Assessing the California Fuel Tax Swap of 2010

Abstract

In 2010, California replaced its state sales tax on gasoline with an annually adjusted per gallon excise tax designed to produce as much revenue each year as the sales tax did previously. This gas tax swap was intended to ( a) relieve the state’s general fund during a period of fiscal emergency by circumventing the narrowly defined transportation purposes for which gasoline sales tax revenues could be legally spent and ( b) protect the existing revenue streams for transportation purposes. Experience to date reveals that this experiment has not met its objectives because of unanticipated volatility in the revenue stream resulting from dramatic fuel price fluctuations. Although the new revenues are protected from diversion to nontransportation uses, the unpredictability of such revenue presents many challenges for state transportation planning and programming. Other states considering similar shifts to price-based transportation taxes to address the continuing decline in purchasing power from fixed-rate fuel excise taxes may draw valuable lessons from the California experience.

Allocating Transportation Revenues to Support Climate Policies in California and Beyond

“…Comprehensive discussion of such deals is beyond our present scope. Yet, other scholars have admirably chronicled the intricate political twists and turns yielding current allocation rules (Brown, Garrett, and Wachs 2016;Giordano 2007;Taylor 1992), and an overarching observation is worth noting:…”

“…(In the late 2000s, the governor began budgeting gasoline sales tax to repay transportation bonds and thereby to relieve the state's General Fund. Article XIX of the state constitution allows the use of gasoline excise taxes for highway bond debt service but prohibits the use of gasoline sales tax for that purpose [Brown, Garrett, and Wachs 2016]). The per-gallon rate of the price-based excise tax has been adjusted each year since 2010 to mimic the state sales and use tax on gasoline sales, which the fuel tax swap had partially eliminated.…”

“…The state of California collects 7.5 percent sales and use tax on a broad array of goods and services. The fuel tax swap enacted by the state legislature in 2010 eliminated most of the state sales and use tax on gasoline (Brown, Garrett, and Wachs 2016), reducing the tax rate for gasolines sales to 2.25 percent. The SB 1 legislation of 2017 left this rate unchanged.…”

“…Major pots of funding have been divided among recipients following many different motives (Brown, Garrett, and Wachs 2016;Giordano 2007;Taylor 1992), not a unified distributional rationale and not climate action. The proceeds of the individual revenue sources outlined above have been divided over time to satisfy claims that follow different geographic, jurisdictional, or modal lines or that reflect population shares.…”

“…When the real gasoline prices went below or above state estimates, however, the state would adjust the price-based tax rate post hoc for the next year, accounting for any shortfall or surplus the tax had produced. These post hoc corrections created significant problems and instability for state transportation funding and the entities that administer it (Brown, Garrett, and Wachs 2016).…”