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The Angry Economist

Suspending The Laws Of Economics Or Public Policy: The Idiocy Of Proposition 87
Posted by William P. McGowan, Ph. D. on Oct 1, 2006 - 10:00:00 PM

SACRAMENTO— One of the more economically deceptive political campaigns we're seeing this year comes from the proponents of the Alternative Energy, Research, Production, and Incentives Tax, aka Proposition 87.  Dressing themselves up in environmental stewardship garb, the folks who want to tack on an additional 1.5 percent to 6 percent tax on oil produced in California want you to believe that you the voter can have something for nothing.

In essence, Proposition 87 wants to suspend the laws of economics simply because the altruists in Sacramento have decided that they get in the way of implementing wholesome sounding public policy. It's emotion over intellect, pure and simple. Here's what I mean.

It directly hurts Californians and California businesses.  Remember, Proposition 87 is not aimed at ending California's dependence on FOREIGN oil; it's aimed at CALIFORNIAN oil. There is a per-unit tax levied on barrels of oil coming out of Californian soil. For those of you who think gasoline just magically appears in California, remember that one of the economic reasons Los Angeles and the Central Valley exist today is oil; Signal Hill was the site of one of the largest oil discoveries in history, Kern County is STILL a big producer, while Ventura's Avenue region was the largest producing oil field in the United States during the 1950s. It is a BIG employer in California, and while it gets a lot of bad press, it has cleaned up its act. Petroleum jobs are good jobs, with lots of training, good pay and benefits.

Proponents of Proposition 87 want you to think that no matter what happens, the additional tax they are taking from the petroleum industry can't or won't get passed on directly to you or be paid by anyone else. This is just plain silly. Oil and gas companies will find a way to recover the cost of the taxes--someplace. California's Attorney General can say he will sue companies that try to pass along the tax all he wants because Bill Lockyear won't be Attorney General next year. 

Finally, the intellectual dishonesty to the Proposition 87 crowd that I find MOST objectionable is their assumption that the oil industry will always be profitable. They are able to "afford" California's special tax. Over and over again, advertisements in favor of Proposition 87 cite last year's profits in the oil business, and how much money ugly, overweight oil executives got paid. Anyone who's followed the oil business over any period of time (for those interested, I would suggest Daniel Yergin's "The Prize") knows how risky and unprofitable the business can be. California's initiative again suspends the laws of economics and dictates that the oil companies continue making $78 billion a year in profits so that bureaucrats in Sacramento can get their "fair share."

Intellectually, ask yourself, "How is it that the people who drafted Proposition 78 can tell me what an oil company's profits will be in the future, (and establish future state spending accordingly) when the finest minds on Wall Street can't?"

All in all, Proposition 87 is a bad idea that sounds wonderful, until you think about it.

When he's not shilling for Big Oil or working on an oil patch, you can reach William P. McGowan at




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