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Gas prices, Sacramento, CA, June 13, 2022. (Photo: Katy Grimes for California Globe)

Could a ‘Penalty’ on Oil Companies Be Passed by a Majority Vote?

Will the bill provide that an oil company can only make a specified margin on the sale of gasoline in this state?

By Chris Micheli, December 5, 2022 2:09 pm

There have been discussions the past two months regarding whether the California Legislature and Governor Newsom will impose an “excess profits” tax on oil companies in this state. When the Governor issued his proclamation to the Legislature to convene a special session on this topic, the first stated purpose is “to consider and act upon legislation necessary to: (a) Deter price gouging by oil companies by imposing a financial penalty on excessive margins, with any penalties collected to be returned to Californians.”

While we have yet to see the proposed bill language to achieve this purpose, there has obviously been a change in terminology from imposing a “tax” (on excess profits) to a “penalty” (on excessive margins). Is that significant? Why might the terminology have been changed?

One possible reason could be the view that a proposed financial penalty on excessive oil company profits could be an exception to the 2/3 vote requirement for tax increases in the two houses of the California Legislature. We need to turn to Article XIII A, Section 3 of the California Constitution to help us get to a possible answer.

Section 3(a) provides that “any change in state statute which results in any taxpayer paying a higher tax must be imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature,” with specified exceptions. A bill that would create a new tax on an industry would undoubtedly fall under the 2/3 vote requirement.

But what are those exceptions? Section 3(b) provides that a “tax” means “any levy, charge, or exaction of any kind imposed by the State,” which is obviously pretty broad and would appear to capture most tax increase proposals. However, Section 3(b) also creates five exceptions from the definition of a “tax” (i.e., these items do not constitute a tax and therefore can be enacted without a 2/3 vote). The following are the exceptions:

  • A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the State of conferring the benefit or granting the privilege to the payor.
  • A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the State of providing the service or product to the payor.
  • A charge imposed for the reasonable regulatory costs to the State incident to issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
  • A charge imposed for entrance to or use of state property, or the purchase, rental, or lease of state property, except charges governed by Section 15 of Article XI.
  • A fine, penalty, or other monetary charge imposed by the judicial branch of government or the State, as a result of a violation of law. [emphasis added]

One argument could be that a “financial penalty on excessive margins” might fall within an exception to the definition of a tax, and therefore require only a majority vote for passage in the two houses of the Legislature. However, just calling something a “penalty” does not necessarily make it one under state law.

It would appear that a penalty (like a fine) is a type of monetary charge assessed for violating the law. And types of fines and penalties, such as violating the Vehicle Code (e.g., for speeding), are used to punish an offender for violating the law. So, when the Legislature imposes a new Vehicle Code prohibition, and requires a fine or penalty to be paid by the violator, that bill does not require a 2/3 vote.

For a penalty against “excessive margins,” one would have to presume that such a bill would provide that an oil company could only make a specified margin on the sale of gasoline in this state, and when a company makes more than that specified margin, then the company would violate the law, and therefore the State could impose a penalty for violating the margin law.

Until we see the actual bill language, we can only speculate about the legal reasoning on what “vote key” will be assigned to the bill by the Office of Legislative Counsel. But we could also presume that the oil industry, if faced with a majority vote bill that would impose a substantial “financial penalty,” would likely sue to get a judicial answer to the question posed.

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2 thoughts on “Could a ‘Penalty’ on Oil Companies Be Passed by a Majority Vote?

  1. Calling it a “penalty” is purposeful on Gruesome’s part to avoid having to get a 2/3 vote.
    What a creep he is. As usual.

  2. I’ve no doubt that the Sacramento Swamp dwellers are trying to circumvent the 2/3 requirement, but I suspect there’s another reason for the language changes. The Petroleum industry can simply pass the financial burden of a tax on to the consumer, and extract a heavy political price from Democrats in the process. They can’t do that with a penalty linked to their margins. Raising the price just increases the fines. In effect, Sacramento may be trying to implement back door price controls. Refiners will certainly react with a law suit, and also sudden ‘difficulties’ importing product into California. Why ship it here and take a loss, when they can sell it for more elsewhere? That will unfortunately align very well with Governor Hair Gel’s agenda. Californians should brace themselves for a repeat of the gas shortages and rationing we saw in the 70’s. How many here are old enough to remember ‘odd and even’ days at the pump?

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