Taxing Exhaustible Resources: Evidence from California Oil Production

Nirupama Rao, Assistant Professor of Economics and Public Policy at New York University’s Wagner School of Public Service, came to Colby College on November 30 to present her paper “Taxing Exhaustible Resources: Evidence from California Oil Production.” She studies the reaction of domestic oil producers on the levying of excise taxes.

Rao graduated with a double major in Economics and Management from the Massachusetts Institute of Technology in 2004. Because of her interest in policy, she initially thought she would become a policy analyst, but her inquiries on the effects of different policies led her to academia. Rao returned one year later to pursue a PhD in Economics. Upon completion in 2010, she began working at NYU.

“I am interested in how individuals respond to changes in the incentives they face and how they make decisions. At its heart, my academic work examines the impacts and consequences of policy choices partly in hope of informing discussions of what better policy looks like,” Rao said.

Policy also led her to her paper topic.

“In 2008, oil prices reached $140 a barrel and there were debates on the campaign trail and in Congress. I knew we’d had a windfall profit tax on oil producers decades ago so I tried to find a study examining the consequences of that tax. I couldn’t find one so I decided to look into it myself,” she said.

Rao gathered data and ran regressions and found that a ten percent tax on oil reduces oil production by 2.4 percent. She used the information she found to examine the deadweight loss of an oil tax.

“Because oil is an exhaustible resource, the deadweight loss doesn’t come from an output gap (the oil will eventually be pumped); instead it comes from higher production costs and the reduced present discounted value of profits because they will be delayed,” she said.

During her lecture at Colby, she discussed the impacts of past oil taxes and the different tax amounts on the variations in types of oil indexed.  Her research estimated a much larger overall elasticity of oil compared to what past studies have shown.

Some of her other work looks at the effect of tax credits on R&D spending by private corporations. She published one paper from her dissertation last year in the National Tax Journal.

Rao is currently starting a project with a co-author on the business cycle on the strength of the social safety net. They will look at the effects of fiscal stress on the likelihood that Medicaid-eligible individuals become program participants.