Should California temporarily suspend its gas tax?
Should California temporarily suspend its gas tax?
California’s high gas prices have put pressure on state leaders to do something. Republicans in the state Legislature argue that suspending the gas tax is a quick fix, but is it?
Today’s Debate
As covered last week, California has some of the highest gas prices in the nation, peaking this June at $6.29 per gallon. The ever-growing gap between California gas prices and gas prices elsewhere in the country has stoked frustration on the part of Californians, leading politicians to seek out solutions.
Republicans in the State Legislature proposed suspending the gas tax in January of this year, arguing that it is the “quickest, easiest way to provide relief to every California consumer on gas prices right now.”
While there are 4 different types of taxes/fees added to the price of gasoline, the tax under debate is the state excise tax, which is the largest of the 4 taxes, almost 3 times larger than the next largest tax. This tax began in 1923 when Californian voters approved a 2-cent per gallon tax. Over the next several decades, the tax increased slowly, hitting 18 cents in 1994.
The tax remained 18 cents/gallon until 2011 when it climbed to 35 cents, which is roughly where it stayed until the passage of SB 1, the Road Repair and Accountability Act of 2017 - which increased the tax by 12 cents and required automatic annual inflation-adjusted increases.
Today, California’s state excise gas tax is $0.54 per gallon and it increases every July 1. As a result, suspending the gas tax could theoretically drop gas prices by as much as $0.54. The gas tax is intended to go toward highway and road improvement projects, but increasingly, it also goes toward a range of other transportation-related projects.
This is not a new debate. Voters rejected Proposition 6 - which would have repealed fuel tax increases included in SB 1 and required voter approval (via ballot propositions) for California to impose, increase, or extend fuel taxes or vehicle fees in the future - in 2018 by a 13-point margin. During the summer of 2021, Republicans called for a freeze on the gas tax increases, but that also failed to get traction in the Legislature.
We revisit this debate today in part because it stands as an alternative to imposing a windfall profit tax or price gouging penalty on big oil companies, which we covered last week - and in part, because Republican legislators have renewed their push for a state gas tax holiday with 2 new bills in the Assembly just last week.
Argument in Brief
Should California temporarily suspend the gas tax?
Suspending the gas tax is one of the easiest, quickest ways to lower gas prices
California has one of the highest gas tax rates in the nation
California has had 2 years of record surpluses
California’s roads and highways are in bad condition, despite above-average spending
The state is spending a significant portion of gas tax money on transportation projects other than road and bridge repair
Suspending the gas tax would put our infrastructure further behind
Because the gas tax makes up a fraction of the gas price, California’s gas prices would still be above average
A gas tax suspension wouldn’t be focused on helping those who need it most
It provides only temporary relief
Big oil companies may keep gas prices high and pocket the extra profit
Suspending the gas tax only makes sense if the case can be made that gas consumers need immediate relief on top of the California and federal government refunds many have already received. It seems unlikely that this case could be made and the proponents of the gas tax suspension have not made this case as far as I can tell.
Suspending the gas tax will also do nothing to solve our problem of high gas prices for the long term and will undermine our already lagging infrastructure. Instead, we should make investments that address the structural reasons our gas prices are high and our infrastructure is among the worst in the nation.
Case For:
Suspending the gas tax is one of the easiest, quickest ways to lower gas prices
Former Republican Assemblymember Kevin Kiley, the author of the bill that first proposed suspending the gas tax, saw his proposal as an immediate solution:
“This is utterly beyond belief. People are struggling right now. They need relief right now…
This bill presents a very simple solution. It is a lever that we can pull immediately. It has an urgency clause. It will take effect immediately to provide folks with some measure of relief."
In its review of Governor Newsom’s proposal for a one‑year reduction in fuel excise tax rates this past winter, the Legislature Analyst’s Office explained the speed of implementation:
“For smooth implementation, the Department of Tax and Fee Administration (CDTFA) generally advises state and local lawmakers to enact sales and excise tax rate changes at least 90 days before they go into effect. If necessary, CDTFA likely could implement a rate change on a shorter timetable…”
Because the state charges this tax to gasoline suppliers before they deliver gasoline to retail stations, if such a proposal were passed, it could be implemented quickly - relative to disbursing refunds or stimulus payments to individuals, which take time to issue and to receive.
California has one of the highest gas tax rates in the nation
California’s state excise tax is the second highest in the nation currently, trailing just behind Pennsylvania, which has a gas tax of $0.58 per gallon. Our gas tax is nearly twice the national average. Only 4 other states have gas tax rates above 40 cents.
California has had 2 years of record surpluses
Over the last 2 years, California has cumulatively brought in over $172 billion in surplus revenue. Republican state Senator Patricia Bates, vice chairwoman of the Senate Transportation Committee, explains the paradox this presents:
“It’s an insult to California’s drivers to force them to pay the nation’s highest gas taxes and then say it’s not enough, especially at a time when Sacramento is supposedly enjoying a budget surplus.”
However, Governor Newsom can’t, for example, spend the full surplus on infrastructure projects. The state must issue refunds when surpluses exceed a certain amount. Beginning in October, Newsom did take action to offset high gas prices within the legal limits of his office, issuing refunds totaling $7.5 billion.
Budget surpluses couldn’t be a long-term backfill for a suspended gas tax anyway. In the 2023-2024 Fiscal Outlook Report, the Legislator’s budget advisor, Gabe Petek, warns:
“State Faces $24 Billion Budget Problem and Ongoing Deficits.”
California’s roads and highways are in bad condition, despite above-average spending
The gas tax brings in over $8 billion per year, which is intended to cover the cost of maintaining our transportation infrastructure, specifically the infrastructure used by those driving: highways, roads, and bridges. Our high gas taxes translate into the 7th highest spend per lane-mile in the country at $206,924 per mile, more than twice the national average of $83,714.
With such elevated taxes and spending, it would be natural to assume that California would top the charts on road and bridge quality, but unfortunately, California lands near the bottom. The Reason Foundation’s 2019 report explains the state’s dismal performance:
“California ranks 45th out of 50 states in overall highway performance and cost-effectiveness, while Texas ranks 16th overall. And California’s ranking has worsened from 43rd overall in previous editions of the report. Part of the reason for the slide—California does not rank higher than average (25th) in any of the Annual Highway Report’s 13 categories. Put simply, when it comes to highways and bridges, the state does many things poorly and nothing particularly well.”
The state underperforms in each area:
“California ranks next to last, 49th, in urban arterial pavement condition, 44th in urban Interstate pavement condition, and 40th in rural Interstate pavement condition. By comparison, 8.08% of the pavement on California’s urban Interstates is in poor condition while just 3.43% of urban Interstate pavement in Texas is in poor condition—and Texas’ highway system is the largest in the country, with nearly four times the lane miles of California’s state-controlled highway system.”
It appears that recent increases in funding brought on by the passage of SB 1 in 2017 have not helped yet either, given California’s drop in rank in the last few years.
Former Democratic Assembly Speaker Anthony Rendon blames this paradox on past decisions:
“The reality is that infrastructure repair was underfunded for decades and that neglect had no instant solution. If we agree that we want improvements for our transportation system, we have to pay for them, and the gas tax made the most sense as the way to do that.”
Republican Assemblymember Vince Fong blames California’s labor laws instead:
“California’s onerous and costly regulations make it impossible to build or fix things quickly and cost-effectively, which means taxpayers are paying more and getting less and less in return.”
Some also point to another explanation, claiming that a significant portion of the tax revenue meant for road and bridge repair is diverted elsewhere.
The state is spending a significant portion of gas tax money on transportation projects other than road and bridge repair
The key argument against suspending the gas tax is that we need the money for infrastructure projects. Given the condition of our infrastructure, it is hard to argue we don’t need the money - but if we’re not using the money we have allocated for roads and bridges then this argument falls apart.
Carl DeMaio, a lead proponent of Proposition 6, which would have restricted the use of the gas tax revenue for infrastructure upkeep, argues:
“The problem is not that Californians are not paying enough in taxes. The problem is that the politicians are not spending the money we give them to fix our roads, to maintain our infrastructure.”
Michael Quiqley, executive director of the California Alliance for Jobs, disputes DeMaio’s claim:
“This proposal by DeMaio is a deeply flawed attempt to distract voters from his destructive Proposition 6, which would eliminate $5 billion in funding and jeopardize more than 6,500 bridge, road and transportation safety projects already underway all over California.”
Republican Assemblymember Vince Fong, who proposed an alternative to SB 1 sides with DeMaio, argues that it’s a matter of prioritization:
“As the author of the alternative to the SB 1 gas tax increase, I said over and over again that we can fully fund our roads without any fee or tax increases. We need to give voters an opportunity to tell Sacramento they need to prioritize our transportation infrastructure with the tax dollars motorists already pay.”
On paper, at least until September 2019, it appeared that gas tax funds would go to roads and bridges. There are 3 components of the gas tax, which have different allocation regulations. The Legislative Analysts Office breaks the allocation rules down in detail, which you can see in the visual below or read more about here.
This may be why the Reason Foundation makes this claim:
“California, as an example, diverts none of its gas tax revenue. Yet, the state collects over $8 billion in revenue per year from vehicle registration and miscellaneous motor vehicle fees, which is partially allocated to programs such as the California Highway Patrol, the California High-Speed Rail Authority and local public transportation.”
The text of SB 1, which anticipated raising $5B in new gas tax revenue, spells out exactly how these funds are to be spent. Of the $762M itemized in the bill, only $100M was allocated for active transportation, which could be linked to public transit improvements. Of the non-itemized portions (which is the majority) 50% of the remaining funds are for “maintenance of the state highway system or to the state highway operation and protection program” and 50% go to cities and counties. “The bill would authorize a city or county to spend its apportionment of funds under the program on transportation priorities other than those allowable pursuant to the program if the city’s or county’s average Pavement Condition Index meets or exceeds 80.”
This makes it difficult to make sense of the April 2018 announcement, which suggested nearly half of the tax revenue would go to transit projects:
“State officials announced Thursday that $2.4 billion from increases in the gas tax and vehicle fees will be spent on dozens of transit projects, including work to prepare Southern California for the 2028 Summer Olympics… The funding includes $36 million of the $102-million cost to the city of Los Angeles for 112 zero-emission buses to replace existing propane-powered vehicles and expand the DASH bus fleet so it will run more often and in more areas.”
Governor Jerry Brown, who “lobbied lawmakers hard for their votes on the tax measure, SB 1, citing a large backlog of repairs and improvements,” lauded such uses of the funds:
“These zero-emission bus and rail projects mean millions of tons less pollution in the air we breathe.”
Brian Annis, then secretary of the California State Transportation Agency, explains what may be the real motivation behind the gas tax increases:
“The transit projects funded Thursday also help the state meet climate and air quality goals, reducing greenhouse gas emissions by more than 32 million tons.”
Governor Newsom took this another step further in September 2019 when he signed Executive Order N-19-19 into law, effectively repurposing the funds obtained through gas taxes:
“The State Transportation Agency shall leverage the more than $5 billion in annual state transportation spending for construction, operations, and maintenance to help reverse the trend of increased fuel consumption and reduce greenhouse gas emissions associated with the transportation sector.”
Jon Coupal, president of the Howard Jarvis Taxpayers Association, slams the irony of using gas tax funds to reduce fuel consumption:
“It’s infuriating to hear Caltrans moan that it needs more money for road repair when, in a move that incensed both taxpayers and drivers in the Central Valley, Governor Newsom signed an executive order in 2019 that redirected gas tax money to fund railway systems and other non-road projects… When it comes to highway construction and maintenance, California delivers a low level of service at an inflated cost. We can fix this by directing gas tax revenues to projects that do the most good for the state’s driving public and by reducing our transportation bureaucracy.”
David Kim, then California’s secretary of transportation, reveals the real priority of the state in allocating these funds:
“Maintaining the condition of our highways, roads and bridges is of the utmost importance to the governor and this approach will continue. Having said that, we are legally required to meet climate goals. The transportation sector contributes more than 40 percent of greenhouse gas emissions in the state. Therefore, we must take the necessary steps to reduce the share of greenhouse gas emissions that come from the transportation sector.”
San Jose City Councilmember Johnny Khamis calls out Newsom for this bait-and-switch maneuver:
“He’s taking away $5 billion dollars from highway repair and I think it’s a shame. A lot of voters are not going to see their highways fixed, and they’re going to have less trust in government. As a government official, I think we have to live up to our promises and do what we say we’re going to do, otherwise no one will trust us with their tax dollars anymore…
They’re going to stop fixing Highway 99 — a major artery in San Jose — and will be eliminating several other projects. The city could lose millions in funds. We were depending on a lot of money for highway cleanups and repairs that we may not be getting now.”
These priorities are reflected in the 10-year investment plan shared by Caltrans in February 2021. It plans to invest $49.3B in the State Highway Operation and Protection Program (SHOPP) compared to just $6.4B in maintenance. While SHOPP sounds like it would be focused on the highways, only half of the money will go toward pavement, bridges, tunnels, and drainage. 41% will go to “all other objectives.”
Case Against:
Suspending the gas tax would put our infrastructure further behind
As described in detail in the Case For, California’s infrastructure is lacking. In the most recent rankings, California placed 45th in overall highway performance and cost-effectiveness. California is one of six states to have more than 20% of its urban arterial pavement condition in poor condition and it did not rank higher than 25th in any of the 13 categories - a low only shared with Oklahoma.
Clearly, the state needs funding to restore its aging infrastructure.
But with the second-highest state excise gas taxes and record surpluses, shouldn’t the state have plenty of money to cover the costs of infrastructure upgrades and maintenance?
Citing a February 2021 Caltrans (California Department of Transportation) report, the Los Angeles Times answers that question with a definitive “no”:
“Four years after the Legislature boosted the gas tax in order to fix California’s crumbling roads and bridges, the state has spent billions and made some progress in repairs, but officials now say the funding is sufficient only to complete less than half of the work needed.”
Available funding will address just 45% of the total identified needs. Caltrans projects a $6.1B annual shortfall that “imposes a constraint requiring transportation objectives to be prioritized.”
This shortfall is blamed on a host of factors, including sharp declines in gas tax revenue during COVID, increased electric or hybrid vehicle usage in the state, and increased maintenance costs.
However, Caltrans representative Matt Rocco explained that the funding gap in the report represents the difference between the estimated cost to satisfy all transportation needs and available funding - not the funding amount needed to meet the goals set forth in SB 1:
“[The California] department [of Transportation] is making steady progress on the goals established by the legislation four years ago and remains on track to meet statutory benchmarks with the current level of SB 1 funding.”
How much additional funding is needed to enable Caltrans to meet its SB 1 goals - if any? That’s not clear.
We don’t have enough money to do everything we would like to do, but if we’re happy with achieving the SB 1 targets by 2027, then we may not need significantly more money.
Because the gas tax makes up a fraction of the gas price, California’s gas prices would still be above average
The gas tax is not insignificant, but $0.54 represents just 10% of the total per gallon price of gas on average this year. In contrast, the 3 primary costs associated with getting gas to the pump have made up 84% of the price of gasoline on average this year.
Further, cutting the gas tax completely would not be enough to put California’s gas prices in line with the rest of the nation. California’s gas would still have been $0.82 more expensive per gallon than the national average and $0.26 more expensive than the average of the 6 other West Coast states.
The gas tax suspension may provide some immediate relief, but it won’t solve California’s high gas price problem.
A gas tax suspension wouldn’t be focused on helping those who need it most
If the goal of suspending the gas tax is to provide “relief right now” to “people who are struggling right now,” as Assemblymember Kevin Kiley argued, then a compelling argument could be made for focusing relief on those who need it.
A gas tax suspension would benefit all those who are paying for gas, which, of course, includes people across the income spectrum. Severin Borenstein, a professor at UC Berkeley's Haas School of Business, makes this argument when explaining Democratic legislators’ counterproposal to the gas tax suspension:
“They're coming out with an overall rebate to help low-income families. It's also going to be more targeted at low income than rescinding a gas tax would be. Rescinding the gas tax would give money to everyone, including wealthy people who can easily afford it."
The Legislative Analyst’s Office makes the same case for going beyond the gas tax if the goal is helping those who need it most:
“In contrast, if the Legislature’s goal is to provide relief to those experiencing the greatest financial hardship, it may want to consider options beyond those linked to fuel taxes and vehicle ownership. For example, non‑vehicle owners—who also are facing high overall costs—represent 7 percent of households in the state and tend to be lower income.”
Ultimately, it depends on the goal of the relief and the justification for the relief. If the Legislature wants to provide general inflation-related relief, then it makes sense to go beyond vehicle ownership, but if the goal is to provide relief on account of high gas prices, then any relief should be given to both those who need it and those who are spending the most on gas.
In the spring of this year, Governor Newsom originally proposed a $400 tax rebate for every vehicle a person owned. This was met with considerable opposition from the Legislature and the Los Angeles Times Editorial Board for the very reason cited above:
“Newsom has insisted the fastest, easiest option is to give $400 debit cards to car owners to offset high gas prices. Individuals with two vehicles, including motorcycles, would get $800. No car? No debit card. To which we say, no fair. Californians too poor to afford a car or who choose to forgo car ownership also deserve financial relief. It makes no sense to exclude them when all consumers are feeling the pinch of rising grocery costs, rent and energy prices.”
Newsom ended up conceding to this argument, agreeing to a Middle Class Tax Refund that has since been issued to nearly 26 million Californians as a one-time payment, ranging from $400 to $1,050 for couples filing jointly and $200 to $700 for other individuals depending on income level and claimed dependents. Individuals making up to $250,000 qualified for a refund. The refund is not linked at all to vehicle ownership or the use of gasoline.
It provides only temporary relief
Former Assemblymember Kevin Kiley’s original proposal was to suspend the gas tax for 6 months. The most recent proposal by Vince Fong extends this to one year. The stated goal is to provide immediate and temporary relief.
The gas tax suspension wouldn’t fix the problem of high gas prices in California - and it couldn’t be extended indefinitely unless the state were to come up with a different way to fund its transportation work.
If the proposal can only provide temporary relief, then the case must be made that temporary relief from high gas prices specifically is needed right now - and that those who would benefit from the gas tax suspension would be the ones who would need the temporary relief at this very time.
This would be a difficult argument to make.
Big oil companies may keep gas prices high and pocket the extra profit
Even if you did believe that suspending the gas tax to reduce gas prices would benefit the Californians you want it to benefit, some argue that the drop in taxes would not lead to a drop in gas prices. Democratic Assemblymember Alex Lee, who rewrote Kiley’s AB 1638 to impose a windfall profit tax on oil companies, makes this argument:
"There is no guarantee that suspending the gas tax nets any savings on the consumer.”
This argument came up in the gubernatorial debate between Newsom and state Senator Brian Dahle, when the moderator pressed Dahle on the topic:
KQED's Senior Editor for Politics and Government Scott Shafer: "How do you guarantee that if the tax goes away, that it's actually going to go to consumers and not just the oil companies?"
"Well, we make sure that they do it," Dahle said.
Newsom took Shafer’s question further:
“We have seen other states that have moved with gas tax reductions and we haven’t seen the commensurate reduction because there is no guarantee. It means more money in the pockets of big oil companies.”
However, University of Pennsylvania’s Wharton School of Business’s analysis of the effect of state gasoline tax holidays published in June of this year mostly refutes Newsom’s claim:
“We provide causal evidence that recent suspensions of state gasoline taxes in three states were mostly passed onto consumers at some point during the tax holiday in the form of lower gas prices: Maryland (72 percent of tax savings passed onto consumers), Georgia (58 percent to 65 percent) and Connecticut (71 percent to 87 percent). However, these price reductions were often not sustained during the entire holiday.”
The Legislative Analyst’s Office reached a similar conclusion when evaluating a proposal made by, ironically, Newsom to reduce the gas tax for one year:
“Available evidence suggests that lower excise taxes likely would result in lower retail prices. The exact effect on retail prices is uncertain, but most of the change in the tax rate likely would be passed through to prices at the pump. For example, if the state declined to increase the excise tax by 3 cents per gallon on July 1, retail gasoline prices likely would be 2 to 3 cents per gallon lower than if the state proceeded with the increase.”
Further, the Republican legislators’ latest attempt at suspending the gas tax - AB 53 - contains a stipulation that would require oil companies to transfer the full savings to consumers.
My Assessment
Suspending the gas tax for a year would likely save the average driving Californian $300-$400. This would be meaningful for some. Yet, some of those savings would go to people who don’t need them.
In turn, the state would lose roughly $9B in revenue aimed at infrastructure and transportation projects. A year later, none of the structural factors that drive the majority of California’s gas price premium would be different on account of the gas tax suspension.
In short, we would be where we are today, but with less funding for infrastructure projects in the coming 10 years.
The state’s time and resources would be much better spent addressing the structural issues that cause our prices to be so high (see last week’s debate) and the strategic, ethical, and structural issues that put California’s roads and bridges among the worst in the country.
We could begin to address some of these structural issues undermining our infrastructure through some of the following actions.
We could start by performing and publishing an audit of the state’s gas tax spending over the last 5 years.
From there, we should revisit road repair and maintenance goals set forth in SB 1 to determine if reaching those targets will increase our ranking on highway performance and cost-effectiveness to #25 or higher over the next 5-10 years. If not, we should re-evaluate those goals and then recalculate the funding Caltrans needs to meet the revised goals.
Finally, if, as a result of climate initiatives, we expect some of our existing infrastructure to be irrelevant in 5-10 years, then we should avoid spending money on that infrastructure (if possible), but prioritize bringing all other infrastructure up to fair or good quality before investing in active living and public transit projects with gas tax dollars.