Assessing California’s Climate Policies—Implications for State Transportation Funding and Programs

2023-24 BUDGET Assessing California’s Climate Policies—Implications for State Transportation Funding and Programs GABRIEL PETEK | LEGISLATIVE ANALYST DECEMBER 2023 www.lao.ca.gov 1 AN LAO REPORT 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Executive Summary State Has Many Policies to Reduce Transportation Emissions. Transportation is the largest source of California’s greenhouse gas (GHG) emissions—accounting for roughly 40 percent of total statewide emissions in recent years. The state has many initiatives in place to reduce GHG emissions from the transportation sector, including programs and policies that are targeted at increasing the adoption of zero-emission vehicles (ZEVs), increasing the use of lower-carbon fuels, and reducing the number of vehicle miles traveled (VMT). The California Air Resources Board is required to complete a Scoping Plan that identifies a strategy for achieving the state’s GHG reduction goals, incorporating both existing state efforts and any additional changes that will be needed across various sectors. Given the magnitude of emissions associated with transportation, reducing GHGs from this sector will need to be a key component of the state meeting its overall climate goals. As such, the most recent Scoping Plan, adopted in 2022, included several major changes needed within the transportation sector. These included transitioning all new vehicle sales to ZEVs (by 2035 for light-duty vehicles and by 2040 for medium- and heavy-duty vehicles) and reducing VMT statewide. California’s Climate Policies Will Have Long-Term Impacts on Existing State Transportation Funding Sources. California’s transportation system is supported by state, local, and federal sources. State sources—which historically have accounted for roughly one-third of total transportation funding, including $14.2 billion in 2023-24—consist of various fuel taxes and vehicle fees. While recent state initiatives to reduce GHG emissions from the transportation sector—along with additional steps envisioned in the Scoping Plan—are intended to have climate benefits, they also will have resulting impacts on state transportation revenues. Most significantly, policies aimed at increasing the adoption of ZEVs will decrease the consumption of gasoline and diesel fuels, and consequently reduce the associated tax revenues that currently support the state’s transportation system. In this report, we estimate impacts to state transportation revenues and programs (in inflation-adjusted dollars) under the GHG reduction pathway envisioned by the Scoping Plan. Specifically, compared to current levels, we project notable revenue declines over the next decade from the state’s gasoline excise tax ($5 billion or 64 percent), diesel excise tax ($290 million or 20 percent), and diesel sales tax ($420 million or 20 percent). We estimate that these declines will be partially but not fully offset by projected increases in revenues from an existing annual registration fee levied on battery-electric and hydrogen fuel cell vehicles ($1 billion). On net, we estimate that if the state undertakes the steps envisioned in the Scoping Plan to reduce GHGs, annual state transportation revenues will decline by $4.4 billion (31 percent) over the next decade as compared to current levels. While we estimate total revenues would decline even under a baseline forecast due to ongoing increases in fuel efficiency and greater interest in ZEVs, the state’s recently adopted and planned policies will expedite these underlying trends significantly. Revenue Declines Will Have Significant Impacts for Certain Transportation Programs. Absent a funding backfill from alternative sources, the projected revenue declines will result in certain state transportation programs having less capacity to support state and local transportation projects and activities. The exact impacts on each specific program will depend on several factors, such as the magnitude of its estimated funding reduction and the degree to which www.lao.ca.gov 3 AN LAO REPORT it relies on state funds as compared to other sources. For instance, the California Department of Transportation’s highway maintenance and rehabilitation programs are funded primarily by state fuel taxes and therefore will face significant funding declines. Specifically, under the GHG reduction pathway envisioned by the Scoping Plan, we project funding for these programs will drop by roughly $1.5 billion (26 percent) over the next decade, from $5.7 billion to $4.2 billion. Correspondingly, these programs will experience an overall reduction in the number of projects the department can complete on the state highway system, likely resulting in a decline in highway conditions for drivers. While certain programs will experience smaller reductions in terms of total dollars, if they are more reliant on fuel tax revenues then such declines will have proportionally greater impacts on their activities. For instance, we estimate the State Transit Assistance program, which is solely supported by diesel sales tax revenues, will experience funding declines of about $300 million by 2034-35, which represents about one-third of its total funding. In cases where programs distribute funding to local governments, such as for local streets and roads and transit, the magnitude of the impacts will vary across jurisdictions. In general, jurisdictions that historically have been more dependent on state funding for their local efforts will experience greater impacts across their transportation systems, likely resulting in reduced services and/or poorer road conditions for their residents. Legislature Has Several Options for Funding Transportation. The Legislature has several options for addressing the forecasted funding gap. It could choose to raise additional revenues to help partially or fully offset the projected loss from existing fuel taxes and thereby mitigate the potential impacts on transportation programs and activities. Alternatively, it could downsize the state’s existing support for transportation programs in line with projected revenue declines and focus remaining funding on its highest priorities—although clearly this would result in a reduction of current service levels. Specific options the Legislature could consider include: (1) increasing existing fuel taxes and vehicle fees, (2) shifting transportation costs to other fund sources, (3) reducing and reprioritizing spending for transportation programs, and (4) generating revenues from new transportation-related charges (such as implementing a road charge or new taxes on alternative fuels). The Legislature will want to weigh the benefits and trade-offs of each of these options. Key considerations the Legislature could use to guide its deliberations include: how well a potential funding source aligns with the “user-pays” principle (that is, whether those who use and benefit from the state’s transportation system are the ones paying for its maintenance and improvements); how impacts are distributed amongst various groups, such as by income level and/or geography; the magnitude of potential state costs associated with implementation; and whether the associated revenues will be stable and sustainable over the long run. Recommend Legislature Continue to Monitor Revenues and Develop Long-Term Plan. When and how transportation revenues will be affected is dependent on a number of factors— including how quickly the state’s fleet of vehicles transitions to ZEVs—and is therefore subject to considerable uncertainty. However, if the state continues with its GHG reduction and ZEV adoption strategies, the overall downward revenue trajectory we discuss here will occur over time. We therefore recommend that the Legislature continue to track this issue closely over the coming years—including the rate at which revenues are declining and how significantly program funding levels are being affected—to help inform how and when it might want to take additional steps to meet its transportation priorities. We also recommend the Legislature begin to develop a plan for how it will address impending declines in state transportation revenues. While the state has several approaches with which it could respond, each comes with various benefits and trade-offs that will need to be considered. Beginning to weigh these options now would better position the state to act in the future when revenue declines become more significant. 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT INTRODUCTION In this report, we discuss how meeting the transportation funding and programs, (4) options state’s greenhouse gas (GHG) reduction goals the Legislature could consider to address could impact existing state transportation revenues associated impacts, and (5) recommendations for and programs. Specifically, our report includes: legislative next steps. This report was developed (1) background on the state’s policies to reduce pursuant to Chapter 135 of 2017 (AB 398, GHG emissions from the transportation sector, E. Garcia), which requires our office to report (2) an overview of state transportation funding annually on the economic impacts and benefits of and programs, (3) estimates of how meeting the the state’s GHG reduction goals. state’s GHG reduction goals could impact state BACKGROUND State GHG Emission Goals and from 2010 to 2019, emissions declined by about 1 percent annually. In contrast, meeting statutory Transportation Sector statewide emission reduction goals would require California Has Established Several Significant average annual reductions of 4 percent from 2019 GHG Reduction Goals. The Legislature has to 2030, and 9 percent between 2030 and 2045. adopted three successive statewide goals for (At the time of this report’s preparation, final data reducing GHG emissions: on actual emissions for 2021 were not yet available.) • 2020. Chapter 488 of 2006 (AB 32, Núñez) established the goal of limiting GHG emissions statewide Figure 1 to the 1990 level by 2020. California Has Adopted • 2030. Chapter 249 of 2016 (SB 32, Aggressive GHG Reduction Goals Pavley) extended the limit to at Millions of Metric Tons of Carbon Dioxide Equivalent least 40 percent below the 1990 level by 2030. 500 • 2045. Chapter 337 of 2022 1990 emissions (AB 1279, Muratsuchi) established by 2020 a new limit of at least 85 percent 400 below the 1990 level by 2045. Assembly Bill 1279 also established a statewide goal 300 40 percent below of zero net carbon emissions 1990 level by 2030 by 2045, commonly known as Actual Emissions 200 carbon neutrality. As shown in Figure 1, statewide GHG emissions have decreased in 100 recent years—dropping below the 2020 85 percent below 1990 level by 2045 target several years ahead of schedule. However, emissions will need to decline 2010 2015 2020 2025 2030 2035 2040 2045 at a much faster rate in order to meet the 2030 and 2045 targets. For context, GHG = greenhouse gas. www.lao.ca.gov 5 AN LAO REPORT Transportation Is Largest Source of State smaller amount coming from medium-duty vehicles GHG Emissions. As shown in Figure 2, the (larger pickup trucks and delivery vans) and transportation sector is the largest source of state heavy-duty vehicles (buses and long-haul trucks). GHG emissions, accounting for about 40 percent State Has Several Policies and Programs to of total emissions in 2019. (While data for 2020 are Reduce Transportation Emissions. The state has available, emissions from that year are anomalous many initiatives in place to reduce GHG emissions due to the impacts of the COVID-19 pandemic— from the transportation sector. These include particularly in the transportation sector, where programs that are specifically targeted at increasing stay-at-home orders and social distancing reduced the adoption of zero-emission vehicles (ZEVs). the demand for driving.) Transportation-related (Please see the nearby box for a more detailed emissions mostly result from light-duty vehicles description of the different types of ZEVs discussed (passenger cars and smaller pickup trucks), with a in this report.) Such programs provide financial Figure 2 Roughly 40 Percent of Statewide GHG Emissions Come From the Transportation Sector 2019 Landfills and Composting 2% ODS Substitutes Other 5% 2% Livestock 6% High GWP Light-Duty Vehicles Gases 29% Commercial 5% 4% Agriculture 8% Waste 2% Residential Commercial 6% and Residential Transportation 40% 10% Imported Electricity 5% Electricity 15% Medium- and Heavy-Duty Vehicles 9% In-State Generation Industrial 10% 20% Other 3% Refineries Other Oil and 7% Cogen (Thermal) 1% 3% Fue 3 l % Use Pro G du a c s tion Total = 405 MMTCO2e Cement 2% 3% Note: Percentages may not add due to rounding. GHG = greenhouse gas; GWP = global warming potential; ODS = ozone depleting substance; and MMTCO2e = million metric tons of carbon dioxide equivalent. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT incentives for consumers to purchase ZEVs, as Additionally, the regulation establishes well as support for installing charging and refueling medium- and heavy-duty ZEV purchase and stations and for ZEV manufacturing. The state also phase-in requirements for federal and state has adopted several regulatory policies that require agencies, local governments, and certain an increasing percentage of new vehicle sales to private fleets. be ZEVs and that entities comply with certain ZEV In addition to the policies mentioned above, the purchase and phase-in requirements. Two major state also has programs centered around increasing regulatory policies the California Air Resources the adoption of lower-emission vehicles (not Board (CARB) recently adopted include: necessarily zero emission), particularly in sectors • Advanced Clean Cars II. Adopted by CARB where ZEVs may not be widely available; increasing in 2022, this regulation requires an increasing the use of lower-carbon fuels; and reducing the percentage of new light-duty vehicle sales number of vehicle miles traveled (VMT). to be ZEVs, establishing a sales threshold Scoping Plan Assumes Significant of 35 percent in 2026 that increases to Reductions in GHG Emissions From 100 percent in 2035. (The Advanced Clean Transportation Sector. Statute requires CARB Cars II regulation builds on previous ZEV sales to complete a Scoping Plan at least once every requirements CARB set for new light-duty five years. The Scoping Plan is meant to identify vehicles from 2015 to 2025.) CARB’s strategies for achieving the statewide GHG • Advanced Clean Fleets. Adopted by CARB targets. The plan assesses the most cost-effective in 2023, this regulation requires 100 percent and technologically feasible scenario to achieve the of new medium- and heavy-duty vehicle sales state’s GHG reduction goals, incorporating both to be ZEVs by 2036. (This builds on previous existing state efforts and any additional changes ZEV sales requirements that CARB set for CARB anticipates will be needed across various new medium- and heavy-duty vehicles from sectors. This “Scoping Plan Scenario” is evaluated 2024 to 2035.) The regulation also requires against a “Reference Scenario,” which is meant all drayage trucks—heavy-duty vehicles to reflect what emissions would be under existing that transport cargo to and from intermodal state policies and trends. seaports and railyards—to be ZEVs by 2035. Three Main Types of Zero-Emission Vehicles Zero-emission vehicles (ZEVs) are vehicles that do not produce tailpipe emissions when they operate. However, producing the fuel that is used to power the vehicle still may result in some emissions. There are three main types of ZEVs: • Battery-Electric Vehicle—Relies solely on a battery to propel the vehicle and has to be recharged from an external power source. • Hydrogen Fuel Cell Electric Vehicle—Uses an electrochemical reaction to combine hydrogen fuel and oxygen to produce electricity to propel the vehicle, with water being the other byproduct of the reaction. • Plug-in Hybrid Electric Vehicle—Uses a battery that can be recharged by plugging into an external power source, but also has an internal combustion engine—typically powered by gasoline—that can be used when the battery runs out of power. While these vehicles produce tailpipe emissions when the internal combustion engine is used, they sometimes are referred to as ZEVs because they can be powered by a battery for a short distance. For the purposes of this report, we consider plug-in hybrid electric vehicles as a type of ZEV because they are currently included in most state programs intended to increase ZEV adoption. www.lao.ca.gov 7 AN LAO REPORT The most recent Scoping Plan, which CARB Scoping Plan Assumes Most of California’s adopted in December 2022, included three major Vehicles Will Transition to ZEVs Over the changes needed within the transportation sector Coming Decades. Figure 3 highlights the to meet the state’s GHG reduction goals: (1) ensure assumptions the Scoping Plan makes regarding that 100 percent of new light-duty vehicle sales are the state’s transition to ZEVs over the coming ZEVs by 2035, (2) ensure that 100 percent of new years. Specifically, the plan assumes the overall medium- and heavy-duty vehicle sales are ZEVs fleet of vehicles driven in the state will transition by 2040, and (3) ensure that per capita VMT for from 97 percent conventional vehicles in 2022 light-duty vehicles is limited to 25 percent below to 85 percent ZEVs in 2045. The plan assumes the 2019 level by 2030 and 30 percent below that this transition will be phased in at a steady level by 2045. (While the Scoping Plan identifies and aggressive pace, with the majority of the and models the annual changes needed to achieve fleet consisting of ZEVs by 2037. As noted, the state’s GHG reduction goals, it does not this scenario is based on the changes CARB specify which policies will achieve those outcomes. anticipates are needed to achieve the state’s GHG We discuss this shortcoming in our January 2023 goals. The envisioned transition will be aided by report, Assessing California’s Climate Policies— implementation of the recent Advanced Clean The 2022 Scoping Plan Update. The Advanced Cars II and Advanced Clean Fleet regulations, but Clean Cars II and Advanced Clean Fleets may also require other unspecified policy changes regulations mentioned in the previous section were to help encourage the intended outcomes. As adopted after the development of the 2022 Scoping shown in the figure, the Scoping Plan assumes a Plan and will help the state make progress towards notably more rapid ZEV transition compared to the its intended outcomes.) As a comparison, the plan’s Reference Scenario, which does not incorporate Reference Scenario reflects a baseline projection new policy changes beyond those in place in early that assumes current policies and practices that 2022 and assumes conventional vehicles will still were in place in early 2022 continue without further make up 65 percent of the cars, trucks, and buses updates. As such, the Reference Scenario does not on California’s roads in 2045. incorporate projected impacts from the Advanced Clean Cars II or Advanced Clean Fleets regulations that CARB subsequently adopted. Figure 3 Scoping Plan Assumes ZEVs Will Make Up Majority of State's Vehicle Fleet by 2037 Scoping Plan Scenario Reference Scenario 100% Medium- and Heavy-Duty ZEVs Medium- and Heavy-Duty ZEVs Conventional Medium- and Heavy-Duty Vehiclesª Conventional Medium- and Heavy-Duty Vehiclesª 90 80 Light-Duty ZEVs 70 Light-Duty ZEVs 60 50 40 Conventional Light-Duty Vehicles Conventional Light-Duty Vehicles 30 20 10 2020 2025 2030 2035 2040 2045 2020 2025 2030 2035 2040 2045 a Includes natural gas vehicles. ZEVs = zero-emission vehicles. 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Major State Transportation per gallon, while the diesel excise tax is set Funding Sources and Programs at 44.1 cents per gallon. Rates for both taxes are adjusted each July to account for inflation. The state’s transportation system consists of (The federal government also levies additional highways, local streets and roads, transit and fuel excise taxes, which for many years have rail systems, bicycle routes, and pedestrian been set at 18.4 cents per gallon for gasoline pathways. This system is supported by a number and 24.4 cents per gallon for diesel.) The state of state, local, and federal funding sources. also collects revenues from a 13 percent sales The state distributes its funds through a variety tax on diesel, with 10.5 percent dedicated of programs. This section discusses the state’s to state transportation programs. (The transportation revenue sources, programs, and remaining amount is used for other state and funding allocations. local purposes.) Transportation Supported by State, Local, • Vehicle Fees. The state collects three major and Federal Sources. Public funding for vehicle fees to support its transportation California’s transportation system comes from system: the transportation improvement fee numerous sources. Historically, about one-third (TIF), weight fees, and the road improvement of total transportation funding has come from fee (RIF). (Certain other state vehicle fees— state sources. Local sources—such as local sales such as vehicle registration and driver’s tax revenues, transit fares, and city and county license fees—are used to support the general funds—have made up slightly less than half California Highway Patrol and the Department of total funding. The remaining amount (roughly of Motor Vehicles.) TIF is an annual registration one-fifth of total funding in most years) comes fee that varies based on the market value of a from federal sources that are provided to the state vehicle, while RIF is an annual registration fee or directly to local governments. (These trends charged to battery-electric and hydrogen fuel have fluctuated some in recent years due to the cell electric vehicles that are model year 2020 impacts of the pandemic, additional federal funds or later. (RIF is not charged for plug-in hybrid provided through the Infrastructure Investment and electric vehicles.) Both fees are adjusted each Jobs Act and various pandemic relief packages, January for inflation. Weight fees are annual and augmentations provided to transportation registration fees charged to commercial programs in recent state budgets.) In 2023-24, we vehicles based on their weight. Weight fees estimate that public funding for transportation in are not adjusted for inflation. California from all sources will total over $40 billion. Figure 4 State Transportation Revenues State Transportation Funding Is Supported by Primarily Come From Various Several Fuel Taxes and Vehicle Fees Fuel Taxes and Vehicle Fees. As shown in Figure 4, state funding for 2023-24 transportation comes from six different Estimated Revenues fuel taxes and vehicle fees that are Rate (In Billions) dedicated to specific purposes. Fuel Taxes As shown in the figure, funding Gasoline excise tax 57.9 centsa $7.8 from these sources is estimated to Diesel excise tax 44.1 centsa 1.4 total $14.2 billion in 2023-24. These Diesel sales tax 13 percentb 1.3 consist of: Vehicle Feesc Transportation improvement fee $29 to $206d $2.3 • Fuel Taxes. The state collects Weight fees $8 to $2,064 1.3 excise taxes on gasoline and Road improvement fee $108d 0.1 diesel. In 2023-24, the gasoline Total $14.2 excise tax is set at 57.9 cents a Per gallon. b 10.5 percent is dedicated to transportation purposes. c Per vehicle per year. d Rate as of January 2023. Will be adjusted for inflation in January 2024. www.lao.ca.gov 9 AN LAO REPORT In addition to these taxes and fees, each year California’s Transportation System Is the state continuously appropriates a portion of Supported by Various State Programs. As shown its cap-and-trade auction revenues through the in Figure 5 and described in more detail below, the Greenhouse Gas Reduction Fund (GGRF) to several state supports its transportation system through transportation programs. (The cap-and-trade several major state programs that fund various program sets a declining statewide annual cap on types of infrastructure and activities. (Figure 5 GHG emissions. Regulated entities can comply displays ongoing funding provided to transportation with this requirement by either reducing emissions programs from state fuel taxes, vehicle fees, and or purchasing allowances at quarterly auctions GGRF and does not include the one-time funding that generate GGRF revenues.) In 2023-24, the augmentations provided to transportation programs amount of continuously appropriated cap-and-trade from recent state budgets.) In most cases, auction revenues provided to transportation is these programs support transportation projects estimated to be $1.4 billion. Moreover, recent state and activities in conjunction with federal- and budgets have provided significant limited-term locally-funded programs. augmentations for transportation—mostly from • Highways. The California Department of the General Fund—including $10.9 billion over a Transportation (Caltrans) is responsible five-year period approved as part of the 2022-23 for maintaining and rehabilitating the budget package. The 2023-24 budget package state highway system, which includes included an additional $1.1 billion over a four-year about 52,000 lane miles of highways, period to support transit agencies in addressing 13,000 bridges, and numerous other projected operational funding shortfalls, purchasing transportation assets such as culverts. ZEVs, and installing ZEV-related infrastructure. The department does this through the Highway Maintenance Program, which Figure 5 Overview of State’s Major Transportation Programs (In Billions) 2023-24 State Program Description Funding State Highways and Local Streets and Roads Highway Maintenance and SHOPP Supports Caltrans’ maintenance and rehabilitation work on the state highway $5.7a system. Local streets and roadsb Supports projects on local streets and roads. 3.4 Transit and Rail State Transit Assistanceb Supports transit operations and capital projects. $1.0 Transit and Intercity Rail Capitalc Supports transit and rail projects that reduce GHG emissions and congestion. 0.6 Low Carbon Transit Operationsb Supports transit operations and capital projects that reduce GHG emissions. 0.2 State of Good Repairb Supports transit maintenance, rehabilitation, and capital projects. 0.1 State Rail Assistanceb Supports rail operations and capital projects. 0.1 Multimodald State Transportation Improvementb Supports capacity improvement projects. $0.6 Trade Corridor Enhancementc Supports projects on corridors with high volume of freight movement. 0.4 Solutions for Congested Corridorsc Supports projects on highly traveled and congested corridors. 0.3 Local Partnershipb,c Supports projects in jurisdictions with local taxes and fees dedicated to 0.2 transportation. Active Transportationc Supports projects that increase walking and biking. 0.1 a Includes funding to support Caltrans' administrative programs, such as project planning and general administration. b Funding allocated on a formula basis. c Funding allocated on a competitive basis. d Programs are eligible to support transportation improvements across various modes, such as highways, local streets and roads, transit, and rail. SHOPP = State Highway Operation and Protection Program; Caltrans = California Department of Transportation; and GHG = greenhouse gas. 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT supports corrective and preventative Funding for State Transportation Programs maintenance activities, and the State Highway Based Largely on Statutory Formulas. The state Operation and Protection Program, which allocates funding from its fuel taxes and vehicle supports capital projects that rehabilitate and fees to different transportation programs and reconstruct the state highway system. accounts through statutory formulas. (The • Local Streets and Roads. California contains California Constitution includes restrictions that about 330,000 lane miles of local streets and require that these taxes and fees be used for roads. The state’s 58 counties and 482 cities specific transportation purposes.) These formulas own and maintain these assets, as well as largely distribute funding based on established roughly 12,000 locally-owned bridges and percentages, but in some cases, statute sets other related roadway infrastructure. The aside fixed dollar amounts for certain programs. state distributes a portion of its transportation Statutory allocations vary by fund source, revenues to cities and counties to support with some supporting specific programs and local streets and roads. activities. Figure 6 on the next page provides a simplified overview of how the state allocates • Transit and Rail. California contains over its transportation funding. As shown, the state 200 transit agencies which deliver services to uses most of the revenues from its fuel taxes and the public through buses, trains, ferries, and vehicle fees to support highways (maintenance and paratransit vans. Transit systems generally are rehabilitation) and local streets and roads, with a owned and operated by local governments. smaller amount supporting transit and multimodal The state provides support for transit through programs. Notably, all of the revenues collected several formula programs. Additionally, the from the diesel sales tax are used to support state provides competitive funding for capital transit and rail programs, while all of the collected improvements through the Transit and Intercity revenues from weight fees currently are used to Rail Capital Program. The state also is in offset a portion of the debt service costs on past the process of constructing a high-speed voter-approved transportation bonds. As noted rail line, largely supported by GGRF and above, the state also continuously appropriates a voter-approved state bonds. portion of its cap-and-trade auction revenues to • Multimodal. The state also operates several transportation programs. These funds are allocated formula and competitive programs that on a formula basis to transit and rail programs and support transportation improvements across the state’s high-speed rail project. various modes. For instance, the State Transportation Improvement Program provides formula funding to Caltrans and counties for capacity improvements on highways, local streets and roads, and transit systems. www.lao.ca.gov 11 AN LAO REPORT Figure 6 Transportation Revenues Are Allocated to Various Programs Based on Formulas 2023-24 Gasoline Excise Taxb ($7.8 billion) Cap-and-Trade Transportation Road R e A v u e c n t u io e n sª Die ($ s 1 e . l 3 S b a i l l e lio s n T ) ax Imp ($ ro 2 v .3 e m bi e lli n o t n F ) ee Im ($ p 8 r 2 o F m v e e e i m llio e n n ) t Die ($ se 1 l . 4 E x b c il i l s io e n T ) ax W ($ e 1 i . g 3 h b t i F lli e o e n s ) ($1.4 billion) High-Speed ($ R 9 a 0 il 0 P m ro i j l e lio c n t ) Ra T i r l a P n r s o i g t r a a n m d sc ( M $ P 1 u r . o l 6 t g i m b ra i o l m li d o s a n l ) Local Streets and Roads T D r ( a $ e n b 1 s . t 3 p S o b e r i r t l a v lio i t c i n o e ) n e ($2.3 billion) Caltrans’ Highway Maintenance ($3.4 billion) and Rehabilitation Programsd ($5.7 billion) a Only displays cap-and-trade auction revenues that are continuously appropriated to transportation. b Not displayed is about $400 million in funding that is distributed to non-transportation programs to reflect gasoline excise tax revenues collected from non-roadway vehicles, such as off-highway and agricultural vehicles. c Includes funding provided to Caltrans for activities related to supporting intercity rail. d Includes funding to support Caltrans’ administrative programs, such as project planning and general administration. e Weight fee revenues currently are used to offset a portion of the debt service costs on past voter-approved transportation bonds. Caltrans = California Department of Transportation. CALIFORNIA’S CLIMATE POLICIES WILL HAVE LONG-TERM IMPACTS ON STATE TRANSPORTATION FUNDING AND PROGRAMS Given the magnitude of emissions associated the state’s GHG reduction goals might impact the with transportation, reducing GHGs from this state’s current level and sources of support for its sector will be a key component of the state transportation system. meeting its overall climate goals. Accordingly, as State Transportation Revenues discussed above, the state has implemented a variety of programs and regulations to achieve Projected to Decline Significantly these objectives, and the Scoping Plan envisions As described, the state has numerous goals additional actions. While these steps are intended and plans that, once implemented, ultimately will to have climate benefits, they also will have resulting result in a reduction in Californians’ gasoline and impacts on state transportation revenues and diesel fuel consumption. These include a statewide programs. In this section, we discuss how pursuing 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT transition to greater reliance on ZEVs (as highlighted projections on two different scenarios—the Scoping in Figure 3) and planned reductions in statewide Plan Scenario, which that puts the state on the path per capita VMT for light-duty vehicles. Below, we to meet its GHG reduction goals, and the Reference discuss estimates for how these anticipated trends Scenario, which serves as a baseline comparison will impact the revenue sources that currently for what revenue trends would be absent recent support the state’s transportation programs. and planned GHG reduction policies. We express As described in the nearby box, we base our all estimates in inflation-adjusted dollars. Forecasting Methodology Estimates Reflect Two Scenarios. In this report, we present estimated state transportation revenues from 2023-24 to 2034-35 under two different scenarios based on data from the Scoping Plan as well as other state and federal resources. We then utilize our revenue projections under both scenarios to estimate funding levels for state transportation programs over the same period. We express all estimates in inflation-adjusted dollars. The two scenarios underlying our revenue estimates are: • Scoping Plan Scenario. This reflects modeling assumptions from the California Air Resources Board’s (CARB’s) 2022 Scoping Plan, which assumes the state takes actions to implement the following: (1) ensure that 100 percent of new light-duty vehicle sales are zero-emission vehicles (ZEVs) by 2035, (2) ensure that 100 percent of new medium- and heavy-duty vehicle sales are ZEVs by 2040, and (3) ensure that per capita vehicle miles traveled (VMT) for light-duty vehicles is limited to 25 percent below the 2019 level by 2030 and 30 percent below that level by 2045. In some aspects, the state is already on a path towards this scenario given that it has recently adopted regulations that align with or are more aggressive than the ZEV-related changes included in Scoping Plan. • Reference Scenario. This reflects modeling assumptions made under the Reference Scenario included in the Scoping Plan. It is important to note that the state is no longer on a path towards this scenario given recent regulations that will instigate a more rapid transition to ZEVs. However, this scenario provides a baseline comparison to understand how achieving the state’s greenhouse gas (GHG) reduction goals under the Scoping Plan Scenario are likely to impact state transportation revenues and programs compared to if more current policies—as of early 2022—were maintained. Timing of Changes to Future Transportation Revenues Subject to Considerable Uncertainty. This report is intended to provide a general trajectory of state transportation revenues under the Scoping Plan’s pathway to achieving the state’s GHG reduction goals. As noted in our 2022 report, Assessing California’s Climate Policies—The 2022 Scoping Plan Update, the plan lacks key details on how the state can align itself with the pathway identified. In many cases, the plan’s estimated reductions are driven primarily by assumptions developed by CARB, without a specific strategy for how those assumed outcomes might be achieved. For instance, the Scoping Plan does not indicate what specific policies the state would need to implement to reduce per capita VMT for light-duty vehicles. Furthermore, while the state has implemented certain ZEV sales regulations that align with the Scoping Plan’s goals, the actual rate at which the state’s vehicle fleet will transition to ZEVs will depend on various factors, such as consumer preferences, the availability of financial incentives, and the number of ZEV charging and refueling stations that are installed over the coming years. As such, decreases to state transportation revenues could materialize more slowly or more rapidly than the forecast trends we model in this report. www.lao.ca.gov 13 AN LAO REPORT As we discuss below, the recent climate policies are Fuel Tax Revenues Decline as Fuel Efficiency not the only factors affecting revenue trends, so the and ZEV Adoption Increase. Figure 7 models Reference Scenario is an important comparison to anticipated revenue trends for the three key fuel show the true estimated impacts of these policies. taxes that support state transportation programs— For example, conventional light-duty vehicles the gasoline excise tax, the diesel excise tax, and generally are becoming more fuel efficient, which the diesel sales tax. As shown, revenues from all would reduce gasoline consumption even without three taxes experience declines under the Scoping the recently adopted state ZEV sales requirements. Plan Scenario, which is the state’s intended When and how transportation revenues will be pathway. Specifically, compared to 2023-24, by affected is dependent on a number of factors— 2034-35 gasoline excise tax revenues decrease by including how quickly the state’s fleet of vehicles $5 billion (64 percent), diesel excise tax revenues transitions to ZEVs—and is therefore subject to decrease by about $290 million (20 percent), considerable uncertainty. However, if the state and diesel sales tax revenues decrease by about continues with its GHG reduction and ZEV adoption $420 million (32 percent). The trends under this strategies, the overall trajectory we display here scenario are all driven by assumptions that vehicles will occur in the coming years. (We note that across the state will consume less gasoline and similar trends are occurring nationwide—though diesel due to increasing fuel efficiency and ZEV likely not at the same rate as California—which adoption. (In addition to consumption trends, will also impact federal gasoline and diesel excise diesel sales tax revenues also are impacted by tax revenues. This in turn could affect the amount forecasted prices.) However, gasoline excise tax of federal funds provided to the state and local revenues decline at a comparatively steeper rate governments. Similar to California, these trends due to several factors. First, as displayed earlier in also will impact the amount of revenues other states Figure 3, ZEV adoption over the forecasted period collect from their own individual taxes on gasoline is significantly higher in the light-duty vehicle sector and diesel.) (the primary consumer of gasoline) when compared to the medium- and heavy-duty vehicle sectors (the primary consumers of diesel). The higher Figure 7 Fuel Tax Revenues Decline as Fuel Efficiency and ZEV Adoption Increase Inflation-Adjusted Dollars (In Billions) Gasoline Excise Tax Diesel Taxes $9 $1.8 Reference Scenario 8 1.6 Excise Tax Reference Scenario 7 1.4 6 1.2 Sales Tax Scoping Plan Scenario 5 1.0 Scoping Plan Scenario 4 0.8 3 0.6 2 0.4 1 0.2 2023-24 2025-26 2027-28 2029-30 2031-32 2033-34 2023-24 2025-26 2027-28 2029-30 2031-32 2033-34 ZEV = zero-emission vehicle. 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT percentage of ZEVs within the light-duty vehicle RIF Revenues Will Increase but Not Fully sector therefore leads to larger declines in gasoline Offset Declines in Fuel Tax Revenues. As consumption. Second, consistent with the Scoping discussed above, the state levies an annual Plan assumptions, this scenario assumes that the registration fee known as RIF on all battery-electric state is able to reduce per capita VMT for light-duty and hydrogen fuel cell electric vehicles that are vehicles, which will lead to further declines in model year 2020 or later. This fee was adopted gasoline consumption. in part to require that owners of ZEVs contribute The figure shows a less consistent revenue trend to state transportation needs in lieu of fuel taxes. for the three taxes under the baseline Reference We do anticipate that RIF revenues will increase Scenario. Specifically, gasoline excise tax revenues as ZEV adoption expands. Specifically, we project still would decline (albeit at a less steep rate than that under the Scoping Plan Scenario, RIF revenues the Scoping Plan Scenario) due to increased fuel will total $1.1 billion by 2034-35, an increase of efficiency and an assumption that more Californians $1 billion compared to current levels. (We estimate would opt to purchase ZEVs even without the that RIF revenues would total $400 million under state aligning itself with the actions and changes the Reference Scenario by 2034-35.) However, included in the Scoping Plan. The trends for diesel as highlighted in Figure 8, RIF does not generate excise and sales tax revenues are more divergent, enough revenue to offset overall declines in fuel tax in that the Reference Scenario estimates the state revenues under either scenario. This is primarily would see an increase in revenues. This is due due to two reasons. First, as more of the vehicles to the assumption that medium- and heavy-duty on California’s roads become ZEVs, RIF is only vehicles likely would experience minimal ZEV able to make up for a portion of the lost fuel tax adoption, along with increasing per capita VMT due revenues. This issue can be observed through the to an increasing demand for transporting goods (an average charges that owners of these vehicles pay. assumption included under both scenarios). These For instance, an owner of an average conventional trends would result in gradual increases in diesel light-duty vehicle pays around $280 a year in consumption over the coming years. gasoline excise taxes, while an owner of a light-duty battery-electric vehicle pays only $108 through RIF. Overall Transportation Revenues Projected to Furthermore, RIF is not levied on plug-in hybrid Decline Significantly. Figure 8 displays combined electric vehicles, despite these vehicles being revenue projections for all of the state’s taxes and fees that support transportation programs across the next decade. The figure includes not only the three fuel taxes shown in Figure 7 but also Figure 8 RIF, TIF, and weight fee revenues. As shown, we Overall Transportation Revenues estimate total revenues will decrease under both Projected to Decline Significantly scenarios, with notably steeper declines under the Inflation-Adjusted Dollars (In Billions) Scoping Plan scenario due to the anticipated drop in fuel consumption discussed above. Specifically, $16 under the state’s climate strategy, we project net 14 transportation revenues will decline by $4.4 billion Reference Scenario 12 (31 percent) by 2034-35. (The decline in fuel tax revenues highlighted above are partially but not fully 10 Scoping Plan Scenario offset by increases in revenues from RIF—which we 8 discuss further below—and TIF.) While we estimate 6 total revenues would decline even under the 4 Reference Scenario (by $1.9 billion, or 13 percent), 2 the state’s recently adopted and planned policies will expedite these underlying trends significantly. 2023-24 2025-26 2027-28 2029-30 2031-32 2033-34 www.lao.ca.gov 15 AN LAO REPORT able to drive some portion of their total mileage cities and counties for local streets and roads will using only electricity (and therefore consuming also experience significant reductions under this and paying taxes on significantly less gasoline). scenario, decreasing by $900 million (26 percent) Second, while RIF partially offsets some lost fuel by 2034-35. While the other programs displayed tax revenues from increased ZEV adoption, it does in the figure will experience smaller reductions not address declining revenues resulting from fuel in terms of total dollars, it is important to note efficiency gains across conventional vehicles. that they are more reliant on fuel tax revenues. This makes declines in fuel taxes proportionally Revenue Declines Will Impact Funding more impactful for these programs over the long for Transportation Programs run. For instance, the State Transit Assistance State Programs Supported by Fuel Tax program, which is solely supported by diesel sales Revenues Will Be Impacted Over the Long Run. tax revenues, will experience funding declines of Figure 9 shows our estimates (in inflation-adjusted about $300 million by 2034-35 under the Scoping dollars) for how the revenue projections displayed Plan Scenario—a loss of roughly one-third of its in Figure 8 will affect funding for the state’s total funding. Consistent with the revenue trends transportation programs over the next eleven years. discussed above, some declines likely would In terms of total funding reductions, Caltrans’ occur even absent the state’s climate policies highway maintenance and rehabilitation programs (as displayed under the Reference Scenario), but will be the most heavily impacted under the further transitions away from gasoline and diesel— Scoping Plan Scenario, decreasing by $1.5 billion and the associated tax revenues their consumption (26 percent) by 2034-35. Funding provided to generates—will exacerbate these impacts. Figure 9 Several State Transportation Programs Will Be Impacted by Declining Revenues Inflation-Adjusted Dollars (In Billions) $6 5 2023-24 Base 2034-35 Reference Scenario 2034-35 Scoping Plan Scenario 4 3 2 1 Caltrans’ Highway Maintenance Local Streets and Roads State Transit Assistance State Transportation Trade Corridor State Rail Assistance and Rehabilitation Programsª Improvement Program Enhancement Program ª Also includes funding to support Caltrans’ administrative programs, such as project planning and general administration. Caltrans = California Department of Transportation. 16 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT The figure excludes certain transportation programs heavily on state resources—will experience an for which funding will not be directly impacted by overall reduction in the number of projects the the changes modeled in this report. This includes department can complete on the state highway programs that receive an amount specified in system. This likely will result in a decline in highway statute (such as the Active Transportation Program conditions for drivers. In cases where programs and Solutions for Congested Corridors Program) as distribute funding to local governments, such as well as programs that are funded with GGRF (such for local streets and roads and the State Transit as the Low Carbon Transit Operations Program and Assistance program, the magnitude of the impacts Transit and Intercity Rail Capital Program). will vary across jurisdictions. This is because Decreased State Funding Will Result in Fewer certain local governments rely less heavily on state Transportation Projects and Activities, With funding to support their transportation activities. Specific Impacts Varying by Program. Absent For instance, some counties have voter-approved a funding backfill from alternative sources or sales tax measures that dedicate funding to significant changes in how the Legislature chooses transportation purposes, such as local streets and to allocate remaining funds, the estimated funding roads and/or transit, meaning state funds make reductions will result in programs having less up a smaller share of their overall programmatic capacity to support state and local transportation support budgets. These areas of the state still will projects and activities. This does not mean that experience net losses in funding—and, therefore, calls for expenditures will decrease at the same likely reduced levels of service or fewer projects— rate as funding declines, however. In fact, demands but still would have another source of more stable for transportation spending on maintenance funding upon which to rely. In contrast, jurisdictions and capital projects likely will increase in the that historically have been more dependent on state coming years due to causes such as impacts funding for their local efforts will experience greater from climate change. The exact impacts on impacts across their transportation systems, likely specific programs will depend on several factors, resulting in reduced services and/or poorer road including the magnitude of the estimated funding conditions for their residents. To mitigate impacts reductions and the degree to which that program on state and local programs, the Legislature could or activity relies on state funds as compared to consider alternative funding sources to partially other sources. For instance, Caltrans’ highway or fully backfill the lost fuel tax revenues, as we maintenance and rehabilitation programs— discuss next. which face significant funding declines and rely OPTIONS TO ADDRESS APPROACHING TRANSPORTATION FUNDING GAP In light of the above forecasted trend, the Key Considerations for Weighing Various Legislature likely will want to start planning and Options. We identify four key criteria the Legislature weighing various options to address the anticipated can use to help guide its evaluation of options for drop in state transportation revenues over the addressing declining state transportation revenues: coming decades. This section provides an overview • “User-Pays” Principle. Are the costs of the key criteria the Legislature could use in of maintaining and improving the state’s considering alternative transportation funding transportation system paid by those who use approaches, as well as a discussion of some of the and benefit from the system? key options—including associated trade-offs—for • Equity. How are the impacts distributed addressing the forthcoming funding gap. amongst various groups, such as by income level and/or geography? www.lao.ca.gov 17 AN LAO REPORT • Ease of Implementation. Are there significant categories of options the Legislature could consider state costs associated with implementation? to address the anticipated decline in historical How complicated would the option be to state funding sources for transportation. These implement for the state and the public? include: (1) increasing existing fuel taxes and vehicle • Revenue Stability and Sustainability. fees, (2) shifting transportation costs to other fund Are the additional revenues sustainable sources, (3) reducing and reprioritizing spending over the long run? Does this option address for transportation programs, and (4) generating the structural fuel tax funding shortfall revenues from new transportation-related charges. resulting from increasing fuel efficiency and Below, we analyze the benefits and trade-offs of ZEV adoption? these options based on the above criteria, which we also summarize in Figure 10. These options are not Legislature Has Several Options for necessarily mutually exclusive; the Legislature could Funding Transportation but Each Comes consider a combination of actions over the coming With Trade-Offs. We have identified four broad Figure 10 Options to Address Approaching Transportation Funding Gap Options Key Trade-Offs to Consider Increase Existing Fuel Taxes and Vehicle Fees Increase Existing Fuel Taxes • Generally linked to road usage, but varies based on fuel efficiency. • Larger relative impact on lower-income households who tend to drive less fuel-efficient vehicles. • Relatively easy to implement. • Additional revenues raised would decline over time due to continued increases in fuel efficiency and ZEV adoption. Increase Existing Vehicle • While not linked to road usage, does target vehicle owners—who likely use and benefit from the Fees state’s transportation system. • Larger relative impact on lower-income households, but could be mitigated to some extent based on how increases are implemented. • Additional revenues raised would not automatically track with fuel tax revenue declines and would require very significant increases to keep pace. Shift Transportation Costs to Other Fund Sources Use General Fund or • Not linked to road usage. Existing Special Funds for • Equity considerations would depend on the source of the funding. Transportation • Would need to weigh against other, non-transportation state expenditure priorities. • Would not be linked to rate of revenue declines from increases in fuel efficiency and ZEV adoption, meaning additional amounts would be needed over time. Reduce Spending on Transportation Programs Reduce and Reprioritize • Would not require the state to increase taxes and fees or redirect funding from other sources. Transportation Spending • Likely would have negative impacts on the condition and performance of the state’s transportation system. • Some local governments could take local actions to offset losses in state funding, but likely not all. Adopt New Transportation-Related Charges Implement Road Charge • Directly linked to road usage. • Larger relative impact on lower-income households, but could offset existing disproportionate impacts related to average vehicle fuel efficiency across income groups. • Significant implementation and administrative costs. • Would address revenue declines from increases in fuel efficiency and ZEV adoption. Implement New Taxes on • Generally linked to road usage. Alternative Fuels • Larger relative impact on lower-income households, particularly if focused on public charging locations. • Poses unique implementation challenges, such as taxing the electricity used to charge vehicles at home. • Could address revenue declines from shift to ZEVs, but not declines from increases in fuel efficiency. ZEV = Zero-emission vehicle. 18 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT years. For example, it could consider adopting a efficiency and ZEV adoption rates increase in the moderate increase to vehicle fees to help “buy time” coming years. As such, while raising existing fuel and avoid major impacts from revenue declines over taxes could help slow the trajectory of anticipated the next few years while it takes steps to develop revenue losses, the fact that the state’s policies and implement a more permanent (and potentially are requiring a transition away from gasoline complicated) longer-term solution, such as a and diesel make this strategy infeasible as a road charge. permanent solution. Increase Existing Vehicle Fees. The Legislature Increase Existing Fuel Taxes could increase existing vehicle fees, which would be and Vehicle Fees similarly easy to implement. This approach would Increase Existing Fuel Taxes. The Legislature somewhat align with the user-pays principle since could increase existing fuel taxes to offset declining the increases would impact vehicle owners who state transportation revenues. Such an approach likely use and benefit from the state’s transportation would be relatively easy to implement in that system. However, in contrast to fuel taxes, vehicle it continues existing charges, just at a higher fees are not closely tied to road usage because rate. Increasing fuel taxes would be consistent vehicle owners pay the same annual fee regardless with the state’s historic practice of generating of the amount they drive. As such, relying more transportation revenues through the user-pays heavily on revenues from such fees would represent principle, whereby the costs of maintaining and a shift in how the state has historically funded improving the state’s transportation system are transportation programs and activities. Increasing paid by those who use and benefit from the system. vehicle fees also could raise equity considerations In the case of fuel taxes, an individual’s road usage given that the increases would impose a larger is measured based on the amount on gasoline relative burden on lower-income households if and diesel consumed. However, in examining this they were applied uniformly regardless of income. option, the Legislature will also want to consider This could be offset to a certain extent depending how greater variabilities in fuel efficiency have— on how the increases are structured. For instance, and will continue to—diminish the link between increases to TIF could avoid some of these adverse fuel consumption and road usage. For instance, impacts by targeting vehicles above a specific owners of newer conventional vehicles pay less value. To achieve a similar outcome, the state also per mile when compared to owners of older could increase existing vehicle license fees—which vehicles. Increasing fuel taxes also raises equity also are based on the value of a vehicle—and direct considerations given that the increases would the additional funding to support transportation. impose a larger relative burden on lower-income (Revenues collected from existing vehicle license households. This is because the increase would fees are not currently used for state transportation be applied uniformly regardless of income—so programs and therefore are not discussed in detail responding to an increased charge of 10 cents per in this report.) As compared to raising fuel taxes, gallon, for example, would require dedicating a increasing vehicle fees is more likely to provide larger proportional share of monthly expenditures stable funding over the long run since revenues are for a lower-earning household as compared to based on the number of vehicles, which—unlike fuel households with more resources upon which to consumption—is not expected to decline over time. draw. Furthermore, these impacts could become Yet while there could be some predictability and more regressive over time if higher-income stability in the revenues raised by increasing vehicle households continue to own a disproportionate fees, this source is not directly linked to changes share of fuel-efficient vehicles and ZEVs. While in fuel tax revenues. As such, additional vehicle fee increasing fuel taxes could provide the state increases likely would be needed over time to keep with some additional funding in the near term, pace with escalating declines in fuel tax revenues. this approach is unlikely to be sustainable on a Such an approach likely would result in extremely longer-term basis. This is because total funding high fees over time. still would continue to decline as vehicle fuel www.lao.ca.gov 19 AN LAO REPORT Shift Transportation Costs to from other sources could provide a stable source of Other Fund Sources additional funding for transportation, it likely would not be directly linked to the rate of decline for fuel Use General Fund or Existing Special Funds tax revenues. As such, additional funding likely for Transportation. The Legislature could offset would be needed from these sources over time as declining transportation revenues by shifting fuel tax revenues continue to decrease. costs to the General Fund or other special funds. This option would deviate from the user-pays Reduce Spending on principle and would represent a significant Transportation Programs shift in how the state historically has supported Reduce and Reprioritize Expenditures to transportation. However, there is some precedent Align Transportation Spending With Available for this approach in limited amounts, such as the Revenues. The Legislature also could choose to state providing a portion of GGRF revenues to reduce state transportation spending as revenues support transportation programs. Furthermore, decline over time. A benefit of this option is that a reasonable rationale exists for funding certain it would not require the state to increase taxes transportation costs from other sources in some and fees or redirect funding from other sources. cases. For instance, the state’s transportation However, given that statewide transportation needs system provides some broad-based benefits are unlikely to decrease over time, this option likely to both drivers and non-vehicle users—such would have negative impacts on the condition and as individuals and businesses that benefit from performance of the state’s transportation system. delivery services via roadways—which could justify In fact, needs are likely to increase over time due some associated General Fund expenditures. to climate change impacts such as sea-level rise General Fund support could be provided directly and flooding causing damage to and undermining or through paying the debt service on a potential existing transportation infrastructure. Additionally, new voter-approved general obligation bond. maintenance needs may be exacerbated by (While a general obligation bond could provide a additional road wear due to increasing vehicle significant infusion of funding for transportation weights, particularly as more of the state’s vehicle over a limited period of time, it would come with fleet transitions to ZEVs, which tend to be heavier unique considerations, such as increasing the total than conventional vehicles. The state also may cost of the associated projects due to additional need to make additional expenditures within the interest payments, as well as committing additional transportation sector to meet its goals of reducing future state resources to pay debt service over VMT, such as expanding transit services and biking several decades.) The Legislature could determine and walking infrastructure. The Legislature could the appropriate mix of these two strategies seek to manage the decline in revenues—at least based on the state’s fiscal condition and budget in part—by reprioritizing remaining funds on what it priorities. For example, it could ask voters to views to be the most critical activities. For example, approve a bond in years where a large up-front this could include focusing on operations and infusion of funding might be desired to achieve maintenance rather than new capital projects. economic stimulus, pursue specific high-priority Additionally, local governments could potentially transportation goals, or because other funding take actions to help offset declines in the state is not readily available. Both the justification for funding that currently supports local streets and and the equity considerations of shifting other roads and transit, such as by raising additional funding to transportation purposes would depend revenues or shifting local funding from other on the source and usage of that funding. A key purposes. However, not all regions of the state will consideration is that such a shift likely would be able to take these actions. mean reducing or limiting support for other state programs and priorities—particularly in years when the state does not have a budget surplus—which could raise difficult trade-offs. While shifting funds 20 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Adopt New collected through various reporting methods, such Transportation-Related Charges as odometer readings, vehicle plug-in devices, or in-vehicle telematics. The charge could be Implement a Road Charge. The Legislature applied based solely on miles driven, but also could could seek to offset declining revenues by incorporate other factors, such as vehicle weight enacting a new transportation charge based on or time of day. (Please see the nearby box for more the number of miles a particular vehicle drives. details on the state’s recent efforts to pilot a road A road charge, sometimes also referred to as a charge approach.) A road charge would align with mileage-based user charge or a VMT charge, would the user-pays principle since the amount owed levy a per-mile charge on all vehicles regardless would depend solely on road usage. From an equity of their fuel source. Mileage information could be perspective, a road charge would impose a larger State Has Undertaken Several Studies to Pilot Feasibility of a Road Charge In recent years, the state has conducted several pilot efforts—in some cases with the federal government and partners from other states—that have focused on studying various aspects of implementing a road charge: • Road Charge Pilot. Chapter 835 of 2014 (SB 1077, DeSaulnier) required the California State Transportation Agency (CalSTA) to test the feasibility of implementing a road charge. The pilot was completed in 2017. Results largely proved such a charge would be feasible, but the final report noted key areas of further research that were needed to ensure driver privacy and data security and to prevent fraud. • Regional Pilot. This federally-funded pilot study tested how to accommodate multiple sets of road charge requirements, processes, systems, and rates from across different states and/or jurisdictions. The pilot was conducted by Oregon and California—through the California Department of Transportation (Caltrans)—and was completed in 2021. Results indicated that a clearinghouse could be beneficial in supporting the interoperability of a road charge. • Four-Phase Demonstration Pilot. This federally-funded pilot tested the collection of a road charge through the following technologies: usage-based insurance, ridesharing, electric vehicle charging stations/pay-at-the-pump systems, and autonomous vehicles. The pilot was completed by Caltrans in 2022. Results indicated that there could be success in collecting a road charge from the technologies studied. • Public and Private Roads Pilot. This federally-funded pilot tested the ability of current global positioning system technologies to differentiate between public and private roads in a road charge system. Caltrans completed testing for this pilot in the fall of 2023 and expects to release a report on its final results in the summer of 2024. • Road Charge Revenue Collection Pilot. Chapter 308 of 2021 (SB 339, Wiener) requires CalSTA to conduct a road charge pilot study that collects payments from participants. The development of the pilot is currently underway, with implementation expected to begin in 2024. The legislation requires CalSTA to provide the Legislature with an interim report on its results by July 1, 2024 and a final report by December 31, 2026. In addition to the work being undertaken in California, other states have conducted or are in the process of conducting road charge pilot studies. Moreover, three states—Oregon, Utah, and Virginia—have active, voluntary road user charge programs. The U.S. Department of Transportation also is in the early stages of developing a national road charge pilot program. www.lao.ca.gov 21 AN LAO REPORT relative burden on lower-income households. This is Implement New Taxes on Alternative Fuels. because the charge would be applied uniformly The state could levy taxes on the consumption of regardless of income. Moreover, some studies alternative fuels such as hydrogen and electricity. have found that high housing costs have pushed This strategy would align with the user-pays higher proportions of lower-income households principle in a similar manner as current fuel taxes to live farther away from their workplaces and on gasoline and diesel. That is, an individual’s urban centers, resulting in comparatively longer road usage would be measured based on the commute distances (and correspondingly higher consumption of a specific fuel. While alternative fuel costs from both fuel consumption or a potential taxes would have the benefit of capturing additional road charge). However, some research suggests revenues from vehicles that use these fuels, that lower-income households would benefit from they do pose unique challenges in some cases. paying a road charge as compared to the existing For instance, levying taxes on the electricity used fuel tax structure given that this group tends to to charge vehicles at home—where most charging own less fuel-efficient vehicles. Implementing a occurs—would be a complex and costly task for the road charge would be a significant undertaking and state to undertake. This is because it would require the state likely would have to overcome a number the installation of metering technologies that are of potential challenges. These include privacy able to differentiate between electricity consumed and security concerns from the public around the by vehicles versus other household devices. From collection of mileage information. Additionally, an equity perspective, alternative transportation a road charge likely would require higher costs fuel taxes would impose a larger relative burden on to administer when compared to fuel taxes and lower-income households. This is because the tax vehicle fees. For instance, the gasoline excise tax is would be applied uniformly regardless of income. collected from a small number of fuel wholesalers Impacts to lower-income households also could and is relatively inexpensive to administer, costing be exacerbated in certain instances. For example, the state less than 1 percent of collected revenues. if implementation complications led the state to A road charge would involve collecting mileage only levy a tax on electricity consumed at public information—potentially via several different charging stations, the tax’s impact would be reporting options—and payments from the state’s concentrated on vehicle owners who do not have 27 million licensed drivers. Some studies suggest access to home charging. This could result in a that collection and enforcement costs associated disproportionate burden on renters, who generally with a road charge could range from 5 percent to have lower incomes on average. Alternative 13 percent of collected revenues. However, even fuel taxes would be able to generate additional with greater administrative costs, a road charge revenues and likely would grow over time as ZEV likely would yield more revenues over the long run adoption increases. Given that these taxes could when compared to fuel taxes given the continued be charged based on the consumption of electricity shift towards more fuel-efficient vehicles and ZEVs. and hydrogen, this option could address funding Because it could be charged on every vehicle declines related to increasing ZEV adoption over the regardless of fuel type, it could represent a viable long run. However, this approach would not track and sustainable long-term option throughout the with declines in fuel tax revenues associated with state’s fleet transition. increasing fuel efficiency for conventional vehicles that continue to be driven in the state. 22 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT NEXT STEPS The findings we highlight in this report lead state’s transportation system over the forthcoming to two primary conclusions: state transportation ten years, including a forecast of revenues and funding and programs will be significantly impacted potential funding shortfalls. The interim report by California’s climate policies; however, significant is due January 1, 2024, with a final report due uncertainty remains around when the resulting January 1, 2025 and every five years thereafter. funding declines will materialize. This leads us to The Legislature could use this existing report as a two overarching suggestions for next steps the tool to monitor revenue trends, perhaps modifying Legislature could consider taking to address the statute to require more frequent updates if it wanted anticipated funding shortfall. to track developments more closely. Continue to Monitor State Transportation Begin Developing a Long-Term Plan for Revenues and Programs. We recommend the How to Address Future Revenue Declines. We Legislature continue monitoring state transportation recommend the Legislature begin to develop a plan revenues and programs over the coming years. for how it will address impending declines in state Because the rate at which anticipated impacts transportation revenues. While the Legislature has occur will depend on various factors, how quickly several approaches with which it could respond, the funding shortfalls will materialize and when each comes with various benefits and trade-offs additional actions will be needed still are uncertain. that will need to be considered. Beginning to weigh It will therefore be important for the Legislature to these options now would better position the state continue to track this issue closely over the coming to act in the future when revenue declines become years—including the rate at which revenues are more significant. Developing this plan also could declining and how significantly program funding help identify what steps might need to be taken in levels are being affected—to help inform how and the near term. For instance, if the Legislature were when it might want to take additional steps. The to consider implementing a road charge, it would Legislature has a number of ways it could monitor want to understand what actions the state would state transportation revenues and programs. need to take to initiate this effort, such as potentially This could include holding legislative hearings or beginning implementation with a subset of vehicles having the administration report regularly to the in the state. The Legislature could develop such a Legislature. For example, through Chapter 508 plan in several ways, such as through a legislative of 2022 (SB 1121, Gonzalez) the Legislature task force; a blue-ribbon committee; or a state has directed the California Transportation department in coordination with representatives Commission to prepare a needs assessment from various state and local agencies, academia, of the costs to operate, maintain, and grow the and stakeholder groups. CONCLUSION The Legislature has established ambitious GHG Accordingly, as next steps we recommend the reduction goals to help mitigate the magnitude Legislature continue monitoring state transportation and impacts of climate change. Achieving these revenues and programs over the coming years goals will require significant adjustments within to keep track of how quickly these changes will the transportation sector, such as increasing materialize, while simultaneously beginning to the adoption of ZEVs and reducing VMT. These develop a long-term plan for how to address future changes will in turn have significant impacts on revenue declines. state transportation revenues and programs. www.lao.ca.gov 23 AN LAO REPORT LAO PUBLICATIONS This report 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. 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. 24 LEGISLATIVE ANALYST’S OFFICE