Existing law, the Motor Vehicle Fuel Tax Law, administered by the California Department of Tax and Fee Administration, imposes a tax upon each gallon of motor vehicle fuel removed from a refinery or terminal rack in this state, entered into this state, or sold in this state, at a specified rate per gallon. Existing law requires the department to annually adjust the tax imposed by increasing the rates based on the California Consumer Price Index, as specified.

This bill would limit the above-described annual adjustment to a maximum of 2% for rate adjustments made on or after July 1, 2023.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Anna M. Caballero, Chair

2023 - 2024 Regular

Motor Vehicle Fuel Tax Law: limitation on adjustment

Caps motor vehicle fuel rate adjustments for inflation at up to 2 percent, effective on or after July 1, 2023.

Background

Fuel taxes. State law imposes the motor vehicle fuel tax and diesel fuel tax on each gallon of fuel entered, or removed from a refinery or terminal rack in this state. The law parallels federal fuel excise taxes, currently $0.184 per gallon tax on gasoline and a $0.244 per gallon tax on diesel fuel, and applies whenever fuel:

• Is removed at the refinery or terminal rack;
• Enters into the state; or
• Is sold to an unlicensed person.

Prior to 2017, the Board of Equalization administered both motor vehicle and diesel fuel taxes. In that year, the Legislature enacted the Taxpayer Transparency and Fairness Act, which created the California Department of Tax and Fee Administration (CDTFA), and shifted all of the Board of Equalization’s (BOE’s) statutory tax administration functions to the newly formed Department (AB 102, Committee on Budget). As a result, CDTFA now operates almost all tax and fee programs previously administered by BOE, including motor vehicle and diesel fuel taxes. While taxpayers register, file returns, and pay taxes to CDTFA, the Controller processes gasoline tax payments and refunds, and the Office of Tax Appeals considers appeals.

Section Two of Article XIX of the California Constitution provides that revenues from taxes the state imposes on motor vehicle fuels less refunds and costs of administration must be deposited into the Highway Users Tax Account. State law further distributes revenue from the diesel fuel tax into the State Transportation Fund to construct and maintain public roads and mass transit systems, while motor vehicle fuel tax revenues flow to the State Transportation Fund to construct and maintain public roads and mass transit systems, airports, and waterways.

The Governor’s Proposed Budget for 2022-23 states that motor vehicle fuel taxes generated $6.5 billion in revenue in 2021-22, and an estimated $7.4 billion in 2022-23.

Fuel tax rates. In 1990, voters approved Proposition 111, which increased the tax rate on most motor vehicle fuels from $0.09 to $0.14 per gallon, effective August 1, 1990. The initiative further increased the excise tax rate by $0.01 per gallon per year until the rate reached $0.18 per gallon on January 1, 1994, where it remained until the Legislature enacted the “fuel tax swap.”

In the late 2000s, general fund revenues deteriorated significantly due to the financial crisis and ensuing economic recession. The Legislature enacted the fuel tax swap to shift past and future debt service repayments on general obligation bonds issued for transportation purposes from the General Fund to fuel excise tax funds (ABx6 8, Committee on Budget, 2010). ABx6 8 exempted sales of motor vehicle fuel, except for aviation fuel, from the state share of the sales and use tax imposed on sales of gasoline, where the use of revenues was restricted by Proposition 42 (2004). ABx6 8 then increased the excise tax rate by $0.173 to generate an equal amount of revenue in the excise tax funds, which were not restricted by Proposition 42 and could be spent on debt service. The measure also triggered additional rates if federal fuel excise tax rates drop, and federal transportation funds allocated to the state decreased. Local sales taxes remained at 2.25% of the sales price of gasoline, plus any voter-approved district taxes.

To maintain revenue neutrality under the fuel tax swap, ABx6 8 directed BOE to annually adjust the excise tax rates for gasoline and diesel, so that the overall revenues derived from the swap remained the same. BOE calculated an adjustment to the excise tax, which is measured as a flat amount per gallon, to equal the amount of revenues from sales and use taxes, which apply based on a percentage of the sales prices, would have been but for the swap.

As a result, the motor vehicle fuel tax rate increased $0.17 to $0.35 on July 1, 2010, to compensate for the removal of the state share of the sales and use tax rate that was measured at 6% of the sales price. When voters approved Propositions 22 and 26 in November, 2010, the Legislature reenacted the swap in 2011, with some modifications (AB 105, Committee on Budget).

SB 1. In response to a significant deferred maintenance backlog on California’s streets and roads, the Legislature enacted SB 1 (Beall, 2017), which made several changes to motor vehicle fuel taxes, and directed its revenue to road maintenance and construction. Specifically, SB 1:

• Increased the excise tax on gasoline by $0.12 per gallon, starting November 1, 2017;
• Eliminated the annual adjustment required by the "Gas Tax Swap," on July 1, 2019, instead re-establishing the $0.173 per gallon rate set in ABx6 8; and
• Requires BOE to adjust motor vehicle and diesel excise tax rates, other than the diesel sales tax, annually based on the California Consumer Price Index (CCPI).

Inflation adjustments to the motor vehicle fuel tax resulted in a modest rate increase from $0.505 in 2020-21 to $0.511 in 2021-22. However, the rate increased 2.8 cents per gallon to $0.539 in 2022-23 due to higher inflation. The CCPI used to estimate both rates for 2023-24 of 7.4% will likely result in increases of four cents per gallon to $0.579 for motor vehicle fuel, scheduled to take effect on July 1, 2023. The estimated CCPI for 2024-25 is currently 4.4%.

The author wants to cap SB 1’s inflation adjustment to 2% per year effective July 1, 2023.

Proposed Law

Senate Bill 5 caps motor vehicle fuel rate adjustments at up to 2 percent, effective on or after July 1, 2023. The measure also makes a conforming change.

State Revenue Impact

CDTFA estimates that SB 5 results in Transportation Tax Fund revenue losses of $398.2 million in 2023-24 and $598 million in 2024-25. Because the sales tax base includes excise taxes, and local sales taxes apply to sales of gasoline, SB 5 would also result in local sales and use tax revenue losses of $14.2 million in 2023-24, and $21.3 million in 2024-25.

Comments

1. Purpose of the bill. According to the author, “Californians and Americans in general are suffering from the harmful effects of run-away inflation. Government should not be allowed to be insulated from the impacts of inflation through the use of ‘inflators’ on tax rates while taxpayers have no such protection and must drastically adjust their transportation budget in order to pay inflated prices on gasoline and diesel fuel just to go about their daily activities. SB 5 limits the amount that the gas and fuel tax may increase due to inflation to no more than 2% per year. The target rate for inflation that has been used by the Federal Reserve since 1999 is 2% per year. SB 5 simply parallels that rate as an allowable amount that fuel taxes may increase.”

2. Revenue loss. State law requires inflation adjustment of many different tax rates: personal income tax rate schedules, the amount of the standard deduction, and diesel and motor vehicle fuel tax rates, among others. Inflation adjustments ensure that the revenues that fund public services are maintained at levels necessary for public agencies to pay for the goods and services they require. Public agencies seeking to hire workers, procure information technology, lease real estate, and purchase items pay more when inflation rises too. However, recent increases in motor vehicle and diesel fuel prices have caused significant strain for many Californians, and additional increases in the tax rates won’t help. SB 5 limits a pending increase in motor vehicle taxes, but in doing so, reduces funding used for transportation purposes by almost $400 million in 2023-24. Additionally, the measure’s relief is not temporary; it limits inflation adjustments in the future, which would limit revenue growth. The Committee may wish to consider the tradeoff between the tax reductions granted by SB 5 and the transportation funding reductions that will result.

3. Effective dates. SB 5 limits the annual inflation adjustment to motor vehicle fuel tax rates, which take effect July 1^st of each year under current law. While the bill is a tax levy that will take effect immediately, the Legislature would have to enact it soon to prevent the increased rates from becoming effective, or provide a later effective date so that CDTFA has enough time to notify gasoline sellers of the tax rate change.

4. Gas prices. After a record price of $6.438 per gallon on June 14, 2022, the current average price for a gallon of regular unleaded gasoline is $4.89, a 24% reduction, according to AAA.

5. Related exemption. Last year, the Legislature enacted a state General Fund-only sales and use tax exemption (3.9375%) on the sale, storage, use, or other consumption for diesel fuel, commencing October 1, 2022 and ending June 30, 2023 (AB 194, Committee on Budget). The bill backfilled transportation tax funds from the state General Fund for any revenue losses.

6. Related legislation. Last year, the Committee considered SB 1156 (Grove), which would have eliminated inflation adjustments for both motor vehicle and diesel fuel tax rates. The measure failed passage.

Support and Opposition

(4/28/23)

Support: None received.

Opposition: Professional Engineers in California Government (PECG)

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