Proposition 26: Negative Fallout

Last fall, CA voters approved Proposition 26, an initiative that requires all new state taxes and fees be approved by a two-thirds majority by each house of the state legislature.

The November passage of Proposition 26 threatens a complicated 2010 gas-tax swap that reinstated California’s transit assistance program.

Since that deal involved an increase to the state’s excise tax, it must be re-enacted with a two-thirds majority of the Legislature, according to Jessica Digiambattista of the Legislative Analyst’s Office.

If the reauthorization is not approved, transit agencies will suffer. The San Francisco Municipal Transportation Agency could lose about $31.5 million and BART about $23 million. Caltrain could miss out on about $4.5 million and SamTrans some $4.6 million.

"[A] complicated gas-tax swap" is right. From what I can gather, it seems like the gas-tax swap reduced the overall funds available to public transit by replacing an out-and-out gas sales tax with an excise tax. Because of Proposition 26, that increase in excise tax must be retroactively approved by a 2/3s majority--irregardless of the fact that it was paid for by eliminating the sales tax. (To keep the gas-tax swap palatable, the overall package is revenue neutral, i.e., no net change in state $$ intake or outflow.)

Madness!

Here's a quick selection of explanatory bits from the Bay Area Metropolitan Planning Commission website. Hard to nushell this one, other than that it seems enabled by imaginative accounting, and is probably motivated by a desire to free up monies in the General Fund. (I also want to guard against the strong possibility that any summary by a non-expert will misrepresent the facts at hand, so I'll let them speak for themselves.)

Mechanics of the Tax Swap

The bills (AB 6 and AB 9) provide the General Fund with approximately $1.1 billion by shifting the cost of debt service on outstanding transportation bonds from the General Fund to various transportation funds. Relieving the General Fund of these interest obligations results in approximately $11 billion in General Fund savings over the next 10 years. 

The tax swap, contained in AB 6, affects four different taxes — the state portion of the sales tax on gasoline, the excise tax on gasoline, the state portion of the sales tax on diesel fuel, and the excise tax on diesel. Local sales taxes remain unchanged and will continue to include gasoline and diesel fuel. AB 6 contains the following key changes:

• Beginning July 1, 2010, eliminates the 6 percent statewide sales tax on gasoline, and with it, the funding source for Proposition 42 (the 2003 constitutional amendment that required most gasoline sales taxes to go to transportation) and “the spillover,” a funding formula dedicated to public transit.
• Raises the excise tax on gasoline by 17.3-cents on July 1, 2010, for a total excise tax of 35.3 cents per gallon. Starting March 1, 2011, and each March 1st thereafter, authorizes the State Board of Equalization (BOE) to estimate how much revenue would have been raised by the sales tax on gasoline and adjust the gasoline excise tax to raise an equivalent amount.
• Retains the existing sales tax on diesel fuel and raises it by another 1.75 percent on July 1, 2011 to generate about $120 million in additional funds for public transit, for a total of approximately $436 million in FY 2011-12.
• Offsets the diesel sales tax rate increase by lowering the diesel excise tax from 18 cents per gallon to 13.6 cents, effective July 1, 2011. Similar to the gasoline excise tax, the excise tax would be adjusted by the BOE on March 1st of each year to maintain revenue neutrality.

Public Transit Bears the Brunt of General Fund Savings

While the overall tax swap is revenue neutral by design (in order to allow for passage by a simple majority vote), public transit loses over $1 billion annually due to the elimination of the sales tax on gasoline, as discussed in greater detail below. AB 9 also appropriates $142 million in Public Transportation Account (PTA) funds to the General Fund to offset the cost of public transit bond debt service in FY 2009-10 and another $254 million for FY 2010-11.
 ...
AB 9 stipulates how the excise taxes on gasoline and diesel fuel — and the sales tax on diesel — will be distributed, and appropriates $400 million to the State Transit Assistance (STA) program, the only source of state support for public transit operations.

Raw. Deal. Why the gas-tax swap needs reauthorization when it was signed in March of 2010, and Prop 26 was passed in November of 2010, is beyond me.