BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 70| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 70 Author: Senate Budget and Fiscal Review Committee Amended: 3/22/10 Vote: 21 PRIOR VOTES NOT RELEVANT SUBJECT : Budget Act of 2009: fuel tax swap SOURCE : Author DIGEST : Assembly Amendments deleted the Senate version of the bill relative to legislative intent. This bill now revises provisions of the fuel swap to recognize special users of fuel, such as purchasers of diesel fuel for rail or other off-road use. On March 4, the Legislature approved AB 6 x8, which is a revenue-neutral tax swap bill that lowered certain fuel taxes and raised others. For the typical consumer, there would be no change to fuel prices paid at the pump. However, certain fuel users enjoy tax breaks in current law, and due to these existing tax breaks, they would see a net increase in taxes under AB 6 x8. This bill assumes the Governor will sign AB 6 x8 and then amends statute to revise the tax provisions such that special users, such as railroads and purchasers of aviation gasoline, will not be adversely affected. This bill also makes other technical and clarifying changes requested by the Board of Equalization. ANALYSIS : Under current law, certain fuel consumers are CONTINUED SB 70 Page 2 exempt from excise taxes, others pay a reduced excise rate, and others are exempt from sales tax. Included are the following three groups: 1. Users of "dyed diesel fuel" - the excise tax on diesel fuel is intended for users of the highways system and excludes from the tax those that purchase fuel for off-road use. This would include diesel purchased for railroads, off-road construction equipment, farm equipment, etc. 2. School buses and transit buses - the excise tax on diesel fuel for these vehicles is only one cent per gallon (versus the base rate of 18 cents per gallon). 3. Users of aviation gasoline - aviation gasoline is defined in statute as "motor vehicle fuel" along with regular gasoline. Aviation gasoline is exempt from the sales tax, but pays the excise tax. This bill revises the tax provisions, so that the special fuel users would not see any negative tax impact. For example, the users of dyed diesel fuel would be exempt from the increase in the sales tax on diesel fuel, since they would not receive the compensating benefit of a reduction in the excise tax (because they are already exempt from the excise tax). This bill assumes AB 6 x8 is signed by the Governor and revises that statute to exempt special fuel users, as specified. The description below includes both the base provisions of AB 6 x8 and the new provisions. The changes made by SB 70, specifically, are underlined below. 1. Tax Swap: This bill lowers certain taxes and increases others, such that on net there is a small tax decrease annually through 2011-12. Thereafter, this bill is revenue neutral. Specifically, this bill: A. Exempts gasoline from the State 6.0 percent sales tax on July 1, 2010, which by itself would reduce tax revenue by $2.5 billion in 2010-11. B. Increases the excise tax on gasoline by 17.3 SB 70 Page 3 cents on July 1, 2010, which by itself would increase revenue by $2.5 billion in 2010-11. In 2011-12 and thereafter, the Board of Equalization (BOE) would adjust the excise rate to match what the sales tax on gasoline would otherwise provide. The BOE is also required to adjust the rate for any over, or under, collection of revenue in the prior fiscal year - this "true-up" mechanism ensures revenue neutrality will be maintained. Aviation gasoline is exempted from the excise tax increase, because that fuel is already exempted from the sales tax, and therefore users would not see a compensating tax cut on the sales tax side. The aviation gasoline exemption reduces 2010-11 revenue by about $6 million, but will not have an ongoing affect due to the true-up mechanism for BOE that will adjust the excise rate in the future. C. Increases the State sales tax on diesel on July 1, 2011, from 5.0 percent to 6.75 percent to increase revenue for the Public Transportation Account by about $115 million (the total State sales tax on diesel will increase to about $430 million). Dyed-diesel fuel, which is purchased for off-road purposes (by railroads, agricultural users, etc.), is exempted from the sales tax increase because that fuel is already exempted from the excise tax, and therefore users would not see a compensating tax cut on the excise tax side. Had dyed-diesel users been subject to the sales tax increase, their net tax obligation would have increased about $30 million. Also exempted from the sales tax increase is fuel purchased for school buses and transit buses. Exempting those purchases lowers revenue by about $3 million. D. Decreases the excise tax on diesel on July 1, 2011, from 18 cents per gallon to 13.6 cents per gallon, which decreases revenue for the Highway Users Tax Account by about $120 million. In 2012-13, and thereafter, the Board of Equalization would adjust the excise rate to keep the decrease in the excise revenue equal to the increase in the sales tax revenue. The BOE is also required to adjust the rate SB 70 Page 4 for any over, or under, collection of revenue in the prior fiscal year - this "true-up" mechanism ensures revenue neutrality will be maintained. 2. Protects Proposition 98 Education Funding: Specifies that the tax changes in the bill would have no net fiscal impact upon the amounts that would otherwise be calculated under Test 1 of the Proposition 98 guarantee. 3. Tax Levy: This bill is a tax levy within the meaning of Article IV of the Constitution and would go into immediate effect. However, the changes in tax rates would still be effective July 1, 2010, or July 1, 2011, as specified. 4. Board of Equalization Technical Amendments: This bill includes technical changes to the language of AB 6 x8 due to technical concerns of the Board of Equalization (BOE). These include conforming language on the existing prepayment requirements for the sales tax, and clarification that the annual adjustments to the excise tax rates would occur at the beginning of the state fiscal year. Related provisions in AB 9 x8 : AB 9 x8 was approved by the Legislature on March 4, and contains the expenditure provisions on the fuel swap. Since both bills are necessary to fully enact the swap package, the components of AB 9 x8 are outlined here: 1. Transit Funding: This bill appropriates $400 million to transit operators to help fund operations for the remainder of 2009-10 and for 2010-11. In 2011-12, the diesel fuel swap provides for growth in both transit operations and intercity rail. Transit operators will get about $350 million in 2011-12, and a growing amount thereafter, via receipt of 75 percent of the state sales tax on diesel. The amount available for intercity rail and other state purposes will grow, via receipt of 25 percent of the state sales tax on gas and most of the non-Article XIX transportation funds (about $72 million per year). 2. Highway and Road Funding: This bill increases funding SB 70 Page 5 for highways and local roads. In 2010-11, this bill would fully backfill for the highway and local road funding lost due to the elimination of the sales tax on gas. An additional $650 million in 2010-11 gas excise tax funds would be set aside in this bill for future appropriation by the Legislature. In 2011-12, and thereafter, the excise tax revenue would provide additional funding for highways and roads. After the payment of debt service, the highway and road funding would be split: 44 percent for the State Transportation Improvement Program (STIP); 12 percent for the State Highway Operations and Protection Program (SHOPP); and 44 percent for local streets and roads. This bill would provide net new revenue to highways and roads of about $420 million in 2011-12, with new revenue over ten years of about $3 billion. 3. General Fund Relief: This bill, when combined with AB 8X 6, produces General Fund relief of $219 million in 2009-10, $929 million in 2010-11, and ongoing GF relief of about $700 million and growing in the out years. The General Fund relief by year is as follows: In 2009-10: A. Directs $140 million in PTA funds to reimburse the General Fund for eligible debt service on general-obligation bonds (specifically, Proposition 108 of 1990 bonds, Proposition 1A of 2008, and one-quarter of Proposition 1B of 2006 bonds). B. Directs $79 million in non-Article XIX transportation funds to reimburse the General Fund for Prop 116 of 1990 bonds. In 2010-11: A. Directs $254 million in PTA funds to reimburse the General Fund for eligible debt service on general-obligation bonds. B. Directs $72 million in non-Article XIX transportation funds to reimburse the General Fund for Prop 116 bonds. SB 70 Page 6 C. Directs $603 million in new gasoline excise tax revenue to reimburse the General Fund for Proposition 192 of 1996 bonds, and three-quarters of Proposition 1B of 2006 bonds. In 2011-12 and thereafter: A. Directs $727 million (and varying amounts over time) in new gasoline excise tax revenue to reimburse the General Fund for Proposition 192 of 1996 bonds, and three-quarters of Proposition 1B of 2006 bonds. Comments This bill is similar to the Governor's Budget Proposal, but has been modified to provide additional funding for transit and highways. The amendments in this bill, relative to the base language in AB 6 x8, are designed to address concerns raised by railroads and other industry groups that they would see a net tax increase due to existing tax breaks not being fully factored into the language. With the amendments in this bill, the tax changes are not only revenue-neutral overall, but are also revenue neutral for each of the special industry groups. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No Revenue Impact of Tax Swap (contained in AB 6 x8, as modified by this bill) (Estimates in millions) ---------------------------------------------------------- | |2010-11|2011-12|2012-13|2013-14| | | | | | | |--------------------------+-------+-------+-------+-------| |Eliminate Sales Tax on |-$2,531|-$2,435|-$2,369|-$2,525| |Gasoline | | | | | |--------------------------+-------+-------+-------+-------| |Increase Excise Tax on | $2,511| $2,435| $2,369| $2,525| |Gasoline | | | | | |--------------------------+-------+-------+-------+-------| |Increase the Sales Tax on | 0| 114| 118|125 | SB 70 Page 7 |Diesel | | | | | |--------------------------+-------+-------+-------+-------| |Decrease the Excise Tax | 0| -118| -118| -125| |on Diesel | | | | | |--------------------------+-------+-------+-------+-------| |Net change in revenues: | -20| -4| 0|0 | | | | | | | ---------------------------------------------------------- Expenditure Highlights of Tax Swap (contained in the companion bill, AB 9 x8) (Estimates in millions) ----------------------------------------------------------- | |2010-11|2011-12|2012-13|2013-14| | | | | | | |---------------------------+-------+-------+-------+-------| |Transit Operations via | $400| $348| $348| $354| |STA* | | | | | |---------------------------+-------+-------+-------+-------| |Intercity Rail and other | 162| 157| 171| 190| |State Operations | | | | | |---------------------------+-------+-------+-------+-------| |Net new Highway and Road | 0| 417| 251|208 | | | | | | | ----------------------------------------------------------- * 2010-11 funding amount is that appropriated in 2009-10 by this bill. DLW:nl 3/22/10 Senate Floor Analyses SUPPORT/OPPOSITION: NONE RECEIVED **** END ****