Author(s): Anne Brown, Mark Garret, Martin Wachs
California has historically utilized fuel excise and sales taxes for transportation funding. The former are flat-rate taxes charged on a per-gallon basis, while the latter are charges assessed as a percentage of the pre-tax sales price. Fuel excise taxes have historically been earmarked for transportation purposes, while fuel sales taxes have been divided between transit and general state outlays.
In the mid-2000s, soaring gas prices created a perception of excess revenue from the fuel sales tax, with many arguing that using all of this money on mass transit would be unwise in a recession, when so many other needs beckoned. The state began diverting fuel sales tax money previously earmarked for mass transit to pay debt from highway and rail bonds, as well as general services supported by the state. A state court, however, soon ruled that diverting transportation sales taxes to the General Fund was invalid. Therefore, the Governor proposed a “Fuel Tax Swap”; the state would reduce fuel sales tax by 6% and increase the fuel excise tax in hopes of generating the same amount of revenue, with the excise tax then being used to make these payments. Specifically, a portion of the excise tax would be adjusted annually to approximate the amount of money that the previous sales tax would have generated (which was itself determined by fuel prices).Download Policy Brief