Explanation of State Sales Tax on Gasoline and the Fuel Tax Swap

Gasoline became subject to state sales tax as part of the Transportation Development Act of 1971. Beginning in 2000, sales tax on gasoline was dedicated to transportation. Since 2008-09, revenue derived from this tax was distributed 40 percent to local transportation agencies, 40 percent to the State Transportation Improvement Account, and 20 percent to the State Public Transportation Account. At the same time, “spillover” was created when collections from the sales tax on gasoline increased at a faster rate than for other taxable items. Per statute, these revenues were dedicated to transportation purposes, and transferred to the State Public Transportation Account. In addition to the base excise tax rate on gasoline, sales tax on fuel represented the primary state revenue source for transportation.

During the early 2000s, Budget Acts and trailer bills modified spillover distribution so that a sizable portion was diverted to the Mass Transportation Fund to reimburse the General Fund for transportation-related expenditures. In 2009, however, the California Supreme Court ruled that spillover revenues could not be used by the General Fund, effectively eliminating this diversion for fiscal year 2009-10.

The following year, a series of legislative changes occurred which eliminated the state sales tax on gasoline and replaced it with a price-based excise tax. In an effort to ensure overall taxes paid are the same as under the previous taxation method (revenue neutrality), law requires that the Board of Equalization evaluate and adjust the price-based portion annually. Additionally, revenue from commercial vehicle weight fees became eligible for diversion to the General Fund to pay debt service on transportation bonds. In order to offset this loss of funding, an off-the-top portion from the price-based excise tax on gasoline is considered backfill. The remaining revenue is distributed 44 percent to local transportation agencies, 44 percent to the State Transportation Improvement Program, and 12 percent to the State Highway Operation and Protection Program.

See table below for fiscal year distribution of these revenues. See also PDF of the table.

explofsalestaxandfueltaxswap

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