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The California Fuel Tax Swap
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    NTL-ECONOMICS AND FINANCE-Alternative Finance
  • Abstract:
    In early 2010, California faced another of its seemingly routine budget crises, this time mostly the result of outstanding debt due on state general obligation (GO) highway and rail bonds.2 For several years, the Legislature had been “diverting” gasoline sales tax revenues that had been earmarked for mass transportation purposes to pay debt service on those highway and rail bonds and for other transportation-related purposes to relieve the fiscal pressures on the state’s General Fund. That practice was, however, ruled invalid in the case of Shaw v. Chiang. In response, Governor Schwarzenegger declared a fiscal emergency and called the state Legislature into special session to propose a novel solution. To close a roughly $1 billion deficit, he recommended that the State exempt 6 percent of the sales taxes on gasoline and diesel fuel and replace foregone revenues with the proceeds of an increase in the motor fuel excise tax, that could legally be used to reimburse the state treasury for past and future transportation bond payments. As adopted, the legislation eliminated 6 percent of the gasoline sales tax, and substituted—or swapped—for it a variable per-gallon excise tax that would generate the same amount of revenue. At the same time, the legislation raised the sales tax on diesel fuel by 1.75 percentage points and lowered the diesel excise tax, which was also adjusted annually to maintain revenue neutrality. While this “Fuel Tax Swap” legislation was originally devised to relieve the General Fund by allowing fuel tax revenues to make payments due for general obligation bonds and other transportation-related costs, voter opposition forced the Legislature to revise and readopt these measures using an alternative source of transportation revenues—truck weight fees rather than fuel taxes—to meet the state’s debt obligations. Still, the new fuel tax provisions remain in effect and are having unexpected but significant repercussions on state transportation programs, particularly funding for mass transportation, such that Governor Brown recently proposed ending the “swap” altogether, raising the gasoline excise tax to 36 cents per gallon, and indexing it to the rate of inflation.
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