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Board of Equalization Acts to Reduce Variable Gas Tax Rate

Sen. Jim Beall Introduces Bill to Provide More Stability

February 25, 2015
The State Board of Equalization (BOE) yesterday approved a 6 cent per gallon decrease, from 18 cents to 12 cents, in the state variable tax on gasoline for FY 2015-16.
 
This action will result in a dramatic decrease in the variable gas tax revenues received by cities. The decrease is more than the Department of Finance’s projected 5.5 cent reduction, but is lower than the BOE staff recommendation of a 7.5 cent reduction. The decrease will take effect July 1.

The state gas tax is made up of two portions: the base gas tax and a variable (price-base) gas tax. Currently, both taxes impose 18 cents per gallon of gasoline. Cities receive a portion of both taxes in order to funding local roadway improvements, maintenance and projects.        
 
Under the Gas Tax Swap of 2010, the state sales tax on gasoline was eliminated and replaced with the price-based excise tax. The deal also diverted tax revenues from the state’s transportation budget to fund other projects and required BOE to adjust the state excise tax every year.
 
BOE annually adjusts the variable gas tax to try and match what fuel tax revenues in the forecast year would have been had the swap not occurred under Proposition 42 (sales tax on gasoline). Later, when the actual amount of gallons sold and taxable sales are known for a year, BOE must “look back” and “true up” for any over or under collection of revenue compared to what the sales tax rate would have garnered. This true up is factored into the rate set in subsequent year(s). The result is that if taxable sales of gasoline (which are in turn a function of gas prices and gallons sold) fall more than BOE anticipated in its rate setting, then a downward true up will compound a downward trend in taxable sales in subsequent years. The reverse could also be true of course, but the current reality with automobile transportation fuels is both a slackening of demand and a downward trend in prices. The result is the dramatic downturn in the estimated allocations in FY 2015-16 from the prior year.
 
The variable gas tax rate has seen significant increases and decreases since the BOE adjustment process was implemented. The resulting instability has had a significant impact on state and local agency ability to plan for future projects. In response, Sen. Jim Beall (D-San Jose) introduced SB 321 that would allow BOE to make partial adjustments of the rate over a three year period — a process referred to as “smoothing.”  It would also authorize BOE to adjust the rate on a quarterly basis if the board makes a determination that the amount of revenues generated by the motor vehicle fuel tax will be significantly different than the original estimates made by the board. This important bill is expected to be expedited through the process in order to take effect before the start of the new fiscal year. 
 
Cities can expect more information on this effort shortly. In addition, CaliforniaCityFinance.com is preparing to distribute updated city by city estimates of FY 2015-16 gas tax allocations that incorporate the BOE action.


 
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