California’s Tax Burden:
State Taxes May Go Up Again in July, With $511 Million Gas Tax Increase Pending

Coming on the heels of a 0.25 percent statewide sales tax increase in January, another significant tax jolt will hit California taxpayers this summer. At its February 26 board meeting in Culver City, the State Board of Equalization is expected to approve an increase to the gas tax of 3.5 cents per gallon, effective July 1.

BOE statistics show that Californians purchased more than 14.6 billion gallons of gasoline last year, and if a similar amount continues to be purchased, the extra 3.5 cents per gallon will equate to a tax increase of more than $511 million over a 12-month period. (For diesel fuel, BOE staff recommends that the tax rate remain unchanged.)

The increase is on the BOE’s consent calendar, which means it is not scheduled to be discussed before the vote.

The “fuel tax swap” adopted by the Legislature and signed by Governor Jerry Brown in 2011 requires the BOE to set the gas tax rate annually to raise an amount of revenue that would have been generated under the prior law that imposed a tax of 18 cents per gallon, along with the state sales tax on gasoline. The new system was put in place in exchange for repealing the sales tax on gasoline.

However, the proposed rate is based on assumptions, so the issue is whether the assumptions are correct. If the BOE disagrees with the assumptions, it can adopt a lower or higher rate than proposed, but the board must adopt a rate by March 1.

According to BOE staff: “The calculation requires that staff develop a forecast of both consumption and price of MVF [motor vehicle fuel]. Staff has adopted the quarterly MVF consumption forecast prepared by the Department of Finance (DOF) for its January 10, 2013-14 budget proposal. Consumption of MVF changes relatively slowly in the short-term, and DOF’s forecast appears to be reasonable. … However, staff’s forecast of MVF prices incorporates data not available to DOF when its budget forecast was prepared. Specifically, the macroeconomic forecasting firm Global InSight’s outlook for gasoline prices indicates a very modest increase since the time that DOF prepared its forecast, and staff has incorporated this increase into its price forecast of MVF.”

Some observers questioned the use of DOF forecasts, noting that the department’s revenue estimate for the month of January was 39 percent off target.

It is not clear what impact Proposition 30’s sales tax increase has on the proposed gas tax rate increase. Revenue and Taxation Code Section 7360 (b)(2) reads: “For the 2011-12 fiscal year and each fiscal year thereafter, the board shall, on or before March 1 of the fiscal year immediately preceding the applicable fiscal year, adjust the rate in paragraph (1) in that matter as to generate an amount of revenue that will equal the amount of revenue loss attributable to the exemption provided by Section 6357.7, based on estimates made by the board, and that rate shall be effective during the state’s next fiscal year.”

The board’s action on the gas tax increase will come exactly one week before voters in the city of Los Angeles will decide the fate of a proposed 0.5 percent sales tax increase. The city’s sales tax is imposed on the sale of gasoline. If approved, combined with the gas tax increase before the board, this represents a significant increase in taxes on gasoline in Los Angeles, effective July 1. This may cause voters to think twice about voting for the city’s sales tax increase.

February 22, 2013
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