The 2022-23 Budget: Fuel Price and Other Fiscal Relief Options

The 2022-23 Budget: Fuel Price and Other Fiscal Relief Options MAY 2022 Summary. In response to increasing prices Introduction across the economy—particularly fuel prices—the Prices for many types of goods across California Legislature is considering a number of policies have increased faster than usual over the past for providing fiscal relief to Californians. This post year. Figure 1 illustrates these trends, displaying identifies key questions for the Legislature to the percentage increase in prices for items in the consider when analyzing the merits of the options Los Angeles metro area from January 2017 through proposed by the Governor and designing its own March 2022. While prices in general have increased, relief package. Overall, we suggest the Legislature the price of motor fuels and electricity have grown design a package that (1) targets relief to the groups even more significantly when compared to other it wants to prioritize, (2) can be implemented quickly items, as highlighted in the figure. For instance, and efficiently, (3) aligns with its other policy and statewide average per-gallon gasoline prices rose budget priorities, and (4) helps the state meet its from $3.91 in April 2021 to $5.65 in March 2022, state appropriations limit (SAL) requirements. a 45 percent increase. Figure 1 Prices—Especially Fuel Prices—Have Grown Rapidly Over the Last Year Percent Change in Consumer Prices in the Los Angeles Metro Area Since January 2017a 100% 90 80 70 60 50 Motor Fuel 40 Electricity 30 All Items 20 10 Food at Home -10 2017 2018 2019 2020 2021 2022 a Data not seasonally adjusted. 2022-23 Budget Series 1 In response to these trends, both the Governor $9 billion, but the actual cost would depend on and members of the Legislature have expressed what vehicle value threshold is established for interest in providing relief to Californians providing refunds. experiencing financial hardships, particularly • Offer Free Transit Services. The Governor from high fuel costs. Based on its priorities, the proposes $750 million in one-time General Legislature has several options for pursuing this Fund support for grants to transit agencies on a objective. This post identifies key questions for the formula basis, on the condition that they provide Legislature to consider when analyzing the merits three months of services without collecting fares of the Governor’s proposals and designing its own from riders. relief package. Majority of the Funding Would Be Excluded Background From SAL. Under the California Constitution, the SAL limits how the state can spend revenues that exceed a Governor Proposes Package of Fiscal Relief specific threshold. Recently, the SAL has emerged as Proposals. The Governor has put forward several a constraint that impacts the ways in which the state proposals totaling roughly $11 billion that are can allocate surplus General Fund revenues. The intended to provide relief to Californians, most state can meet SAL requirements through a variety of which were proposed this spring following the of actions, such as lowering revenues from certain release of the Governor’s January budget. The taxes, spending more on excludable purposes (for specific proposals include: example, tax refunds, capital outlay, and subventions • Defer Increasing Fuel Excise Tax Rates. to local governments), and/or providing tax rebates As part of his January budget, the Governor and additional payments to schools. The Governor’s proposed delaying the scheduled 5.6 percent $9 billion tax rebate proposal would help the state 2022-23 statutory increase to fuel (gasoline meet its constitutional SAL requirements because and diesel) excise tax rates for one year. (In our rebates are considered excluded spending. While we February post, The 2022-23 Budget: Fuel Tax will know more about the state’s SAL requirements Rates, we discuss this proposal in more detail.) in the coming weeks, they are likely to be in the tens The administration estimates that the resulting of billions of dollars. (For more information about the revenue loss to the state in the budget year SAL, see our report The State Appropriations Limit.) would be $523 million. • Lower Diesel Sales Tax Rates. The Governor Key Considerations for proposes a one-year reduction in the diesel Designing a Fiscal Relief Package sales tax from 13 percent to roughly 9 percent. The Legislature has multiple options it could The administration estimates that the resulting pursue to provide relief to Californians. Below, we revenue loss to the state in the budget year discuss several key questions for the Legislature to would be up to $600 million. The proposal consider, including issues regarding aligning policies would backfill the lost revenues from the diesel with legislative priorities, as well as some of the fiscal sales tax that support transit programs with and policy trade-offs to consider. We also summarize the General Fund. these considerations in Figure 2. • Provide Tax Refunds to Vehicle Owners. Which Groups of Californians to Prioritize in The Governor also proposes to provide tax Providing Relief? The Legislature will want to clearly refunds to registered vehicle owners in the define which groups it wants to prioritize in developing state. The administration states that the a relief package. For example, categories of focus proposal would provide a $400 refund per could include (1) those experiencing higher fuel vehicle—capped at two vehicles—but would prices, (2) those experiencing the greatest financial target refunds to individuals who own vehicles hardship, or (3) state residents who are more broadly below a certain value. The administration affected by higher prices. This prioritization involves estimates this proposal would have an considering which Californians the Legislature associated General Fund cost of roughly believes are most in need of financial relief—such as 2022-23 Budget Series 2 those who consume the most fuel, those who own cars, those who ride Figure 2 transit, those who have the least Key Considerations for Designing financial resources, or all who live in a Fiscal Relief Package the state (given higher overall prices). The Legislature will also want 9 Which groups of Californians to prioritize in providing relief? to determine exactly how to define the groups it wants to target for 9 Which potential policies best align with the Legislature’s relief priorities? relief, and design its policy actions 9 accordingly. For instance, this could Which potential policies could be implemented quickly and efficiently? involve determining the income 9 thresholds for households that would What are the key fiscal and policy trade-offs? (and would not) receive relief. 9 How can the relief package be designed to help meet the state’s SAL Which Potential Policies Best requirements? Align With the Legislature’s Relief SAL = state appropriations limit. Priorities? Once the Legislature has established which groups it Figure 3 wants to prioritize, it will want to select policies that Key Legislative Options for align with its intended objectives for providing relief. Figure 3 highlights some key potential policy actions Providing Fiscal Relief the Legislature could consider, depending upon its Fuel Price Focus intended areas of focus. The Legislature’s approach Potential Actions: could include approving certain proposals from • Reduce gasoline and diesel excise tax rates.a,b the Governor (such as providing refunds to vehicle • Reduce diesel sales tax rate.a owners), modifying those proposals (such as further • Provide tax refunds to vehicle owners.a reducing existing fuel excise tax rates beyond what Targeted Economic Focus the Governor proposed), or adopting alternatives Potential Actions: • Provide tax refunds to lower-income households. (such as providing targeted relief to households with • Augment funding for existing economic assistance lower incomes). The Legislature could also choose programs. to develop a package that contains a mixture of Broad-Based Focus proposals in order to provide relief to several different Potential Actions: groups. For instance, the Legislature could provide • Provide tax refunds to all taxpayers. relief to those experiencing higher fuel prices and • Provide free transit services.a those experiencing financial hardship by both a Included in Governor’s proposed package of actions. b Governor proposed deferring scheduled inflation increases to gasoline reducing fuel taxes and distributing tax refunds to and diesel excise tax rates in 2022-23. lower-income households. If one of the Legislature’s priorities is to provide In contrast, if the Legislature’s goal is to provide relief to those who are most affected by higher fuel relief to those experiencing the greatest financial prices, for example, reducing fuel taxes will most hardship, it may want to consider options beyond directly target this group because it is linked to the those linked to fuel taxes and vehicle ownership. amount of fuel consumption. Providing tax refunds For example, non-vehicle owners—who also are to vehicle owners would be less directly linked to facing high overall costs—represent 7 percent of fuel consumption, but would provide some related households in the state and tend to be lower income. relief given that these individuals likely drive to some Which Potential Policies Could Be degree. Providing rebates to zero-emission vehicle Implemented Quickly and Efficiently? If one of owners (as included in the Governor’s proposal), the Legislature’s goals is to provide timely relief however, would not have any link to gas price burden. to Californians, it also will want to consider which policies can be implemented quickly and efficiently. 2022-23 Budget Series 3 The speed at which each policy option could be however, given the constraints of the SAL, the use of implemented will vary based on factors such as surplus General Fund resources is considerably more whether it would be implemented through a new constrained. (For further information, see our post or existing program. For instance, tax refunds— The 2022-23 Budget: State Appropriations Limit both broad and income-based—could be issued Implications.) relatively quickly and efficiently given that the state The Legislature will also want to consider potential has experience providing such payments through the policy trade-offs associated with certain relief options. Golden State Stimulus Program and annual refunds For instance, the state has adopted ambitious to taxpayers. Similarly, providing income-based goals related to reducing greenhouse gas (GHG) relief by augmenting established state assistance emissions in the state. Depending on the magnitude programs—such as California Work Opportunity of how much it was to lower fuel taxes, such a price and Responsibility to Kids (CalWORKs)—would be reduction could potentially result in more driving and relatively straightforward. higher fuel consumption, which in turn could lead to In comparison, providing tax refunds to vehicle relative increases in GHG emissions and other forms owners would require several additional steps that of pollution. could delay payments and increase administrative How Can the Relief Package Be Designed to costs. Such steps would include collecting the Help Meet the State’s SAL Requirements? Given necessary data from the Department of Motor the constraints in this year’s budget, the Legislature Vehicles and selecting an entity to distribute will want to design a relief package that focuses on payments. Additionally, some policy options may meeting the state’s requirements under the SAL, not be able to take effect immediately due to with at least a roughly equivalent amount of excluded administrative procedures. In particular, fuel tax spending as that proposed by the Governor—around reductions would need to be enacted 60 to 90 days $9 billion. For instance, providing tax refunds to before they could go into effect. registered vehicle owners would be an excludable What Are the Key Fiscal and Policy Trade-Offs? activity and therefore help the state meet its SAL In prioritizing relief, the Legislature will also need requirements. In contrast, reducing fuel excise taxes to balance this against its other budget and policy would not because those revenues are already aims. Many relief options come with associated excluded from the SAL. Augmenting funding for other fiscal trade-offs. For instance, decreasing fuel excise economic assistance programs—like CalWORKS— taxes—absent any state funding backfill—would also would not assist the state in meeting SAL reduce revenues used to support state transportation requirements unless authorized as emergency projects, such as maintaining highways and local spending (like the Golden State Stimulus payments). streets and roads. The Legislature will therefore Conclusion need to balance the merits of providing gas tax relief against the associated impacts on transportation In response to increasing prices across the infrastructure. Additionally, relief options supported by economy—particularly fuel prices—the Legislature the General Fund—such as providing tax refunds— is considering a number of proposals for providing come with an inherent opportunity cost. That is, every fiscal relief to Californians. Overall, we suggest the dollar dedicated to providing fiscal relief limits the Legislature design a relief package that (1) targets amount of General Fund available for other budget relief to the groups it wants to prioritize, (2) can be priorities. Such priorities might include saving funds in implemented quickly and efficiently, (3) aligns with its reserve to address potential recession-driven budget other policy and budget priorities, and (4) helps the problems that may arise in future years. This year, state meet its SAL requirements. LAO PUBLICATIONS This post was prepared by Frank Jimenez, and reviewed by Rachel Ehlers 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