The 2023-24 Budget: Proposed Reauthorization of AB 8 Vehicle Fees

2023-24 BUDGET The 2023-24 Budget: Proposed Reauthorization of AB 8 Vehicle Fees GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY In this brief, we assess the Governor’s proposal to extend the sunset of certain-vehicle related fees that support clean transportation activities. Fees that are scheduled to sunset on January 1, 2024—often referred to as AB 8 fees—generate revenues totaling about $175 million annually, which are used to support three different programs that encourage adoption of zero-emission vehicles (ZEVs) and upgrades to cleaner vehicle technology. (While these charges are commonly referred to as fees, under the State Constitution they qualify as taxes, and therefore will require a two-thirds vote of the Legislature to extend.) While the associated fee levels are modest, vehicle registration fees in California already are quite high compared to other states. In light of significant policy and funding changes to support ZEVs and cleaner transportation since these fees were last reauthorized in 2013, we recommend the Legislature think carefully about how the revenues complement existing efforts and how essential they are to achieving state goals given the costs they represent to households. Should it choose to reauthorize AB 8 fees, the Legislature could consider changing how the funds are used to support different clean transportation programs, or fund entirely different activities with the revenues, depending on the state’s highest priorities. Background AB 8 Fees Include Various Vehicle-Related Taxes. Chapter 750 of 2008 (AB 118, Núñez) Vehicles Are a Major Source of Greenhouse established several different vehicle-related fees Gas (GHG) Emissions and Air Pollution. The that primarily support climate and air quality state has undertaken a variety of steps to try to programs. Chapter 401 of 2013 (AB 8, Perea) limit the magnitude of climate change and reduce extended these fees until January 1, 2024. GHG emissions. Transportation is the largest single Throughout this brief, we refer to the vehicle source of GHG emissions—responsible for about charges imposed by AB 8 as “fees,” which 40 percent of total GHG emissions overall, with is generally consistent with how they are 25 percent of the total coming from passenger characterized in statute. However, under the State vehicles. This makes vehicles a key area of focus for Constitution, these charges qualify as taxes. achieving GHG reductions. Additionally, vehicles— These fees include an annual smog abatement fee particularly heavy-duty trucks—are major sources for vehicles six years old or less ($8), an annual of air pollution. Numerous counties in the state are vehicle registration fee ($3), an annual vehicle out of attainment with federal air quality standards, identification fee ($5), and a vessel registration and several counties in the Central Valley and fee ($20 every other year). These vehicle fees are Southern California are classified as extreme only charged for light-duty passenger vehicles non-attainment communities. Air pollution from and, in the case of the vessel fee, boats. (These mobile sources is responsible for about 80 percent numbers reflect the share of these fees that go of nitrogen oxide emissions and 90 percent of to AB 8 programs; the state also charges some diesel particulate matter emissions, both of which additional vehicle fees that are not reflected here.) are harmful to human health. Communities with larger percentages of low-income households and people of color are disproportionately exposed to air pollution. www.lao.ca.gov 1 2023-24 BUDGET Fee Revenue Supports Five Vehicle Consumer Assistance Program. Under the Emissions-Related Programs. The revenue from program, low-income consumers are eligible these fees supports five environmental and clean for a $1,500 incentive to retire higher-polluting transportation programs, most of which are targeted older vehicles at a BAR-contracted dismantler. at mitigating climate change and improving air CARB administers the scrap-and-replace quality. The amounts shown reflect approximate portion of EFMP, which provides a retirement AB 8 annual revenues, based on statutory incentive and additional compensation formula allocations. towards the purchase of a cleaner hybrid or zero-emission replacement vehicle. • Clean Transportation Program (CTP, Participants must make 400 percent or less of $110 Million). The CTP program, administered the federal poverty level (FPL) to qualify for the by the California Energy Commission, scrap-and-replace option. provides grants to accelerate development and deployment of clean vehicles, including • Air Quality Improvement Program (AQIP, ZEV fueling infrastructure, alternative vehicle $29 Million). AQIP is a mobile source incentive technologies, and alternative fuels. According program that focuses on reducing criteria to the administration, about 50 percent of pollutants and diesel particulate emissions. funded projects are located in low-income In recent years, CARB has allocated these or disadvantaged communities experiencing revenues to the Truck Loan Assistance disproportionate levels of pollution. Program, which helps small-business fleet owners secure financing for cleaner • Carl Moyer Program ($50 Million). This joint truck upgrades in order to meet regulatory state and local program provides financial requirements. To be eligible, program support for early vehicle retirement and participants must earn less than 225 percent cleaner-than-required equipment. The program of the FPL annually. largely focuses on reducing criteria and toxic air emissions from heavy-duty diesel engines. Portion of Fees Scheduled to Expire at End of It is administered by the California Air 2023. In 2022, the Legislature enacted Chapter 355 Resources Board (CARB) and local air districts. (AB 2836, E. Garcia), which extended the portion of • Waste Tire Program ($35 Million). This the AB 8 fees that support the Carl Moyer Program program, administered by the California and the Waste Tire program until 2034. The portion Department of Resources Recycling of the fees that supports the three remaining and Recovery, supports permitting and programs—AQIP, EFMP, and CTP—however, has enforcement activities to ensure tires are not been extended, and is scheduled to sunset stored and transported safely. It also funds tire on January 1, 2024. Figure 1 displays the annual recycling and market development activities. fees that are scheduled to sunset and how they • Enhanced Fleet Modernization Program Figure 1 (EFMP, $33 Million). The Allocation of Sunsetting AB 8 Fees by Program EFMP provides subsidies to (In Dollars) retire older, high-polluting vehicles and replace Fee AQIP CTP EFMP Totals them with newer vehicles, Vessel Registration Feea $10.00 $10.00 — $20.00 with higher subsidies for Smog Abatement Feeb 4.00 4.00 — 8.00 low-income households. Vehicle Identification Fee 2.50 2.50 — 5.00 Vehicle Registration Fee — 2.00 $1.00 3.00 The Bureau of Automotive Totals $16.50 $18.50 $1.00 $36.00 Repair (BAR) implements a These fees are applied for boat registrations and are charged every other year rather than annually. the scrap-only portion of the b Applies to vehicles six years old or less. program statewide, which AB 8 = Chapter 401 of 2013 (AB 8, Perea); AQIP = Air Quality Improvement Program; receives about 90 percent CTP = Clean Transportation Program; and EFMP = Enhanced Fleet Modernization Program. of the funds, through its 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET currently are allocated across programs. As shown, However, vehicle owners essentially already pay an the fees represent a total cost of up to $16 annually additional fee to help mitigate pollution and reduce per vehicle for a typical vehicle owner and $20 per GHG emissions resulting from the cap-and-trade vessel every other year for boat owners. program, which adds about 22 cents to the cost of each gallon of gas. (This takes into consideration Governor’s Proposal the costs that fossil fuel companies—covered Proposes Reauthorization of Vehicle Fees under the cap-and-trade program—add to each Set to Expire. The Governor proposes to extend gallon of gas, reflecting their program compliance authorization for the sunsetting AB 8 fees from costs that they choose to pass on to customers.) January 1, 2024 through 2035. Because these Moreover, although AB 8 fees are modest, they fees are constitutionally a tax, the extension would represent a direct cost to vehicle owners—including need to be approved by a two-thirds vote of the to lower-income households, which are more likely Legislature. Under the proposal, the fees would to be negatively affected by higher registration be kept at existing rates and continue to generate prices. California vehicle owners already pay high roughly the same level of revenues, estimated registration fees compared to other states and to be about $175 million annually. The proposal have experienced significant increases in the past would continue to designate fee revenue for the decade. For example, average total annual fees same programs it currently supports: CTP, AQIP, paid per vehicle have increased from $143 for and EFMP. automobiles in 2013 to $245 in 2020, not including Proposes Three Somewhat Minor Eligibility air quality fees such as the smog fee. Given these Changes for CTP. The Governor also proposes to trends, together with inflationary pressures and slightly modify which types of projects and entities the exceptionally high cost of living in California, would be eligible to receive funding grants from it will be important for the Legislature to carefully the CTP. First, the proposal would limit eligibility consider how important AB 8 revenues are to for CTP funding to zero-emission technologies. meeting the state’s goals and whether they are (CTP historically has funded both low-emission and worth the costs they place on households. zero-emission technologies, although has begun Significant New Policy Goals Since AB 8 Fees to prioritize the latter in recent years.) Second, Were Enacted and Reauthorized… The state the proposal would modify CTP’s existing statute has adopted new, more ambitious GHG reduction to allow for U.S. Department of Energy national goals since the AB 8 fees were reauthorized laboratories to receive awards under the program. in 2013. For instance, Chapter 249 of 2016 Third, the proposal would expand the definition of (SB 32, Pavley) updated the state’s GHG reduction tribes that may receive funding through the program limit from 1990 levels by 2020 to 40 percent below to all California tribes, rather than only federally 1990 levels by 2030. Chapter 337 of 2022 (AB 1279, recognized tribes. Muratsuchi) requires the state to achieve net-zero GHG emissions by 2045. In addition to these goals, Assessment the administration has introduced new regulations Proposal Would Require Californians to to promote ZEV adoption. The Advanced Clean Continue Paying Existing Taxes. In concept, Cars II rule, adopted by CARB in 2022, requires it is reasonable for the state to have drivers bear 100 percent of new cars and light-duty trucks some of the costs of efforts to reduce the impacts sold in California to be ZEVs or hybrid-electric of mobile emissions, given they represent a by 2035. The proposed Advanced Clean Fleets key source of the resulting pollution and GHG rule, which CARB anticipates adopting this emissions. Moreover, continuing to charge the spring, would require all new trucks and buses AB 8 fees would not represent a new cost to or sold to be ZEVs by either 2036 or 2040 (CARB increase in taxes for vehicle owners, but rather has not yet decided which year). The state also maintain existing, relatively modest levels ($8 in has undertaken numerous efforts to improve air annual registration fees and $8 in annual smog quality, especially in communities that are out abatement fees for cars six years old or less). of attainment with federal air quality standards. www.lao.ca.gov 3 2023-24 BUDGET Taken together, the challenge of meeting ambitious supported by AB 8 fee revenues. While this would goals, carrying out regulatory requirements, and result in a net reduction to ZEV program spending, addressing continuing air quality problems may it could allow the Legislature to achieve General provide some rationale for a continued need for Fund savings while feeling confident that some AB 8 fee revenues. level of its desired activities will still be conducted. …But Also Significant New Other Sources Potential Reauthorization Presents of Funding to Support Those Goals. While Opportunity to Consider Highest-Priority the state’s goals have evolved notably since the Use of Funds. When initially authorized, these Legislature enacted AB 118 and AB 8, so too have fees were intended to support then-emerging the sources and amounts of funding to improve lower-emission/ZEV technologies and help air quality and vehicle emissions. For example, transition car owners to less-polluting vehicles. cap-and-trade auction revenues that flow into the The landscape of ZEV adoption and other clean Greenhouse Gas Reduction Fund (GGRF) have transportation incentive programs has changed increased from $257 million in 2012-13 to more significantly since that time, however, with greater than $3 billion annually in recent years. Much of consumer demand, more available incentives for this funding has been allocated to mobile source purchasing ZEVs, and expanded availability of emissions reduction programs, including “AB 617” infrastructure to support them. For example, about community air pollution reduction efforts as well as 20 percent of all new cars sold in California in 2022 various clean transportation programs. The state were ZEVs (compared to about 10 percent in 2020), also committed roughly $10 billion over five years and there are currently about 80,000 ZEV chargers for ZEV programs, primarily from the General Fund, in California. Research suggests roughly half of the in the 2021-22 and 2022-23 budgets. Although households that receive an incentive to purchase a the Governor’s 2023-24 budget proposes making ZEV would have purchased one anyway, revealing some reductions to this funding, it would maintain the extent to which the ZEV market has matured the significant majority. In addition to these state and thus may not need as many government investments, recent federal spending bills provided incentives to further develop compared to when considerable funding to support ZEVs and other these fees were last authorized. Therefore, should clean transportation efforts. Federal programs the Legislature determine that AB 8 fee revenues include tax incentives for households to purchase still are essential for meeting the state’s clean air ZEVs, grants for charging infrastructure, funding for and GHG reduction goals, it may also want to electric buses and truck electrification, and funding reconsider the highest-priority uses for the funds to promote cleaner vehicle technologies. to ensure they are being used effectively to achieve Extending AB 8 Fee Revenues Could Provide desired outcomes. For example, the Legislature Reliable Funding Source and Help Offset could consider: Potential Budget Reductions. Though the state’s • Revising the Focus of Existing Programs. commitments of General Fund and GGRF revenues As discussed earlier, the Governor is are significant, these sources are not consistently proposing some minor eligibility changes for reliable into the future. Should the Legislature CTP. The Legislature could consider additional believe deeper investments in clean transportation revisions to the current AB 8-funded programs efforts are necessary through 2035, reauthorizing that would allow them to better support the AB 8 fee revenues could provide a consistent the state’s GHG and air quality goals. For funding source without raising new taxes or fees. example, new state regulations will promote Moreover, extending these fees could help the greater adoption of medium- and heavy-duty Legislature continue to pursue its goals at the same ZEVs. Given that this is already the direction time it needs to address the state’s current budget in which the state is heading, rather than problem. For example, the Legislature could opt using AQIP AB 8 funds to support purchases to reduce General Fund expenditures from the of trucks with traditional combustion engines ZEV package for similar activities currently being (as is allowed under current program rules), 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET the Legislature could consider requiring Legislature Could Consider Restructuring AQIP to focus exclusively on upgrades to Fees. The Legislature also could consider ZEVs. In addition, the Legislature could restructuring the way these fees are charged. consider adopting statutory changes to For example, one option would be to adopt a more further modify the focus of CTP. For instance, progressive structure that takes vehicle value into the administration has reported that about consideration. Some other transportation fees—such 50 percent of funded projects have been as the Transportation Improvement Fee, which funds located in low-income or disadvantaged road improvements—vary charges based on the communities. The Legislature could require value of the vehicle. Should the Legislature take this the program to further prioritize these approach, it could help reduce some of the negative communities, such as by adding a focus impacts on low-income households and create a on multiunit dwellings, given that existing more equitable structure. However, depending on chargers are more heavily located in affluent how it was structured, such an approach likely would areas. The Legislature could also consider increase the cost burden for some other vehicle requiring CTP investments to support owners and might generate a different amount of newer, more emergent technologies such overall revenue. In addition, AB 8 fee revenues are as hydrogen charging and medium- and collected from passenger light-duty vehicles, but heavy-duty chargers, which are less prevalent about half of the fee revenues are used to support than passenger vehicle chargers but will be programs that target heavy-duty vehicles. Another needed as more hydrogen-powered and large option the Legislature could consider is to also ZEVs enter the market. charge these fees to heavy-duty vehicle owners, • Funding Different Clean Vehicle Programs given that such vehicles cause air pollution and GHG and Activities. The Legislature also could emissions at an even greater level than passenger fund a different mix of programs and activities vehicles and currently are an area of focus for to ensure AB 8 funds are used to strategically expenditures of this funding. complement other ZEV activities. For example, Recommendations AB 8 fee revenues could be used to support Consider Whether AB 8 Fee Revenues Still Are more ZEV heavy-duty truck and bus vouchers, Essential to Meeting State Goals. We recommend which are one of the most cost-effective mobile that the Legislature weigh whether AB 8 revenues source programs for reducing GHG emissions. still are vital to helping the state pursue its clean • Using the Funds for Other Purposes. The air and GHG emission reduction goals, given Legislature also could extend these fees the continued—albeit modest—tax burden they but use them for other budgetary purposes, represent for California vehicle owners. Significant such as to (1) help the balance of the Motor changes in policies and funding for ZEVs and clean Vehicles Account (MVA); (2) support other transportation have occurred since the fees were clean air or climate activities; or even (3) direct last reauthorized in 2013. While the state’s desire them for other, non-vehicle-related funding to pursue more aggressive goals could argue for priorities, given the state budget problem. a continued need for the revenues, significant other (As we describe in a separate publication, the funding sources have become available to help MVA, which receives revenue from vehicle support those efforts. As part of its deliberations, we registration and other driver-related fees to recommend the Legislature consider whether the primarily support the California Highway Patrol state needs a consistent and ongoing fund source and Department of Motor Vehicles, is currently along with the significant, but limited-term, General experiencing shortfalls.) This third option Fund, GGRF, and federal funds for these purposes. would be a departure from the original intent We also recommend the Legislature assess the and longstanding usage of these funds, but is merits of directing AB 8 fee revenues to help it an available alternative given these are taxes solve the state’s current budget problem, such as and not fees. by using them for some ZEV programs and making corresponding General Fund reductions. www.lao.ca.gov 5 2023-24 BUDGET If Fees Are Reauthorized, Consider Highest Consider Restructuring Fees. Unlike some Priorities for Funding. Much has changed since other vehicle registration fees, AB 8 fees are set at these fees were last reauthorized in 2013—a more equal levels regardless of the cost of the vehicle. robust ZEV market, greater funding for ZEVs, If the Legislature decides to reauthorize the fees, and an increased need to support lower-income it also could consider restructuring them, such as communities in making the vehicle transitions to require more expensive vehicles to pay a higher the state is now requiring. Should it choose rate than lower-cost vehicles. This could create a to reauthorize AB 8 fees, we recommend the more progressive structure and ease cost burdens Legislature consider its highest-priority goals for the for some lower-income vehicle owners, though it associated funding. The Legislature could consider would represent a notable shift in policy approach revising existing programs, supporting a different and could change the amount of annual revenues mix of clean vehicle efforts, or using the funds for generated. The Legislature could consider also other budgetary priorities. charging fees for heavy-duty vehicles, as larger diesel vehicles exacerbate air pollution and GHG emissions at greater rates than light-duty passenger vehicles. Moreover, this category of vehicle owners currently receives significant benefits from AB 8 program expenditures. 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 7 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Sarah Cornett, 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. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 8 LEGISLATIVE ANALYST’S OFFICE