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Board of Equalization Acts to Reduce Variable Gas Tax Rate

League Urges BOE to Stabilize Gas Tax

February 23, 2016
The State Board of Equalization (BOE) today approved a 2.2 cent per gallon decrease, from 12 cents to 9.8 cents, in the state variable tax on gasoline for FY 2016-17.
 
This action will result in yet another dramatic decrease in the variable gas tax revenues received by cities. The decrease is equivalent to the Department of Finance’s projected 2.2 cent reduction. The decrease will take effect July 1, 2016.

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, the League of California Cities® joined other transportation stakeholders to provide testimony at the BOE meeting supporting an adjustment to the variable gas tax rate based on a five year forecast (four years back and the current fiscal year) — a process referred to as “smoothing.” Smoothing would have resulted in a 0.2 cent reduction rather than the approved 2.2 cent reduction. 
 
Unfortunately, the BOE did not adopt the League’s recommendation and instead opted to call on the legislature to act. The BOE will also consider a regulatory process for future decisions so that the smoothing concept can be thoroughly reviewed for future years. 
 
The state gas tax is made up of two portions: the base gas tax and a variable (price-base) gas tax. Currently, the base tax is 18 cents and the variable gas tax is 12 cents per gallon of gasoline. Cities receive a portion of both taxes in order to fund 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 2016-17 from the prior 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 2016-17 gas tax allocations that incorporate the BOE action.


 
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