BILL ANALYSIS Ó
AB 1442
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1442
(O'Donnell) - As Amended May 11, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Motor vehicle fuel: gasohol
SUMMARY: Increases the allowable percentage of gasoline that
may be included in E85, from 15% to 21%, and makes corresponding
changes to the definition of gasohol. Specifically, this bill:
1)Redefines the term "gasohol", for purposes of the Motor
Vehicle Fuel Tax (MVFT) Law, as all blends of gasoline and
alcohol containing more than 21% gasoline (instead of 15% per
current law), or a percentage adopted by State Board of
Equalization (BOE) regulation, as specified.
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2)Defines "blended ethanol fuel", for purposes of the Use Fuel
Tax (UFT) Law, as a fuel blend consisting of ethanol and
gasoline that meets one of the following requirements:
a) Contains not more than 21% gasoline; or,
b) Contains not more than a percentage of gasoline, as
specified by BOE regulation, that is consistent with the
E-85 Fuel Ethanol Specifications of Section 2292.4 of Title
13 of the California Code of Regulations.
3)Amends Revenue and Taxation Code (R&TC) Section 8651.8 to
provide that the excise tax imposed upon ethanol or methanol
containing no more than 21% gasoline, blended ethanol fuel, or
diesel fuels (instead of 15% gasoline or diesel fuels per
current law), shall be one-half the rate prescribed by R&TC
Section 8651 for each gallon of fuel used.
4)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Imposes, under the MVFT Law, a tax upon the privilege of
distributing motor fuel.
2)Defines "gasohol", for purposes of the MVFT Law, to mean all
blends of gasoline, and alcohol containing more than 15%
gasoline. (R&TC Section 7318.)
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3)Imposes, under the UFT Law, an excise tax of $0.18 per gallon
on use fuels. (R&TC Section 8651.)
4)Defines "fuel", for purposes of the UFT Law, to include any
combustible gas or liquid used in an internal combustion
engine for propulsion on the highway, except fuel subject to
taxation under the MVFT Law or the Diesel Fuel Tax Law. (R&TC
Section 8604.)
5)Provides that the excise tax imposed upon ethanol or methanol
containing no more than 15% gasoline or diesel fuels shall be
one-half the rate prescribed by R&TC Section 8651 for each
gallon of fuel used (i.e., $0.09). (R&TC Section 8651.8(a).)
6)Charges the State Air Resources Board (CARB) with adopting and
implementing motor vehicle emission standards, in-use
performance standards, and motor vehicle fuel specifications
for the control of air contaminants and sources of air
pollution, as specified. (Health and Safety Code (H&SC)
Section 43013(a).)
7)Charges CARB with endeavoring to achieve the maximum degree of
emission reduction possible from vehicular and other mobile
sources in order to accomplish the attainment of the state
standards at the earliest practicable date. (H&SC Section
43018(a).)
FISCAL EFFECT: Unknown. Based on the historical data provided
by the BOE, this bill is estimated to result in revenue losses
exceeding $150,000 per year.
COMMENTS:
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1)The author has provided the following statement in support of
this bill:
In order to ensure effective policy, the Legislature must
make certain our laws and regulations remain consistent in
both language and intent. Currently, the tax code and air
resource protection requirements have conflicting
definitions for blended ethanol fuels. Specifically, the
tax code charges half the normal Use Fuel Tax rate on
ethanol fuels containing no more than 15 percent gasoline.
However, the Air Resources Board has set specifications for
E-85 (a common type of blended ethanol fuel) requiring the
total fuel volume to contain a minimum of 79% ethanol and
15-21% of hydrocarbons (e.g., gasoline). This means the
minimum gasoline content required by the ARB is the maximum
content allowable to qualify for the tax incentive.
2)This bill is sponsored by the California Independent Oil
Marketers Association, which notes the following:
AB 1442 adjusts the tax code to be consistent with the CARB
regulations regarding high-ethanol blends, commonly called
E-85. The measure uses the current
maximum-gasoline-content of 21% as the metric for meeting
the tax code benefit. It allows the Board of Equalization
to change that metric to maintain consistency with the CARB
regulation, if the CARB level changes. Therefore, AB 1442
assures environmental conformity for high-ethanol blends
eligible for the lower tax rate.
We are NOT trying to grapple with the larger issues
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antiquated references such as "gasohol" and "methanol"
entail in the same code sections - we believe that is an
issue for a broader code modernization measure. We are
merely attempting to resolve a specific issue related to a
fuel in current distribution, and remove market hindrances
from the deployment of that fuel.
3)Committee Staff Comments
a) The UFT Law : The UFT Law sets the excise tax rate for
ethanol and methanol containing no more than 15% gasoline
or diesel at one-half the normal rate specified by R&TC
Section 8651 (i.e., $0.09 per gallon instead of $0.18 per
gallon). Ethanol and methanol containing more than 15%
gasoline is defined as "gasohol" under the MVFT Law. While
the use fuel tax is technically imposed on the use of fuel,
the vendor who sells or delivers such fuel into a fuel tank
must, at the time of sale, collect the tax from the user
and provide a receipt. (R&TC Section 8732.)
Vendors are required to have permits with the BOE and file
returns. Use fuel vendor responsibilities include
reporting and paying the use fuel tax on alcohol fuels,
including E85<1>, delivered into motor vehicle fuel tanks.
Specifically, the vendor is required to collect and remit
to the BOE the $0.09 per gallon use fuel tax on the full
volume of E85 sold or dispensed from a retail pump.
b) The MVFT Law : The state imposes an excise tax under the
MVFT Law of $0.30 per gallon ($0.18 excise tax and $0.12
surtax) on the removal of gasoline (except for aviation
gasoline) at the refinery or terminal rack, upon entry into
California, and upon sale to an unlicensed person. Refunds
--------------------------
<1> The BOE notes that E85, an ethanol and gasoline blend, is
the most common blended fuel under the UFT Law.
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of the excise tax paid on gasoline are allowed under
certain circumstances to certain persons. (R&TC Section
8101.) For example, a refund is allowed to any person who
buys gasoline to produce a blended fuel used to operate a
motor vehicle on the state's highways when that blended
fuel is taxed as a use fuel. (R&TC Section 8101(h).)
The BOE handles various gasoline tax administrative
functions including registration, licensing, return
processing, auditing, and appeals. The State Controller's
Office, in turn, is responsible for the collection of
delinquent gasoline taxes and the issuance of excise tax
refunds for gasoline not used on the highway. The gasoline
tax collection point differs from that applicable to use
fuels. Specifically, the gasoline tax is generally
collected high up the distribution chain at the "terminal
rack" level.
c) Alcohol fuel blends : Alcohol fuel blends are the result
of blending two components - ethanol or methanol fuel and
gasoline or diesel fuel. E85, for example, is produced by
blending ethanol fuel and gasoline.
d) CARB regulations : The author notes that "[i]n
furtherance of its mission to reduce vehicle emissions,
CARB has set specifications for E-85 requiring that the
total fuel volume contain a minimum of 79% ethanol and
15-21% of hydrocarbons." The UFT Law, however, only
provides the lower $0.09 per gallon tax rate to E85
containing no more than 15% gasoline. According to the
author's office, "E-85 fuels cannot satisfy both standards
. . . ."
e) Why not blend E85 with exactly 15% gasoline ? The
author's office has indicated that it is currently
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impossible to meet both CARB's regulations for E85 and the
15% cap on gasoline contained in the R&TC. It is not
clear, however, that this impossibility is a function of
the referenced statutory or regulatory law. If a blender
were to create an ethanol blend with exactly 15% gasoline
and 85% ethanol, this blend would seemingly meet both
CARB's blend requirements and the 15% cap imposed by R&TC
Section 8651.8. Thus, the blend would be eligible for the
preferential tax rate of $0.09 per gallon. CARB staff
notes, however, that such a blend would likely not meet
standards in place for the fuel's minimum Reid Vapor
Pressure (RVP). RVP is a measure of fuel volatility, which
must be managed to avoid smog formation in the summer.
CARB staff notes that ethanol blends containing closer to
21% gasoline would be more likely to meet the minimum RVP
requirement. While CARB has not instructed blenders to
alter the gasoline content of their blends, it has informed
blenders of this fact.
Despite all this, CARB data suggest that many, if not most,
blenders are still producing E85 with only 15% gasoline.
All E85 sold in California is sold under "test program
exemptions". As a result, fuel blenders must provide fuel
quality test results. CARB notes that this fuel quality
data from 2014 and the first three months of this year
indicate an average ethanol content of 82.75%, and an
average gasoline content of 15%, with the remaining 2.25%
comprised of denaturants. Fuel industry representatives,
however, note that "denaturants" are gasoline-based,
thereby threatening to increase the overall blend's
gasoline content above 15%. If this is the source of
potential conflict, perhaps it would be preferable to amend
the R&TC to clarify that gasoline-based denaturants shall
not be counted toward the 15% cap on gasoline for E85. BOE
staff, however, notes that as a matter of administrative
practice, denaturants are not counted currently toward the
15% gasoline cap.
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f) Potential statutory ambiguity : This bill would provide
that the excise tax imposed upon ethanol or methanol
containing no more than 21% gasoline, blended ethanol fuel,
or diesel fuels shall be one-half the rate prescribed by
R&TC Section 8651. As a preliminary matter, it is not
clear to Committee staff why "blended ethanol fuel" is
being added to the list of items subject to the 21% cap.
The inclusion of this term opens R&TC Section 8651.8 up to
potential ambiguity. Under one such interpretation, the
21% limitation could be read to apply to gasoline and
"blended ethanol fuel" separately instead of collectively.
It could be that this term is being added to allow
flexibility should the BOE adopt regulations defining
"blended ethanol fuel" as fuel containing greater than 21%
gasoline pursuant to future regulations. For example, if
CARB were to increase to 50% the maximum amount of gasoline
that could be added to E-85, the BOE would likely adopt
regulations setting the same standard. But this would only
change the definition of "blended ethanol fuel" for
purposes of R&TC Section 8623. The 21% limitation imposed
by the newly amended R&TC Section 8651.8 would still be in
place. Even under the most expansive reading of R&TC
Section 8651.8, blends would still seemingly need to
contain at least 58% ethanol. Thus, the author may wish to
consider appropriate amendments clarifying the intent of
this bill and its application in the future.
g) Outsourcing definitions : All of this raises another,
but no less important issue: namely, whether the R&TC
should be amended to outsource permanently the definition
of "blended ethanol fuel" to conform to future regulatory
changes. This form of "rolling conformity" to future
regulations would certainly promote a degree of
administrative flexibility and prevent the need for future
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legislation should CARB act to increase allowable gasoline
ratios. At the same time, Committee staff questions the
precedent of permanently outsourcing to a regulatory body
the definition of "blended ethanol fuel" ostensibly subject
to preferential tax treatment. If, theoretically, CARB
were to increase the allowable gasoline ratio to 50%, the
Legislature might wish to consider the policy and fiscal
implications of providing preferential tax treatment to
such blends. In general, higher gasoline contents result
in better fuel economy. At the same time, however, the
preferential tax rates were established to incentivize the
use of renewable fuels and not gasoline.<2> CARB notes
that further research is still needed to determine the
specific emissions benefits and downsides of various E85
blends. In addition, CARB notes that the E85
specifications are likely to be revised in the next two to
three years, but no official timeline has yet been set.
This Committee may wish to consider whether it would be
preferable to: (a) act now to provide rolling conformity
for future changes, (b) act now to increase the gasoline
cap on ethanol blends to 21% per current CARB regulations
and potentially revisit the issue should CARB change its
specifications in future, or (c) await CARB's anticipated
action before acting to amend the R&TC.
REGISTERED SUPPORT / OPPOSITION:
Support
California Independent Oil Marketers Association (Sponsor)
---------------------------
<2> According to the legislative history, the differential tax
rate was also imposed to reflect the lower energy content (i.e.,
BTUs) of ethanol. It would appear that the energy content of
ethanol has increased significantly in recent years, however.
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Pacific Ethanol
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098