Lower Gas Prices: Welcome Relief, with a Catch

When you fill up your tank in California, you pay 18 cents per gallon for the State fuel tax and 18.4 cents per gallon for the Federal fuel tax. This is a flat excise tax that does not vary by the price of gas. So, based upon the basic tenets of supply and demand, with lower gas prices we should see an increase in gas consumption and therefore an increase in fuel tax revenue.

Also, in 2002, California voters passed Proposition 42, amending the State Constitution and requiring the sales tax on gas and diesel fuel to be used for transportation purposes, including highways, streets and roads, and transit improvements. So, this should be good news for the State, cities, and counties who are trying to improve our statewide transportation system. 

However, Proposition 42 had implications on Proposition 98, which established a minimum annual funding guarantee for K-14 education, and became a problem when the State began experiencing budget deficits. To address this issue, the State passed a “gas tax swap” in 2011 to reclassify the sales tax so that it did not trigger additional budget contributions to schools.

Now, instead of paying a sales tax on gasoline, users pay an equivalent tax that is calculated after the fact, based on the previous year’s average gasoline cost. That means that as gas prices started dropping significantly through 2014, the equivalent tax was still based on what would have been the sales tax on the higher 2013 prices. As of January 1, 2015, the equivalent tax was recalculated based on the lower 2014 gas prices, which reduces transportation revenues.

If you are confused, then you are not alone. But that is the way State law is working these days. Lower gas prices can both increase and reduce transportation revenues. Unfortunately, based upon recent projections, the push is much greater on the reduction side.

And it gets worse.
Those sales tax equivalent revenues are not going into repairing the roads or dealing with our current needs – they are going to pay the debt service on transportation bonds, including some passed as long as 25 years ago.

Like we warned you, nothing is simple when it comes to how our gas tax works. For now, we just hope you are enjoying the little bit of relief on your wallet!