BILL ANALYSIS Ó
SB 321
Page A
Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
321 (Beall) - As Amended May 27, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Motor vehicle fuel taxes: rates: adjustments
SUMMARY: Modifies the method by which the State Board of
Equalization (BOE) annually adjusts the motor vehicle "fuel tax
swap" rate to take into account a five-year average of fuel
prices, thereby smoothing perceived revenue volatility.
Specifically, this bill:
1)Provides, for the 2015-16 fiscal year (FY), the BOE shall, on
or before July 1, 2015, adjust the motor vehicle fuel excise
tax rate so as to generate revenues equal to the amount of
revenue loss attributable to the partial sales and use tax
(SUT) exemption provided by Revenue and Taxation Code (R&TC)
Section 6357.7, based on estimates made by the BOE reflecting
the combined average of the actual fuel price over the
SB 321
Page B
previous four FYs and the estimated fuel price for the current
FY, and that rate shall be effective during the 2015-16 FY.
2)Provides, for the 2016-17 FY and each FY thereafter, the BOE
shall, on or before March 1 of the FY immediately preceding
the applicable FY, adjust the motor vehicle fuel excise tax
rate so as to generate revenues equal to the amount of revenue
loss attributable to the partial SUT exemption provided by
R&TC Section 6357.7, based on estimates made by the BOE
reflecting the combined average of the actual fuel price over
the previous four FYs and the estimated fuel price for the
current FY, and that rate shall be effective during the
state's next FY.
3)Provides that if, due to clear changes in either fuel prices
or consumption in California, the BOE determines that the
amount of revenue being generated by the excise tax will be
significantly different than the estimates made by the BOE,
the BOE may adjust the rate more frequently than annually, but
no more frequently than every six months in order to reduce
the potential volatility of the revenues.
4)Provides legislative intent that the amendments made by this
bill shall not produce a net revenue gain in state taxes.
EXISTING LAW:
1)Defines "motor vehicle fuel" under the Motor Vehicle Fuel Tax
(MVFT) Law as gasoline and aviation gasoline. (R&TC Section
7326.) The term does not include jet fuel, diesel fuel,
kerosene, liquefied petroleum gas, natural gas in liquid or
gasesous form, alcohol, or racing fuel. (Id.)
SB 321
Page C
2)Imposes, under the MVFT Law, an excise tax upon each gallon of
fuel. (R&TC Section 7360.)
3)Provides, on and after July 1, 2010, a partial SUT exemption
for "motor vehicle fuel", as defined in R&TC Section 7326.
(R&TC Section 6357.7.)
4)Provides for the annual adjustment of the MVFT excise tax
rate. Specifically, for the 2011-12 FY and each FY
thereafter, the BOE must adjust the rate so as to generate
revenues equalling the amount of revenue loss attibutable to
the partial SUT exemption for motor vehicle fuel. This
calculation is made annually by March 1, based on estimates
made by the BOE, and the adjusted rate applies to the
immediately following FY. (R&TC Section 7360(b)(2).)
5)Provides for a "true up" process to maintain revenue
neutrality. Specifically, beginning with the rate adjustment
calculated on or before March 1, 2012, the adjustment must
also take into account the extent to which actual revenues
derived resulted in a net revenue gain or loss for the FY
ending prior to the rate adjustment date. (R&TC Section
7360(b)(3))
FISCAL EFFECT: Unknown
COMMENTS:
1)The author has provided the following statement in support of
this bill:
Current law, known as the "gas tax swap", requires the BOE
SB 321
Page D
to annually adjust the state gasoline excise tax rate in
order to collect roughly the same amount of revenue as the
state would have collected if it still charged a sales tax
on gasoline. The BOE does so by forecasting gasoline
prices for the year. Difficulty in forecasting gas prices
inevitably results in over- or under-collecting revenue and
requires future adjustments to compensate for any
discrepancy. That reconciliation leads to volatility and
big swings in the amount of tax collected from year to
year.
This volatility is bad for taxpayers who experience big
swings in prices at the pump, and for state and local
governments, who face uncertainty when preparing multiyear
budgets.
SB 321 reduces this volatility by changing the way the BOE
estimates gas prices. It requires BOE to base next year's
gas price estimate on an average of the previous four
years' actual prices (as opposed to its current one year
model). It also allows BOE to adjust the tax rate more
frequently than annually in cases where extreme changes in
fuel prices will clearly affect predicted versus actual
revenue.
2)This bill is supported by the California Transit Association,
which notes the following:
This bill would help smooth the volatility of gasoline tax
SB 321
Page E
revenue by altering the administrative process utilized by
BOE to adjust the excise tax on gasoline. Specifically,
this bill would require BOE to base its projected gas price
estimate on an average of the previous four years' actual
prices and the estimated price for the current year; and
allow BOE to adjust the excise tax rate more frequently
than annually in cases where fuel prices will clearly
affect projected versus actual revenue. The California
Transit Association believes these improvements to the
process would greatly reduce the volatility of the gasoline
tax, reducing greatly impacts to cities and counties.
3)This bill is supported by the BOE, which notes the following
in its staff analysis:
a) Effect of the bill : "This bill is intended to reduce
potential volatility of the revenues generated by the
gasoline tax by specifying the forecast method for fuel
prices and allowing more frequent excise tax rate
adjustments."
b) No administrative difficulties with the forecast
provisions : "Under the current fuel tax swap rate
calculation, the two main components are the forecast and
the true-up. The forecast is comprised of two factors:
fuel price and fuel consumption quantity. The BOE's rate
adjustments are expected to be revenue neutral and any
out-year adjustments are intended to maintain revenue
neutrality. Since this bill provides specifics to assist
with the forecast of fuel prices, and adjustments as
needed, it maintains the goal of revenue neutrality.
Therefore, BOE staff does not foresee administrative
difficulty with the forecast portion of the fuel tax swap
rate adjustments."
SB 321
Page F
4)Committee Staff Comments
a) The fuel tax swap : In 2010, the Legislature enacted two
"fuel tax swap" measures that modified the state taxation
of both gasoline and diesel fuels. [ABx8 6 (Committee on
Budget), Chapter 11, Statutes of 2010 and SB 70 (Committee
on Budget and Fiscal Review), Chapter 9, Statutes of 2010.]
The gasoline tax changes became operative on July 1, 2010,
while the diesel fuel tax changes became operative on July
1, 2011. According to the Senate Committee on Governance
and Finance, the fuel tax swap was enacted partly to allow
the use of additional existing transportation revenue for
highway purposes, including General Obligation bond debt
service, where that debt service was related to
transportation projects.
i) The taxation of gasoline : The "fuel tax swap"
exempted gasoline from the state General Fund SUT rate.
To offset the revenue loss from this partial SUT
exemption, the Legislature increased the gasoline excise
tax rate from $0.18 per gallon to $0.353 per gallon.
ii) The taxation of diesel fuel : In contrast, the
diesel fuel excise tax rate was reduced under the "fuel
tax swap", from $0.18 per gallon to $0.13 per gallon.
The Legislature correspondingly increased the SUT rate on
diesel fuel to offset lost excise tax revenues, resulting
in the following rates:
(1) 1.87% effective July 1, 2011;
(2) 2.17% effective July 1, 2012;
SB 321
Page G
(3) 1.94% effective July 1, 2013; and,
(4) 1.75% effective July 1, 2014, and thereafter.
b) Revenue neutrality : The "fuel tax swap" provisions
require the BOE to maintain revenue neutrality so that the
revenues derived from the increased gasoline excise tax and
the increased SUT on diesel equals the revenues that would
have been derived had the gasoline SUT partial exemption
and the diesel fuel excise tax reduction, respectively,
never occurred. Thus, R&TC Sections 7360 and 60050 require
the BOE annually to adjust the gasoline and diesel fuel
excise tax rates, respectively, either upward or downward,
to maintain revenue neutrality. This calculation requires
BOE staff to develop a forecast of both consumption and
price for both gasoline and diesel fuel. To this end, BOE
staff works closely with the Department of Finance (DOF)
and adopts the DOF's consumption forecasts.
The BOE notes that its annual rate calculations also take
into account the statutory "true up" requirements, which
specify a one-year look back period to determine the
difference between what was estimated for the previous FY
and what was actually collected.
c) The resulting rates : Since the enactment of the fuel
tax swap, the BOE has adjusted the gasoline excise tax rate
to maintain the required revenue neutrality through
incremental increases and decreases as follows:
i) July 1, 2011 : Increase of $0.004;
SB 321
Page H
ii) July 1, 2012 : Increase of $0.003;
iii) July 1, 2013 : Increase of $0.035;
iv) July 1, 2014 : Decrease of $0.035; and,
v) July 1, 2015 : Decrease of $0.060.
The diesel fuel excise tax rate, in turn, has been adjusted
as follows:
i) July 1, 2012 : Decrease of $0.03;
ii) July 1, 2013 : Retain July 1, 2012 rate;
iii) July 1, 2014 : Increase of $0.01; and,
iv) July 1, 2015 : Increase of $0.02.
d) What would this bill do ? This bill would modify the
method by which the BOE annually adjusts the motor vehicle
"fuel tax swap" rate to take into account a five-year
average of fuel prices, thereby smoothing perceived revenue
volatility.<1> Specifically, this bill contains the
following three provisions:
--------------------------
<1>
This bill would make no changes to the method for calculating
the diesel fuel excise tax rate.
SB 321
Page I
i) For the 2015-16 FY, the BOE would be required, on or
before July 1, 2015, to adjust the motor vehicle fuel
excise tax rate so as to generate revenues equal to the
amount of revenue loss attributable to the partial SUT
exemption, based on estimates reflecting the combined
average of the actual fuel price over the previous four
FYs and the estimated fuel price for the current FY.
This rate would be effective during the 2015-16 FY.
ii) For the 2016-17 FY and each FY thereafter, the BOE
would be required, on or before March 1 of the FY
immediately preceding the applicable FY, to adjust the
motor vehicle fuel excise tax rate based on estimates
reflecting the same combined average of the actual fuel
price over the previous four FYs and the estimated fuel
price for the current FY. This rate would then apply
during the state's next FY.
iii) Finally, this bill provides that if, due to clear
changes in either fuel prices or consumption in the
state, the BOE determines that the amount of revenue
being generated by the excise tax will be significantly
different than the estimates made by the BOE, the BOE may
adjust the rate more frequently than annually, but no
more frequently than every six months in order to reduce
the potential volatility of the revenues.
e) Smoothing things out : Advocates of this bill contend
that this bill would address the potentially "jarring"
fluctuations in excise tax revenues by basing price
projections on multi-year historical price data.
Proponents further contend that this increased revenue
stability would benefit both consumers, who pay the tax,
and state and local agencies that rely on the revenues to
SB 321
Page J
build and maintain California's transportation
infrastructure.
There is evidence to suggest that this methodology would
smooth out revenue fluctuations to a certain degree. For
example, in the last four FYs, the actual excise tax rate
has fluctuated from a low of $0.357 in FY 2011-12 to a high
of $0.395 in FY 2013-14, representing a delta of $0.038 per
gallon. Had the five-year smoothing methodology been
employed over this same time period, the state would have
experienced a high of $0.363 in FY 2014-15 and a low of
$0.333 in FY 2012-13, representing a delta of $0.03 per
gallon.
The smoothing function of the five-year methodology comes
into even starker relief when applied to the current FY.
As a result of lower fuel prices, BOE staff recommended a
motor vehicle fuel excise tax rate of $0.285 per gallon.
The BOE members subsequently voted to increase staff's
recommended excise tax rate to $0.300 effective July 1,
2015. However, had the BOE used a five-year smoothing
methodology, it would have arrived at a per-gallon excise
tax rate of $0.326. Thus, this bill will, at least in the
short term, "artificially" prop up excise tax revenues
received by the state. Of course, assuming fuel prices
increase in the future, this methodology may also serve
artificially to constrain revenues in the not-so-distant
future.
f) The proverbial ship has sailed : This bill currently
requires the BOE to adjust the motor vehicle fuel excise
tax rate for FY 2015-16 by July 1, 2015 using the newly
prescribed methodology. Given that this bill's urgency
clause was deleted with the most recent set of amendments,
this bill, if enacted, will become operative on January 1,
2016. Moreover, the BOE has already set the excise tax
SB 321
Page K
rates for the current 2015-16 FY. Thus, the Committee may
wish to consider deleting the provisions applicable to FY
2015-16, thereby applying the bill prospectively to FYs
2016-17 and beyond.
g) Twice a year ? This bill would authorize the BOE to
adjust the rate more frequently than annually. The
Committee may wish to consider whether this authority is
advisable given the inherent administrative hassle (for
both retailers and the BOE) of changing the excise tax rate
for fuel.
h) Related legislation : SB 433 (Berryhill) would transfer
responsibility for calculating the annual rate adjustments
under the "fuel tax swap" from the BOE to the DOF. SB 433
(Berryhill) will be heard by this Committee today.
REGISTERED SUPPORT / OPPOSITION:
Support
Alpine County Board of Supervisors
American Public Works Association, California Chapters
Associated General Contractors
California Alliance for Jobs
SB 321
Page L
California Association of Councils of Government
California State Association of Counties
California State Council of Laborers
California Transit Association
City of Camarillo
City of Glendale
City of Goleta
City of West Hollywood
County of Contra Costa
County of Mono
County of Santa Cruz
League of California Cities
Los Angeles County Board of Supervisors
SB 321
Page M
Orange County Transportation Authority
Organization of SMUD Employees
Planning and Conservation League
Rural County Representatives of California
San Bernardino Public Employees Association
San Diego Association of Governments
San Diego County Court Employees Association
San Francisco Bay Area Rapid Transit District
San Joaquin Valley Regional Transportation Planning Agencies
San Luis Obispo Council of Governments
San Luis Obispo County Employees Association
Santa Clara County Board of Supervisors
Santa Clara Valley Transportation Authority
SB 321
Page N
Self-Help Counties Coalition
Transportation California
United Contractors
Urban Counties Caucus
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098