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Gas Tax Swap

In 2010, the Legislature enacted a “tax swap” intended to create more budget flexibility. Before the tax swap, fuels were subject to a state excise tax of 18 cents a gallon as well as state sales tax of 6%.  Under the swap, the excise tax on gasoline was raised initially to 35.3 cents a gallon and the sales tax was eliminated. The additional 17.3 cents a gallon excise tax was needed to produce the amount of revenues as had the sales tax. The additional excise tax was to be adjusted annually to maintain tax “neutrality” with the sales tax on gasoline discontinued. The excise tax on diesel fuel was to be 13.6 cents a gallon and the sales tax on diesel was to be 6.75%.

The tax swap legislation was intended to provide immediate budget relief to the state through a loan from fuel excise tax revenues to the General Fund, as well to make future budgeting easier by increasing use of flexible funding sources. Increased flexibility resulted from the fact that in California, gas taxes cannot be used to pay debt service on general state transportation bonds, whereas the State Constitution did allow the use of fuel excise tax revenues to pay transportation debt service.

The swap also provided funding from the new excise tax to “backfill” gasoline sales tax revenues that would have been provided under the old funding system to local agencies for their streets and roads programs. Funding for the State Transportation Improvement Program, which previously came from the sales tax, was also maintained at approximately the same levels that had previously been provided.  

However, the Public Transportation Account (PTA), which had received a large share of the gasoline sales tax revenues prior to the swap, was hurt by the 2010 swap.  Partial compensation for the loss of gasoline sales tax was made up by increasing the sales tax on diesel fuel and depositing this tax into the PTA. In addition, the Legislature increased the share of the revenues going to the account. 

Two propositions approved by voters in the Nov. 2010 elections threw a wrench in the works. Proposition 22 restricted the state’s ability to pay for transportation debt service using fuel excise tax revenues, prohibited borrowing of fuel excise tax revenues as well as certain other transportation funds, and required that future gasoline sales tax revenues (if any) be used only for transportation purposes. Prop. 26 Proposition 26, required a 2/3 vote of both houses of the Legislature for any change in statute that results in any taxpayer paying a higher tax and provides that any tax adopted after January 1, 2010, but prior to November 3, 2010, that was not adopted in compliance with the 2/3 vote requirement shall be void, unless reenacted by the Legislature with a 2/3 vote.

AB 105 (2011) responded to both of these propositions. It eliminated the sales tax on gasoline and replaced it with the price-base excise tax to be adjusted annually, and also authorized the redirection of vehicle weight fees from the state highway account to the General Fund to pay off obligation bond debt service for specified voter-approved transportation bonds, thus avoiding conflict with Prop 22.

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