Proposition 87: The Proposed Tax on California Oil Producers
an interview with Steven G. Churchwell of DLA Piper
John Wu | University of California, Davis, School of Law
Christopher C. Yang

Posted Monday, December 4, 2006
7 U.C. Davis Bus. L.J. 12 (2006)

Steve Churchwell, a partner in DLA Piper's Government Affairs group, concentrates his practice on ballot measures, campaign finance laws, state regulatory issues, ethics and conflicts of interest, and related litigation. Mr. Churchwell has spent twelve years as a government lawyer - most recently as General Counsel to the Fair Political Practices Commission - and twelve years in private practice. His practice has always centered around politics and government.

Q: How did you become involved with Government Affairs and Election Law?

A: I was at a private firm in the mid-1980s, and my background was mainly in litigation. The firm had burgeoning initiative and government affairs practices, so I had several choices as to practice areas. It was a real fork in the road in my career. The firm had actually hired me to lobby state agencies. I decided to pursue the one area I did not know a thing about, which at that time was called election law, and which we now refer to as political law. I later took the job with the FPPC, and that solidified my career path.

Q: What is your experience with ballot measures?

A: I have served as lead counsel to many ballot measures, with the majority being at the local level - perhaps because there are more of them. Ballot measures cover a diverse range of subjects. One thing I've noticed is that the "No" side generally is a whole lot more fun than the "Yes" side. On the "Yes" side, you have to anticipate and avoid drafting errors and the dreaded "unintended consequences" that can be pointed out by the Attorney General, the Legislative Analyst, the press and other public and private critics and commentators. We saw that in 2004 with Governor Schwarzenegger having to pull back a pension reform initiative, because it arguably did away with the pensions of firefighters' widows. Furthermore, proponents of the "Yes" side face many procedural obstacles. Recurring problems involve the attachment of the correct legal documents, not getting the petition format correct, etc.

Q: How are you able to deal with issues that may run counter to your client's interests while dealing with the political process?

First, it is necessary that the attorney have credibility with his or her clients. Credibility assures the client that you will represent their interests fairly. Generally, the client will sign a waiver giving you permission to fix a certain problem. Ultimately what emerges is a compromise: in the worst case, it is a "shared pain" approach where all parties need to pay a portion of the costs and the costs are thus spread among everybody. A good example of this is health care reform. All of the stakeholders will have to help fix the problem.

Q: Of the four tax propositions on the November 2006 ballot, which ones look most promising?

A: I think that Proposition 86, the cigarette tax ("Prop. 86") has a shot; I do not think that the oil tax does, and I will address that in more detail later.

Prop. 86 has several popular aims. It would enact a tax on smokers of 13 cents per cigarette for various health care causes. However, the polls currently (as of October 6) are showing a split of 47% yes - 42% no. Usually at this point, [about four weeks before the election], you can already tell if a measure is going to pass. In general, if it's below 50%, it is not going to happen. This is in part due to the fact that support for the "yes" side erodes over time.

Q: What are your concerns about Proposition 87 ("Prop 87"), the proposition dealing with a proposed severance tax on California Oil Companies to spur renewable technologies?

A: Much economic and political capital has been spent on this proposition. The advertisements say that former United States Vice President Al Gore and ex-President Bill Clinton strongly support the proposition; Clinton just did a rally in Los Angeles, and Gore appeared in an advertisement as well. In terms of money, about $100 million has already been spent, and the money that is going into this proposition will exceed $125 million by the time of the election.

I am shocked because the proposition does not make that much sense economically. In my view, it will increase dependence on foreign oil; I do not see how it can not. Economically, when you put a tax on production, you are creating a disincentive for the most costly form of collecting oil. This results in the reduction of oil that would have been produced. Unless we reduce demand, we have to replace that oil. This likely means that we will get the oil from foreign sources, increasing our demand upon foreign oil.

Q: Does Prop 87 involve a marginal tax or flat tax against the oil companies?

A: One of the most difficult things about drafting ballot measures-and also where people go astray the most-is how taxes work. The analysis provided by the Legislative Analyst is great. However, I disagree with the uncertainty concerning whether it is a marginal or flat tax. I think the drafters intended it to be marginal, based upon how these kinds of taxes almost always work. On the other hand, the language is poorly drafted.

By calling it an unclear issue, the Analyst has thrown a monkey wrench into voters' understanding of what they are voting for. Both sides have an interest in the issue being unclear: for the "No" side, the more confusion there is, the more likely some will vote no-it's like throwing up more smoke. Alternately, if I were on the "Yes" side, I would prefer to have the issue go to court, because one interpretation will raise as much as 50% more revenue. The problem for the "Yes" side is that it will likely have to pin itself down on one side, in this case, the side for a marginal tax.

Q: Does Section 42004(c) provide an effective way of enforcing the tax?

A: We already talked about the fact that the least profitable oil reserves will not be extracted because of the tax. In terms of supply and demand, we would have less supply, so the price of oil would rise. The Proponents do not want us to import more oil, so we would have less oil produced in California, and the price will go up. Theoretically, it would not be a conscious decision by Exxon-Mobile to pass that onto consumers, because it is the way markets move. This would not violate section 42004(c), because it says that the tax "shall not be passed on through higher prices." Here, we find one of the problems of using the passive voice in statutory language. Most eighth graders know to avoid the passive voice. As a result, these terms may be litigated for years, most likely resulting in frustrated judges trying to figure out the intent of the drafters of the proposition.

Q: Why tax the corporations/refineries rather than the consumers of oil?

A: It would be smarter to tax the consumers because that is where habits can be changed. I think that proponents are pushing this measure so hard because it is the best thing going for them right now; at least it is on the ballot. We know that oil companies have been making huge profits in the last couple of years. In a way, Prop 87 proponents are saying, "Let's extract some of those profits."

I have to say, of all the propositions I have seen in the last three or four election cycles, this is one of the most confusing measures in terms of determining its intent. I think it is definitely clear they wanted a tax on the oil companies. However, they could not just target individual companies and take a billion dollars. By combining taxes with a renewable energy bill in a single initiative, there was the possibility for a single subject violation. This means that there are two subjects, which in Legislature we call "log rolling" - that is, you take an unpopular idea and roll it up with something that is popular. This would allow courts to strike such a measure down as violative of the California Constitution.

Q: What changes would you make to improve the text of propositions?

A: I think you can make some governmental services available to the drafters of propositions. This would be very useful if the drafters really do not have the expertise. However, if the drafters are not looking to do it the right way and push log rolling, then you're not going to get to those people. From my experience, almost all ballot measures contain drafting errors.

Q: What are the major obstacles to Prop. 87? Is it the textual deficiencies? Is it the opposition by the oil companies?

A: I think there is confusion about how it would work. California voters are sophisticated and generally well educated. However, I think the confusion will cause it to lose, as well as the fact that there is a well funded oil campaign against these propositions. We'll have to see what the polls say.