BILL ANALYSIS Ó
AB 2127
Page A
GOVERNOR'S VETO
AB
2127 (O'Donnell and Brough)
As Enrolled August 22, 2016
2/3 vote
------------------------------------------------------------------
|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Revenue & |9-0 |Ting, Brough, | |
|Taxation | |Dababneh, Gipson, | |
| | |Roger Hernández, | |
| | |Mullin, Patterson, | |
| | |Quirk, Wagner | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |20-0 |Gonzalez, Bigelow, | |
| | |Bloom, Bonilla, | |
| | |Bonta, Calderon, | |
| | |Patterson, Daly, | |
| | |Eggman, Gallagher, | |
| | |Eduardo Garcia, Roger | |
| | |Hernández, Holden, | |
| | |Jones, Obernolte, | |
| | |Quirk, Santiago, | |
| | |Wagner, Weber, Wood | |
| | | | |
| | | | |
------------------------------------------------------------------
AB 2127
Page B
--------------------------------------------------------------------
|ASSEMBLY: |67-0 |(May 27, 2016) |SENATE: |37-1 |(August 16, |
| | | | | |2016) |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
--------------------------------------------------------------------
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
gallon of fuel used.
3)Takes immediate effect as a tax levy.
AB 2127
Page C
4)Sunsets on January 1, 2022.
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
pollution, as specified. (Health and Safety Code (H&SC)
Section 43013(a).)
AB 2127
Page D
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% 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
rate allowed for such alternative fuels. AB 2127 resolves
this conflict and allows E-85 purchases to collect on past
AB 2127
Page E
owed tax refunds.
2)Revenue and Taxation 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<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
--------------------------
<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 F
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
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
AB 2127
Page G
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,
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
--------------------------
<3> The sponsor notes that these regulations were filed on
December 9, 1992, and became operative on January 1, 1993.
AB 2127
Page H
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
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.
GOVERNOR'S VETO MESSAGE:
I am returning the following seven bills without my
signature:
AB 2127
Page I
Assembly Bill 717
Assembly Bill 724
Assembly Bill 1561
Assembly Bill 2127
Assembly Bill 2728
Senate Bill 898
Senate Bill 907
Each of these bills creates a new tax break or expands
an existing tax break. In total, these bills would
reduce revenues by about $300 million through 2017-18.
As I said last year, tax breaks are the same as new
spending -- they both cost the General Fund money. As
such, they must be considered during budget
deliberations so that all spending proposals are
weighed against each other at the same time. This is
even more important when the state's budget remains
precariously balanced.
Therefore, I cannot sign these measures.
AB 2127
Page J
Analysis Prepared by:
M. David Ruff / REV. & TAX. / (916) 319-2098
FN: 0005053