BILL ANALYSIS Ó AB 2127 Page A Date of Hearing: May 9, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 2127 (O'Donnell) - As Introduced February 17, 2016 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 18%, 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 18% gasoline (instead of 15% per current law). 2)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 18% gasoline 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 AB 2127 Page B gallon of fuel used. 3)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.) 3)Imposes, under the Use Fuel Tax (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 AB 2127 Page C 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: The State Board of Equalization (BOE) notes that, accounting for both the "foregone" gasoline tax revenue and the increase in gasoline tax refunds, the total revenue loss is estimated to be roughly $98,000 annually. COMMENTS: 1)The author has provided the following statement in support of this bill: In order to ensure effective policy, the Legislature [should] ensure our laws and regulations remain consistent in both language and intent. Currently, the tax code and air resource protection requirements have conflicting specifications 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 15% 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. Due to this conflict, fuel marketers have difficulties recouping the excise tax paid on E-85 blends to reflect the lower tax AB 2127 Page D rate allowed for such alternative fuels. AB 2127 resolves this conflict and allows E-85 purchases to collect on past owed tax refunds. 2)This bill is sponsored by the California Independent Oil Marketers Association, which notes the following: Simply put, AB 2127 extends an existing 50 percent excise tax discount for ethanol blended fuels to those blends that contain no more than 18 percent gasoline. This harmonizes state tax law, giving incentives to high-ethanol blends of fuel, with the stricter requirements imposed by the Air Resources Board (CARB) to protect air quality emission standards. Several of our members have had difficulty in obtaining already-paid road tax on gasoline after it has been blended with high volumes of ethanol. This allows fuel suppliers who provide E-85 to fuel consumers a needed tax break, thereby incentivizing sale of that product and removing a business uncertainty from fuel blending. The language in this measure has been thoroughly vetted with the appropriate enforcement and policy entities and there is no objection to this proposal from them. By giving ethanol blenders a 3% range for gasoline content (between 15-18%), they can plan their business operations more reliably and continue providing this alternative fuel. This will ensure alignment between our tax incentives and regulations that both fundamentally reduce GHG emissions and protect our air quality. AB 2127 Page E 3)The BOE notes the following in its staff analysis of this bill: a) Effect of the bill : "By increasing the allowable percentage of gasoline blended into E85, from 15% to 18%, the resulting blend would be taxed at a lower rate than is currently imposed on the gasoline portion." b) No administrative concerns with the increase of gasoline blended into E85 from 15% to 18% : "BOE's UFTL duties include registration, returns, collection, audits, and refunds. The proposed change in the specified blending percentage of E85 and gasohol fuels does not complicate administration." c) The SCO administers the specific gasoline tax refund provisions : "The SCO administers gasoline tax refunds if the gasoline is used for purposes other than operating a vehicle on the state's public highways and other exempt uses." d) Below-the-rack blenders sell the E85 with tax-paid gasoline and are authorized to obtain a refund : "Below-the-rack blenders already are authorized to obtain a refund of the tax- paid gasoline component of the E85, as provided by law and authorized by the SCO." 4)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 AB 2127 Page F 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<2> per gallon 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 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 is responsible for 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 ------------------------- <1> The BOE notes that E85, an ethanol and gasoline blend, is the most common blended fuel under the UFT Law. <2> This rate is comprised of an $0.18 excise tax and a $0.12 surtax. AB 2127 Page G 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. The preferential excise tax rate for alcohol blends was originally established in 1981. According to the sponsor, the proponents of this lower rate were primarily interested in stimulating alcohol fuel production and sale. Specifically, the proponents argued that increased alcohol fuel production would reduce dependence on imported oil, create market parity by matching tax rates to alcohol fuel's lower BTU output, and promote Californian agricultural products used in creating alcohol fuels. 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."<3> 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, the tension between these standards has made it difficult for some blenders to obtain gas tax refunds on their fuel blends. Specifically, the author's office notes: While those purchasing pre-blended fuels can self-certify the content of their fuel with the Board of Equalization, ------------------------ <3> The sponsor notes that these regulations were filed on December 9, 1992, and became operative on January 1, 1993. AB 2127 Page H those blending ethanol and gas themselves must apply to the State Controller's office to receive a refund of the tax they paid to purchase their fuel components. To receive this refund, blenders must submit receipts for their fuel purchases that show an exact 15% ratio of gas to ethanol was purchased. While some blenders have successfully claimed their tax credit, others have had confusion over what elements of their blend, such as denaturant, count as gasoline for tax purposes. As a result, some blenders have been denied their tax credit after making purchases and setting prices over the past year with the expectation of receiving it. This undermines the goals of the tax credit and CARB's mission by removing an incentive to use ethanol blends over gasoline. e) Why not blend E85 with exactly 15% gasoline ? 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, and the blender would be eligible for a refund of road taxes paid. 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 more than 15% gasoline would be more likely to meet the minimum RVP requirement. While CARB has apparently 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 AB 2127 Page I quality test results. CARB notes that this fuel quality data from 2014 and the first three months of 2015 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. Proponents, however, contend that increasing the allowable percentage of gasoline to 18% would provide blenders a much-needed margin for error when attempting to satisfy both CARB's regulations and the provisions of the R&TC. f) Should a sunset date be included ? 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.<4> 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. In light of this fact, the Committee may wish to consider adding a five-year sunset date to allow the Legislature to revisit this issue following the adoption of new E85 specifications. g) Related legislation : AB 1442 (O'Donnell) would have -------------------------- <4> 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. AB 2127 Page J increased the allowable percentage of gasoline that may be included in E85, from 15% to 21%, and would have made corresponding changes to the definition of gasohol. AB 1442 died on this Committee's Suspense File. REGISTERED SUPPORT / OPPOSITION: Support California Independent Oil Marketers Association (sponsor) Opposition None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098