Lower Gas Prices – A Welcome Relief…With A Catch

You may remember a few weeks ago when the price of gas here in California dropped to the low $2.00 range, before spiking back up to over $3.00.  Gas prices are off their record highs from a year ago, which has been a welcome relief for our household budgets.  A good thing, right? Not necessarily.  Like so many programs here in California, how our gas tax works is very complicated.  So let’s talk about the gas tax reality and what it all means to us in Placer County.

In California, every time you fill your tank at the gas pump you pay 18 cents per gallon for the State fuel tax and 18.4 cents per gallon for the Federal fuel tax.  These “excise taxes” do not vary no matter what the price of gas is.  Based upon the basic tenets of supply and demand, you would think with lower gas prices we should see an increase in gas consumption and therefore an increase in fuel tax revenue.  However, this is not so.

In 2002, California voters passed Proposition 42, which amended the State Constitution and began requiring the sales tax on gas and diesel fuel to be used for transportation purposes.  These purposes include highway, street, and road maintenance, as well as transit improvements.  This proposition had implications on Proposition 98, which established a minimum annual funding guarantee for K-14 education, and became a problem when the State began experiencing budget deficits.  To address this issue, in 2011 the State passed a “gas tax swap” that reclassified the sales tax so it would not trigger additional budget contributions to schools.

Today, instead of paying a sales tax on gasoline, you pay an “equivalent tax” that is calculated based on the previous year’s average gasoline cost.  As gas prices started dropping significantly in 2014, the equivalent tax you paid was still based on what would have been the sales tax on higher 2013 prices.  As of January 1, 2015, this equivalent tax is now based on the lower gas prices of 2014, which reduced transportation revenues.

If you are confused, you are not alone.  Lower gas prices can both increase and reduce transportation revenues – unfortunately, based upon recent projections, the push is much greater on the reduction side.  What’s more, these decreased sales tax equivalent revenues are not going into repairing our roads or dealing with our current needs.  Instead, they are going to pay the debt service on transportation bonds, including some passed as long as 25 years ago.

Nothing is simple when it comes to how our gas tax works.  For now, we just hope you are enjoying the little bit of relief on your wallet!