(March 23, 2010)

Relief for local transit providers is on the way after the Governor last night signed off on the components of a legislative plan to revise the state's mechanisms for transportation funding.

With the adoption of ABx8 6 and ABx8 9, the state will issue a one-time allocation of $400 million for the State Transit Assistance (STA) program to provide relief for operations funding through Fiscal Year 2010-11. Allocations beginning in 2011-12 will fund the STA at a baseline of approximately $350 million per year, with that amount projected to grow in subsequent years.

By eliminating the sales tax on gasoline, the package technically wipes out revenue streams that would generate roughly $1 billion a year in transit-dedicated funding. In reality, those funds have been repeatedly diverted to fill non-transit holes in the General Fund, prompting a lawsuit by the California Transit Association that ultimately resulted in court rulings declaring those diversions to be illegal.

While final disposition of the case is pending – including the possible repayment of at least some of the more than $3 billion diverted over the past three years – the new agreement provides STA funding at a minimum level that represents an 83 percent increase compared to average annual STA allocations over the past ten years.

The Governor's original "gas tax swap" plan presented in January would have gutted all state funding for transit with the elimination of sales taxes on gas and diesel fuels. The plan sought to replace those revenues with an equivalent increase in fuel excise taxes, the revenues from which by law do not carry the same spending restrictions as the previously-existing sales tax revenues. The plan crafted by legislative leaders, in consultation with representatives from the Association, retains the diesel sales tax, enacts an increase in that tax rate (offset by a smaller increase in the diesel excise tax) and splits those revenues between local transit operations (75 percent) and other historic state transit obligations, including intercity passenger rail (25 percent).

A letter released last week by the Governor's office indicated his intention to veto the package based on the unintended consequence of increasing tax liability for some purchasers of diesel fuel, primarily private freight railroad operators. Followup legislation in the form of SB 70 revised the tax swap formulas to alleviate the increased tax burden to those diesel users, thus clearing the way for the Governor's signature.

The enacted package does the following:

ABx8 6:

• Eliminates the sales tax on gasoline and increases the excise tax on gasoline by 17.3 cents.
   
• Beginning in 2011-12, increases the sales tax on diesel fuel by 1.75 percent (5% to 6.75%) and decreases the excise tax on diesel by 4.4 cents in 2011-12 (from 18 to 13.6 cents). The Board of Equalization will adjust this tax annually thereafter to maintain revenue neutrality. This change will generate roughly $118 million in additional revenue for the Public Transportation Account (PTA) to fund the State Transit Assistance program and other PTA eligible expenditures.

ABx8 9:

• Appropriates $400 million to transit operators to help fund operations for the remainder of 2009-10 and 2010-11. 
   
• Provides that 75 percent of revenue from the diesel sales tax be directed to transit operators beginning in 2011-12 (roughly $350 million per year). The amount available for intercity rail and other state purposes will grow, via receipt of 25 percent of the state sales tax on gas and most of the non-Article XIX transportation funds (about $72 million per year).
   
• Protects the education funding guarantee (Prop 98).
   
• Appropriates approximately $700 million of revenue from the increase gas excise tax to go to bond debt service on an annual basis. The remaining funds will be split as follows: 12% SHOPP, 44% STIP, 44% Local Streets and Roads.
   
• Temporarily suspends STA efficiency criteria (Section 99314.6 of the Public Utilities Code) after January 1, 2010 through the 2011–12 fiscal year to ensure that STA funds can be used for operations.

SB 70

Under current law, certain fuel consumers are exempt from excise taxes, others pay a reduced excise rate, and others are exempt from sales tax. Included are the following three groups:

• Users of “dyed diesel fuel” – the excise tax on diesel fuel is intended for users of the highways system and excludes from the tax those that purchase fuel for off-road use. This would include diesel purchased for railroads, off-road construction equipment, farm equipment, etc.
   
• School buses and transit buses – the excise tax on diesel fuel for these vehicles is only one cent per gallon (versus the base rate of 18 cents per gallon).
   
• Users of aviation gasoline – aviation gasoline is defined in statute as “motor vehicle fuel” along with regular gasoline. Aviation gasoline is exempt from the sales tax, but pays the excise tax.

This bill would revise the tax provisions, so that the special fuel users would not see any negative tax impact. For example, the users of dyed diesel fuel would be exempt from the increase in the sales tax on diesel fuel, since they would not receive the compensating benefit of a reduction in the excise tax (because they are already exempt from the excise tax).

The amendments in this bill, relative to the language in AB X8 6, are designed to address concerns raised by railroads and other industry groups that they would see a net tax increase due to existing tax breaks not being fully factored into the language. With the amendments in this bill, the tax changes are not only revenue-neutral overall, but are also revenue neutral for each of the special industry groups.

Dyed-diesel fuel, which is purchased for off-road purposes is exempted from the sales tax increase because that fuel is already exempted from the excise tax, and therefore users would not see a compensating tax cut on the excise tax side. Had dyed diesel users been subject to the sales tax increase, their net tax obligation would have increased about $30 million. Also exempted from the sales tax increase is fuel purchased for school buses and transit buses. Exempting those purchases lowers revenue by about $3 million.