‘Sick and tired’ of high gas prices, California seeks to punish oil companies with new penalty

California lawmakers on Monday introduced legislation to penalize oil companies for alleged price gouging, setting up a showdown with an industry that has long wielded political influence in the Golden State.

At the urging of Gov. Gavin Newsom, California Senate Budget Chair Nancy Skinner, D-Berkeley, proposed a new bill that would levy a penalty on oil companies when their profits exceeded a legally-established threshold. The money raised by the penalty would then be placed in a fund that would be directed back to taxpayers in the form of rebates.

But the initial bill language is vague, failing to define the profit threshold that oil companies would be penalized for exceeding and lacking an explanation of who would be eligible for the rebates. Newsom said those specifics will be sorted out over the course of the special session.

The move comes two months after the Democratic governor first unveiled a plan to levy a windfall profits tax on oil companies that were running up record earnings while Californians were getting squeezed at the pump. He subsequently called for a special session beginning to hammer out the plan.

“These guys have been gaming the system for decades,” Newsom said Monday about the oil and gas industry. “... I think we’ve got a lot of remarkable legislative leaders here that get it and they’re sick and tired of paying the price in terms of dirty air.”

Getting a first-of-its-kind penalty like this through the Legislature and to the governor’s desk will not be without its challenges.

Along with the opening of the special session, Monday also marked the first day of the regular legislative session. This meant a new class of lawmakers were sworn into office — some of whom were elevated to a state office with backing from the oil industry and its associated trade unions. One oil-funded political action committee spent more than $8 million this year backing candidates it thought might be helpful in fending off a possible windfall penalty.

California deals with high gas price spikes

Newsom proposed the tax when Californians were paying $2.60 per gallon more than the national average — an unprecedented margin even in a state known for its high gas prices.

Although California’s high taxes and environmental fees factor into the disparity, Newsom and proponents of the penalty say that doesn’t completely explain what was happening at the time. California gas prices kept climbing as the price of crude oil dropped. Newsom said that’s because oil companies were taking advantage of California drivers to rake in unprecedented profits.

California gas prices have dropped significantly since then, but Newsom argues the price-gouging measure is still needed to deter future price spikes.

Newsom did not say how much money Californians could expect to receive if an oil company still decided to hike up the price of gasoline above the state-designated threshold.

And as for how the refunds would be distributed, he suggested it could be done in a similar fashion as this year’s inflation relief checks and the 2021 Golden State Stimulus.

In both cases, leaders used the Franchise Tax Board to send taxpayers money through direct deposit or mailed debit cards.

“I hope we never have to go there,” Newsom said. “Because I hope the oil companies change their ways.”

The bill also calls for expanding the powers of the California Energy Commission and the state Department of Tax and Fee Administration to allow them to investigate and obtain information from oil companies on their costs, supply levels and operations.

Oil companies hoped to see more specific language on the penalty proposal after months of discussion, said Kevin Slagle, a spokesman for the Western States Petroleum Association. He said market forces, environmental regulations and public policy are responsible for high gas prices.

“Overall, it’s still the wrong approach to driving lower energy costs in the state,” Slagle said.

Price-gouging penalty versus tax

Over time, the Democratic governor has changed his rhetoric around the proposal, retiring the term “windfall tax” and instead referring to it as a “price gouging penalty.”

It’s a shift that could help win over more moderate Democrats and provide more wiggle room for the votes needed to pass the measure. Passing a tax in the Legislature would require two-thirds support while a cap or penalty only needs a simple majority.

When asked about the deviation, Newsom said his proposal “went down a different path, a much better path.” He said the legislative vote threshold was “not a part of my consciousness.”

Democratic lawmakers were hopeful about the new penalty’s chances in the Legislature. But Republicans suggested the move will do little to change gas prices, and lawmakers are better off suspending the state’s gas tax and increasing statewide oil production.

Assemblyman Alex Lee, D-San José, who floated a similar idea last year, was optimistic about getting a proposal passed but acknowledged there would likely be a difficult road ahead.

”I think in times of crisis, we have more momentum,” Lee said. “Now we’re talking about the future and being proactive, so it might be harder.”

Assemblyman Vince Fong, R-Kern County, said the penalty will do nothing to lower gas prices and that it will actually “have the opposite effect.”

“If we are going to to really hone in on energy, let’s have the debate,” Fong said. “But what the governor’s proposal is going to do, is it’s going to increase the cost of energy production in California. And that’s going to make us more dependent on foreign countries, like Saudi Arabia, Iraq, Ecuador — countries that don’t share our values.”

Fong suggested the Legislature should instead suspend the gas tax and backfill the lost revenue with general fund dollars, a proposal Republicans repeatedly pushed during the previous legislative session.

“The governor always says that the budget reflects values and priorities,” Fong said. “If the governor’s No. 1 priority is to reduce the price of gasoline on hardworking Californians, prioritize it — make it No. 1.”