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Is It Time to Bury the Gas Tax?

In recent weeks, we've seen a lot of moves that suggest it may be time to change the way California funds transportation, including the following:

  • Board of Equalization Member George Runner has been touting a 21% cut in the gas tax as part of the "fuel tax swap" formula from a few years ago.
  • A committee headed by former San Diego City Councilmember Jim Madaffer is looking at how to implement a mileage tax as an alternative to the gas tax.
  • Assembly Speaker Toni Atkins has proposed a $52 annual fee on most drivers as a way to raise almost $2 billion for road repairs.

The gas tax isn't the only source of funds for transportation in California, of course. Local transit agencies and some local street and road repairs are funded by the sales tax on gasoline not the same, obviously, as the gas tax. Most large counties have an additional sales tax on gasoline to pay for transportation and road repairs. But most of the state's big-ticket transportation projects are paid for out of the gas tax, and the buying power of that funding source has been in decline for decades.

Typical of California public finance, the whole gas tax story is so convoluted it's nearly impossible to understand, primarily because of the "fuel tax swap" back in 2010, which increase the gas tax in exchange for reducing the sales tax on gasoline. But for all practical purposes the gas tax has not increased since the year that today's college seniors were born 1994. (Yes, the tax has increased but only as part of a deal that reduced other taxes to maintain the pool of transportation revenue even.) Since then, the state has added about 7 million new residents. Yes, gas tax revenues have gone up in recent years. But hybrid engines and greater fuel efficiency has cut into the growth in gas tax revenues. The value of every sales tax dollar has dropped by 40% due to inflation. Taxable sales of gasoline dropped every year from 2005 to 2013, though it's since recovered.

It's no wonder, then, that the state and its local governments still struggle to pave streets and roads and fund the long list of transportation projects that comes to Sacramento for consideration every year. And it's no wonder that the gas tax looks to be on its last legs.

Though it's technically a tax on the purchase of gasoline, the gas tax has always functioned in effect as a user fee: The more you drive, the more you pay. And the gas tax has always been the financial foundation for the California freeway system. It was the passage of what was then known as the Collier-Burns Act in 1947 which increased the gas tax by 50% -- from 3 to 4.5 cents per gallon that funded the freeway system and helped California avoid toll roads in the postwar era. (Gas cost 23 cents a gallon at the time.)

For most of the postwar era, the gas tax formula worked fine. But a wide range of factors inflation, the rising environmental and labor costs of transportation projects, and better fuel mileage to name just a few have conspired to undermine the gas tax as a stable funding source.

Policymakers in California have known about this problem for a long time. I can remember back in the 90s running into Richard Katz then the chair of the Assembly Transportation Committee shaking his head. He'd just gotten pathbreaking California's electric vehicle law passed, only to realize that if it worked it would reduce the gas tax revenues he needed to move other parts of the transportation agenda.

In case you haven't noticed, the federal government has had the same problem. Rather than raise the gas tax or reduce transportation spending Congress has been shoring up the federal transportation trust fund by borrowing billions of dollars every year from the federal general fund.

So California like other states and he federal government is faced with a bunch of tough choices. Here are some of the things the state might do:

1.     Raise the gas tax though this is both politically difficult and, for the reasons described above, an imperfect approach. (Among other things, the fuel tax swap has resulted in California having one of the highest gas taxes in the country.)

2.     Switch to a mileage tax something that may have legs in California, since the main criticism seems to be that the government will know your driving habits, which is a Republican criticism rather than a Democratic one.

3.     Create some additional fee on drivers, as Speaker Atkins has proposed though there might be some pushback against this as being an additional tax.

4.     Or, of course, live with the money we get now.

This last one is tough but actually worth thinking about. The problem for both states and the federal government in recent years has been pretty simple: There's enough money to maintain the transportation system we have or build new transportation facilities, but there's not enough money to do both.

That's why some mostly left-wing advocates have argued for a "fix-it-first" approach, on the theory that focusing on maintenance will mean the current system will be in better shape but sprawl will be discouraged because new facilities won't be built.

Even conservative politicians, of course, like to be able to cut ribbons on new facilities, so "fix it first" may not have legs. But something has to give. The gas tax era is over.

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