Deep Cut Proposed for California's Gas Tax

In essence, because gasoline prices plummeted from last summer, dropping over $1 a gallon, the Board of Equalization (BOE) is tasked with maintaining the same level of gas tax revenue as had the sales tax and excise tax not been changed almost five years ago. The higher excise tax and lower sales tax has increased tax revenue, which BOE needs to address.

"The Board of Equalization released a proposal on Friday [Feb. 13] to reduce the per-gallon tax Californians pay on regular gas by 7.5 cents per gallon, a 21 percent cut from the current 36-cent excise tax," writes Jonathan Horn, economics reporter for U-T San Diego. "The new rate of 28.5 cents per gallon could be approved Feb. 24 and take effect July 1, the start of the 2015-16 fiscal year."

The board has been charged with setting the excise tax rate under a complex system approved in 2010 by the state legislature and then-Gov. Arnold Schwarzenegger called the fuel-tax swap.  The system allowed the state to take some money away from fixing roads to put toward future appropriations. To do this, California reduced the sales tax rate from 8.25 percent to 2.25 percent, and then made up for it by nearly doubling the excise tax rate from 18 cents per gallon to about 35 cents per gallon.

Horn describes the mechanics of adjusting the excise tax and history of gas tax revenue, which is tied to gasoline prices and consumption. "The excise rate is set to replace exactly what was lost under the old sales tax system," said Steve Gill, a professor of accountancy at San Diego State University. "In the short run, the tax can differ due to price estimates being off but it is required to be reconciled the next year."

The latest proposed rate represents a whirlwind for the fuel tax swap. Two years ago, the board increased that tax from 36 cents per gallon to 39.5 per gallon. Last year, the board lowered the excise tax rate back to 36 cents per gallon. The topsy turvy nature of the system has led to some Board of Equalization members to call the system a scheme, urging the state legislature to change systems. So far, there has been no action taken. [See BOE fuel tax chart (PDF)]

In Gov. Jerry Brown's inaugural address last month, one of the three infrastructure priorities he mentioned was tackling the enormous $59 billion problem of deferred highway and bridge maintenance. Reducing current gas tax revenue will not be helpful toward meeting that goal.