City extraction tax would have companies digging deeper.

With oil prices topping $100 a barrel last week and the city of Los Angeles staring at a deficit topping $150 million, the city is eyeing oil production as a new revenue source.

City Councilwoman Janice Hahn has proposed enacting a production tax on all oil extracted in the city, similar to existing taxes in Long Beach and Signal Hill.

Hahn pushed a motion through the City Council Feb. 20 ordering city staff to study the feasibility of an "oil extraction fee," and to recommend a per-barrel amount.

"As we face a $150 million budget deficit this year, and a projected $300 million shortfall next year, we need to find ways to raise revenue in addition to tightening our belt," Hahn said.

Hahn is expecting the tax would be pegged somewhere between 20 cents per barrel and 60 cents per barrel and generate perhaps $10 million per year, though that's only an estimate since there's no accurate count of how many barrels of oil are extracted within city limits. Countywide, 27 million barrels of oil were extracted last year.

The move has stirred opposition from both large and small oil companies that say they pay substantial taxes to the city.

"We're already paying millions of dollars in business taxes to the city and we also pay hundreds of thousands of dollars in royalties to the city," said David Fleming, senior vice president of Warren Resources Inc., the New York City-based oil company that operates a significant portion of the Wilmington oil field, which lies in Hahn's council district. "We obviously would not like to see another tax."

Oil companies note that in the city of Los Angeles, they already pay the city $1.05 for every $1,000 in receipts from extracted oil. Also, when oil is extracted from city-owned land, oil companies pay royalties to the city.

Even though such taxes typically get passed on to consumers, raising taxes on oil companies has popular appeal, especially with gasoline prices approaching $3.50 a gallon at the pump. But oil companies have also fought back, most recently in the fall of 2006 when they put more than $100 million into the campaign to sink a statewide initiative to impose a 6 percent tax on most oil extracted in the state to raise hundreds of millions of dollars to fund alternative energy projects.

Still, voters last year in Long Beach approved a 25-cent hike in that city's 17-year-old oil extraction tax, initially to 40 cents per barrel; the tax is now annually pegged to the consumer price index. As a tax for a specific purpose, it needed more than two-thirds support and ended up receiving 70 percent approval in a special election last May.

Meanwhile, in neighboring Signal Hill, there's an oil extraction tax of 60 cents per barrel, while nearby Seal Beach in Orange County charges 58 cents per barrel. While these amounts may not seem like much with oil at $100 per barrel, oil companies argue that every little bit adds to the cost of extracting oil.

"The proposed tax increase on local production would increase the costs of producing energy for California consumers," said Tupper Hull, spokesman for the Western States Petroleum Association.