The 2022-23 Budget: Fuel Tax Rates

The 2022-23 Budget: Fuel Tax Rates FEBRUARY 2022 Summary. In this post, we analyze the State Collects Excise Taxes on Transportation Governor’s proposed one-year fuel tax holiday. Fuels. The state collects excise taxes from gasoline This proposal presents the Legislature with a and diesel suppliers before they deliver fuel to retail tradeoff between reducing fuel expenses and stations. In 2021-22, the tax rates are 51.1 cents per funding state highway projects. gallon on gasoline and 38.9 cents per gallon on diesel. (We provide additional information about gasoline Background taxes at https://lao.ca.gov/Transportation/FAQs.) Fuel Prices Grew Rapidly in 2021. As shown State Adjusts Fuel Excise Taxes Annually. in Figure 1 below, California gasoline prices often Under current law, the state adjusts its fuel excise tax rise and fall by large amounts. For example, prices rates on July 1 every year. Each adjustment reflects declined from $4.04 per gallon in October 2019 to a 12-month change in the California Consumer $2.69 per gallon in May 2020. Prices then rose to Price Index (CA CPI)—a broad measure of the prices $3.02 per gallon by July 2020 and remained around California households pay for goods and services. that level through the rest of 2020. In 2021, prices For example, the rate adjustment scheduled for rose rapidly, reaching $4.51 per gallon in November. July 1, 2022 will reflect the 12-month change in the CA CPI from November 1, 2020 to November 1, 2021. Figure 1 Gas Prices Grew Rapidly in 2021 Statewide Average Price of Regular Gasoline (Dollars Per Gallon) $5.00 4.50 Steep Climb 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022-23 Budget Series 1 Fuel Excise Taxes Support State Highways Backfill Funding for Local Programs. and Local Transportation Projects. As described above, the state’s fuel excise taxes The administration estimates that the state’s fuel raise revenues that support local transportation excise taxes will raise $8.8 billion in 2021-22. projects, such as local street and road maintenance Roughly two-thirds of these revenues remain and rehabilitation, as well as local-led highway and at the state level. Most of this funding supports transit projects. The Governor proposes using the state highway maintenance, rehabilitation, and State Highway Account—which funds state highway improvements, with a smaller amount supporting projects—to backfill money to local governments and state programs that fund both state-led and local-led to state programs that support local projects to offset highway and transit improvements. The remaining the revenue they would lose due to the proposed one-third goes directly to cities and counties tax holiday. As a result, the proposal ultimately to support local street and road maintenance would reduce funding for state highways but not and rehabilitation. for local programs. Federal Funding Also Supports Transportation Assessment Projects. In addition to state excise tax revenues, July 1st Rate Changes Would Require Early the state receives federal fuel excise tax revenue Action. Advance notice of future tax rates is very for transportation. In recent years, the state helpful for taxpayers and tax administrators. For typically has received roughly $4 billion per year for smooth implementation, the Department of Tax and this purpose. Roughly 60 percent remains at the Fee Administration (CDTFA) generally advises state state level to support state highway maintenance and local lawmakers to enact sales and excise tax and rehabilitation, and 40 percent goes to local rate changes at least 90 days before they go into governments. The 2021 federal Infrastructure effect. If necessary, CDTFA likely could implement Investment and Jobs Act will provide at least an a rate change on a shorter timetable, but passing additional $2 billion per year over five years for state a trailer bill in June would not leave enough time. and local transportation projects. Consequently, we advise the Legislature to treat Governor’s Proposal July 1st fuel tax changes as an “early action” item to Lower Fuel Tax Rates in 2022-23. The Governor resolve in advance of the main budget package. proposes a one-year reduction in fuel excise Slightly Lower Prices at the Pump. tax rates relative to current law. The amount of Available evidence suggests that lower excise taxes this reduction would exactly offset the inflation likely would result in lower retail prices. The exact adjustment currently scheduled for July 1, 2022. effect on retail prices is uncertain, but most of As a result, from a taxpayer’s perspective, no the change in the tax rate likely would be passed rate change would occur on that date. When this through to prices at the pump. For example, if the one-year “holiday” ends on July 1, 2023, the state state declined to increase the excise tax by 3 cents once again would collect the full amount of the fuel per gallon on July 1, retail gasoline prices likely would excise taxes set by current law, including both the be 2 to 3 cents per gallon lower than if the state 2022 and 2023 inflation adjustments. proceeded with the increase. The administration estimates that the 2022 Less Revenue for Future Highway Projects. inflation adjustment will be 5.6 percent. As a result, Any reduction to fuel tax rates would reduce fuel tax under the Governor’s proposal, the gasoline excise revenues. If the Legislature backfilled local funding tax would be roughly 3 cents per gallon lower than as the Governor proposes, then the revenue loss it would be under current law. The corresponding primarily would reduce funding for state highway reduction in the diesel excise tax would be roughly projects. The California Department of Transportation 2 cents per gallon. The administration estimates that (Caltrans) plans such projects well in advance, so the resulting revenue loss would be $523 million. changes in 2022-23 revenue likely would affect funding for projects around 2024-25. Due to the State Highway Account’s estimated beginning balance of $3 billion in 2022-23, the revenue loss would not affect projects planned for 2022-23 or 2023-24. 2022-23 Budget Series 2 The amount of the revenue loss depends state highway projects). As a rough guideline, for on the amount of the rate reduction and on the every $175 million in revenue that the state forgoes, number of gallons of fuel sold in 2022-23. Like all it can “buy” a one-cent per gallon reduction in forecasts, fuel consumption forecasts are subject to gasoline tax rates (and a 0.7-cent per gallon uncertainty, but the administration’s forecast—and reduction in diesel tax rates). The key question for the resulting revenue loss estimate of $523 million— the Legislature is what balance to strike between is reasonable. reducing fuel expenses and funding state highway Effects on Fuel Consumption Likely Modest. projects. The connection between this fundamental The administration has framed many of its January policy choice and the annual inflation adjustment is budget proposals as efforts to combat climate tenuous at best, so we encourage the Legislature to change. In contrast, lower fuel taxes—and the lower regard the Governor’s proposal as just one among fuel prices that would result—likely would lead to a wide range of options. higher fuel consumption, which in turn could lead Who Gains, and Who Loses? Lower fuel taxes to higher greenhouse gas (GHG) emissions and would help people who buy fuel. Future highway other forms of pollution. That said, two factors projects would help people who drive on highways. could make the net increase in GHG emissions These two groups overlap heavily, but there are modest—perhaps even zero. First, a temporary some key differences. The people who likely would price reduction of a few cents per gallon likely gain the most from a fuel tax holiday are those would result in a small increase in fuel consumption. who purchase a lot of fuel relative to their use of (For example, we estimate that the Governor’s state highways—because they mostly use surface proposal would increase gasoline consumption streets, or their vehicles consume a lot of fuel, or in 2022-23 by roughly 0.1 percent to 0.2 percent.) both. The people who likely would lose the most Second, the state’s cap-and-trade program sets are those who use state highways extensively a limit on GHG emissions across various sectors but purchase relatively little fuel—because they through 2030. If this emissions cap turns out to drive electric vehicles (or fuel-efficient vehicles be binding, then any increase in GHG emissions more generally). from transportation fuels will be offset by an equal One-Year Holiday Would Make 2023 Increase reduction in GHG emissions from other sources Steeper. A one-year tax holiday would not change subject to the cap. (Other aspects of the proposal— 2023-24 fuel tax rates. Consequently, such a such as changes in state highway projects—also holiday would result in a larger tax rate increase in could have environmental effects.) 2023 than the one scheduled under current law. For example, the Governor’s proposal effectively Issues for Legislative Consideration would combine the increases currently scheduled Key Tradeoff: Lower Fuel Prices Now or More for 2022 and 2023 into a single, larger increase in State Highway Projects Later? As noted above, 2023. Alternatively, the Legislature could consider lower fuel taxes provide benefits for fuel purchasers making these adjustments in a few steps between but reduce funding for state programs (primarily July 2022 and July 2023. 2022-23 Budget Series 3 LAO PUBLICATIONS This post was prepared by Seth Kerstein with assistance from Frank Jimenez, and reviewed by Carolyn Chu and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 4