder to access, it will no longer be economically worthwhile to base much of our economy on oil. As that day approaches, the price of oil will naturally rise and free markets will drive the development of the most economically efficient alternate sources of energy. Even if politicians could do a better job than markets in predicting which technologies will be successful (and they can’t), they are hardly unbiased observers given the hefty campaign contributions they receive from lobbyists seeking targeted government subsidies (think of 2005’s terrible federal energy bill).

In fact, big financial support for Proposition 87 is coming from those with a monetary interest in getting government funding for their alternative energy products. For these funders, expenditures on Proposition 87 can be viewed as a political down payment.

Supporters claim that this tax-and-spending scheme will “create jobs.” That’s another falsehood. Study after study has shown that employment is higher and economic growth is more robust where taxes are lower and government limited.

California voters may be upset at oil industry profits. But perhaps they should try to put those profits in perspective. First, millions of Californians are shareholders in the energy sector, so those profits are returned to them. And second, government is a far bigger profiteer off energy than is the private sector. Consider that at current prices, oil companies make about 10 cents in profit per gallon of gas. The federal government meanwhile rakes in 18.4 cents per gallon. California adds another 41.6 cents. So for every dollar that California drivers provide in profit for oil companies, they are shelling out six dollars to government. Giving $4 billion more from California taxpayers to Sacramento—via oil companies—is a bad deal for the state. Proposition 87 should be rejected.

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