California Budget - R˚Î˚ÚÏ˚ EÓÌ˜ÛˇÌ˚Ó · 2018. 1. 17. · 2017. California does not automatically conform to federal tax law, which will limit the impact on revenues

Revenue Estimates

C alifornia’s economy and revenues are expected to continue to grow somewhat fasterover the budget window than had been forecast at the 2017 Budget Act. The General

Fund revenue forecast has improved, reflecting a large share of wages going to high-incometaxpayers and stronger consumption and investment over the medium term. As a result, afteraccounting for all transfers, except for transfers to the Rainy Day Fund, General Fund revenue ishigher than the 2017 Budget Act projections by $4.7 billion from 2016-17 through 2018-19.These estimates do not include any impacts of the federal tax changes passed at the end of2017. California does not automatically conform to federal tax law, which will limit the impact onrevenues. However, changes by individuals and businesses in response to federal taxincentives will affect revenues in potentially unexpected ways. The impact of the federal taxchanges will be assessed at the May Revision.

Figure REV-01 compares the revenue forecasts, by source, in the 2017 Budget Act and theGovernor’s Budget. Revenue, including transfers, is expected to be $127 billion in 2017-18 and$130 billion in 2018-19. The projected increase since the 2017 Budget Act is due to an improvedoutlook for personal income tax and sales tax. The corporation tax is slightly lower. Over thethree fiscal years, personal income tax is up $2.9 billion, sales tax is up $1.5 billion, andcorporation tax is down $358 million.

The improved revenue forecast for personal income tax is driven by strong wage withholdingand capital gains. Because wage growth is not keeping up with the growth in withholding, itappears that much of the wage growth is accruing to higher-income taxpayers, who havehigher-than-average marginal tax rates. Capital gains are expected to be somewhat lower in2017 than estimated at the Budget Act, but to be significantly higher in 2018 and somewhat

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Governor's Budget Summary — 2018-19 155

higher in later years, as well. The sales tax forecast has improved due to strong sales taxreceipts as well as a more favorable forecast for consumer spending and capital equipmentspending. The reduced corporation tax forecast reflects continued weak performance forcorporate tax receipts, even as corporate profits have been strong in 2017.

Figure REV-02 shows revenue from capital gains as a percentage of total General Fund taxrevenue. As seen from this table, the amount of revenue the General Fund derives from capitalgains can vary greatly from year to year. For instance, in 2007, capital gains contributed


156 Governor's Budget Summary — 2018-19

$10.9 billion to the General Fund. By 2009, the contribution from capital gains had dropped to$2.3 billion. For 2018, capital gains are forecast to contribute $13.4 billion to General Fundrevenue—the highest amount ever.

Figure REV-03 shows capital gains reported on California tax returns from 1970 throughprojections for 2018. Although the level of capital gains has grown significantly since 1970(along with the economy and total personal income tax revenue), capital gains volatility hasbeen a constant. History suggests that above-normal levels of capital gains eventually drop off.

Forecasting capital gains is difficult because capital gains realizations are heavily dependentupon stock market performance. This forecast assumed that the S&P 500 ended 2017 at 2,588and will grow slowly for the next several years. While the stock market has outperformed theBudget Act forecast, estimated income tax payments thus far in 2017 have only grownmodestly and 2016 capital gains appear to be much lower than forecast at the Budget Act.Reflecting this divergent data, the capital gains forecast for 2017 is down somewhat fromBudget Act levels, but the capital gains forecast for 2018 and later has been revised upward.

The highest-income Californians pay a large share of the state’s personal income tax. For the2015 tax year, the top 1 percent of income earners paid just under 48 percent of personalincome taxes. This percentage has been greater than 40 percent in 11 of the past 12 years.The share of total adjusted gross income from the top 1 percent of income earners hasincreased from 13.8 percent in 1993 to 24 percent in 2014. This number has exceeded 20percent in 11 of the past 12 years. Consequently, changes in the income of a relatively smallgroup of taxpayers can have a significant impact on state revenues.



These two related phenomena—significant reliance of the General Fund on capital gains and ontaxes paid by a small portion of the population—underscore the difficulty of forecastingpersonal income tax revenue. The Rainy Day Fund helps address some level of volatility. UnderProposition 2, when capital gains revenue is greater than 8 percent of General Fund taxrevenue, that windfall revenue is used to pay off General Fund debts and build up a reserve forfuture downturns.

Along with California’s economy and demographic profile, California’s revenue structure haschanged significantly since 1975. For the 1975-76 Budget, total General Fund revenues were$9.4 billion. Sales tax made up the largest share of General Fund revenue, at just under 40percent. Personal income tax revenue made up less than a third of General Fund revenue, andcorporation taxes were about 13 percent. An estate tax in 1975 funded over 3 percent of theGeneral Fund. The current Budget includes total General Fund revenue of $132 billion, withpersonal income taxes making up almost 70 percent of the total. Sales tax makes up19.4 percent of General Fund revenue and the estate tax has been repealed. Although thestatutory sales tax base has changed very little since 1975, a continuing shift in the economyfrom the consumption of taxable goods to the consumption of nontaxable services has led to adramatic drop in the share of personal income spent on taxable goods. On the tax policy front,California has adopted many new tax changes in the intervening four decades:

• Corporations can elect to only report on their activities within the United States, as opposedto having to report on their worldwide activities.



• Personal income tax brackets and other parameters are indexed for inflation.

• The personal income tax structure is friendlier to families with children; the dependentexemption credit has been increased and a state earned income tax credit has beenadopted.

• In 1975, the top personal income tax rate was 10 percent for joint returns with income over$31,000. In 2018, the top rate is 12.3 percent for incomes over $1.1 million (plus 1 percentfor the Mental Health Services Tax for incomes over $1 million).

• Proposition 13 was adopted by voters in 1978. It limits the growth of property tax revenueand, along with court cases, had the effect of shifting school funding from localgovernments to the state government.

• Corporations now apportion their income to California using the portion of sales inCalifornia, as opposed to a three-factor formula which also considered payroll and propertyin California.

• The definition of nexus for sales and use tax was expanded in 2011 to include some remoteretailers who do not have a physical presence in California.

• Enterprise Zones were first established in 1984. They were repealed in 2013 and the use oftheir tax credits are still being phased out.

Proposals To Encourage Additional Job Creation

California’s economy has added 2.6 million jobs since 2011. In support of this growth, Californiarepealed the ineffective enterprise zone and redevelopment programs and redirected part of thesaved revenue towards more effective programs, such as the sales tax exemption formanufacturing equipment and the California Competes tax credit program. This past summer,the exemption for manufacturing equipment was expanded to include equipment used forgreen electricity production and food production. The Budget proposes the extension of theCalifornia Competes program at $180 million for another five years. An additional $20 million isproposed to provide direct assistance to small businesses. In addition, because manyCalifornians continue to struggle to find work, the Budget proposes a reconstituted $50 millionper year credit to encourage businesses to hire individuals with employment barriers.



General Fund Revenue

Figure REV-04 shows the breakdown of General Fund revenues, excluding transfers, by taxationtype. Personal income tax contributes 69.3 percent of the total.

Long-Term Forecast

Figure REV-05 shows the forecast for the three largest General Fund revenues from 2016-17through 2021-22. Total General Fund revenue from these sources is expected to grow from$117.8 billion in 2015-16 to $142.8 billion in 2021-22. The average year-over-year growth rate forthis period is 4.2 percent.

The economic forecast reflects continued steady growth through 2022. The projected averagegrowth rate in U.S. real Gross Domestic Product over this period is around 2.2 percent.



Planning for the Next Recession

Economic growth is forecast to continue over the next few years. However, a recession duringthis period is possible, particularly in light of the length of the current expansion. As discussedin the Economic Outlook Chapter, there are several economic risk factors that could either leadto a recession or cause a significant slowdown in revenue growth. Continued shortages ofhousing will require higher percentages of income to be spent on rent or mortgage costs,limiting the amount of disposable income and reducing sales tax revenue. Even at high wages,businesses may find it difficult to hire more people because of the housing shortage whichwould limit wage and salary growth. Geopolitical events may also cause disruptions forCalifornia corporations, many of which have a significant presence in global markets.

Even in a moderate recession, revenue declines could be significant. Figure REV-06 shows ahistory of California’s three largest revenue sources—personal income tax, sales tax, andcorporation tax—along with revenue projections for the budget forecast and a moderateone-year recession in 2019. Under this scenario, revenue losses result from a decline in wagesof about $90 billion compared to forecast (about 7 percent) and by a drop in capital gainsrealizations due to a 30-percent stock market correction. The shaded areas in this figure showthe timing of the 2001 recession, the 2007 recession, and the recession scenario. While theactual revenue declines in the past two recessions were significant (as shown in this figure), taxlaw changes temporarily increased revenues to lessen the declines. Revenue losses in thisrecession forecast would exceed $20 billion per year for two years, continue with several moreyears of revenue declines in the range of $15 billion, and lead to a permanently lower revenuebase compared to the current forecast.



Personal Income Tax

The personal income tax is expected to generate $82.9 billion in 2016-17, $89.4 billion in2017-18, and $93.6 billion in 2018-19. These figures reflect a reduction of $304 million in2016-17, and increases of $582 million in 2017-18 and $2.6 billion in 2018-19. The personalincome tax is the state’s largest revenue source and is expected to comprise 69.3 percent of allGeneral Fund revenues in 2018-19.

Modeled closely on federal income tax law, California's personal income tax is imposed on nettaxable income—gross income less exclusions and deductions. The tax rate structure isprogressive over the income spectrum. For the 2012 tax year, the marginal rates ranged from1 percent to 12.3 percent. Proposition 30 created three additional income tax brackets forfamilies with rates of 10.3 percent for taxable income above $500,000, 11.3 percent for taxableincome above $600,000, and 12.3 percent for taxable income above $1,000,000. Proposition30 held these tax brackets in effect for seven years—tax years 2012 to 2018. Voters approvedProposition 55 in November of 2016, extending the three additional tax brackets through taxyear 2030.

The largest income source for the personal income tax is wages and salaries. Although theyear-over-year growth rate for wages tends to be less volatile than other income sources, wagesand salaries include some unpredictable types of compensation such as stock grants, restrictedstock units, stock options, and bonus payments. In 2015, taxes attributable to wages andsalaries accounted for nearly 58 percent of personal income tax revenues. Based on the



economic forecast, wages and salaries are expected to increase 5.4 percent in 2017, 5.9 percentin 2018, and 3.7 percent in 2019. The economic forecast increased the growth rates for 2017and 2018 since the Budget Act, reflecting stronger near-term economic growth, while thelong-term forecast for wages has been downgraded anticipating slower economic growth. Theeconomic forecast shows personal income growing more slowly due to an increasing numberof retirements slowing wage growth as higher-income earners leave the work force and arereplaced by lower-wage earners. Taxable personal income, however, includes pension income,which is excluded from the economic series for personal income. Recent data suggests thatthe distribution of income gains among various income levels since the beginning of 2016 hasalso been disproportionately distributed to high-income earners compared to prior years. Thegrowth rate in wage withholding receipts has been outpacing economic wage growth in 2016and 2017, which has led to a higher forecast for wage withholding receipts since the BudgetAct.

Capital Gains

This forecast assumes that the S&P 500 ended 2017 at 2,588, and will grow annually atapproximately 0.4 percent. Though stock market levels are forecast to be higher than theBudget Act, which assumed a 2017 year-end level of 2,398, long-term returns are forecast to belower due to its higher valuation. Although the stock market is expected to yield slow growthgoing forward, the strong performance of the stock market in recent years is expected to leadto continued above-normal capital gains through 2020.

This forecast estimates, based on cash receipts and partial-year tax data, capital gains in 2016 at$107 billion, a downgrade from the Budget Act forecast of $115 billion, but still above normallevels. Despite estimated tax payments in 2017 reflecting modest growth over the prior year,the Budget forecasts capital gains to grow substantially year-over-year to $129 billion in 2017,although this is still below the 2017 Budget Act level of $133 billion. Reflecting the strong stockmarket performance and unrealized gains, 2018 capital gains are forecast at $133 billion, upsignificantly from $126 billion at Budget Act. Capital gains are forecast to decline modestlybeginning in 2019 until reaching a normal level at 4.5 percent of personal income in 2021. Thereturn to a normal level of capital gains is one year later than what was assumed in the BudgetAct.

A portion of personal income tax revenue is deposited into a special fund instead of the GeneralFund. Proposition 63, passed in November 2004, imposes a surcharge of 1 percent on taxableincome over $1 million. Revenue from the surcharge is transferred to the Mental HealthServices Fund and used to fund mental health programs. Revenues of $1.8 billion areestimated for 2016-17, and projected to be $2.1 billion for 2017-18 and $2.2 billion for 2018-19are projected. The General Fund and the Mental Health Services Fund shares of personal



income tax revenues for 2016-17 through 2018-19 are shown in Figure REV-07.

Sales and Use Tax

The sales tax is expected to generate General Fund revenue of $24.9 billion in 2016-17,$25.2 billion in 2017-18, and $26.2 billion in 2018-19. These figures reflect increases of$378 million in 2016-17, $695 million in 2017-18, and $426 million in 2018-19. Receipts from thesales tax, the state’s second largest revenue source, are expected to contribute 19.4 percent ofall General Fund revenues in 2018-19.

The sales and use tax (sales tax) is generally applied to the sale of merchandise, includingvehicles, in the state. Sales tax revenues are forecast by relating taxable sales to consumptionof goods and business investment. Higher projections of growth in taxable consumption andbusiness investment have increased the forecast relative to the Budget Act. However, theimproved outlook for sales tax does not reverse the long-term trend of deterioration of the salestax base. This deterioration is evidenced by taxable sales as a percentage of personal incomedeclining from over 50 percent in the late 1970s to 30 percent today.

Figure REV-08 displays total sales tax revenues for the General Fund and various special fundsfor 2016-17 through 2018-19.



Figure REV-09 displays the individual elements of the state and local sales tax rates.

Figure REV-10 shows combined state and local tax rates for each county, including special ratesfor certain cities within those counties.

Motor vehicle and parts dealers were the largest contributor to the sales tax base in thecalendar year 2016, comprising nearly 13.3 percent of taxable sales. Food service sales sawstrong growth of 6.7 percent from 2015 to 2016 and was the second-largest contributor to thesales tax base, with close to 12 percent. The third most significant contributor to the sales taxbase is wholesale trade, which comprised 11.6 percent of the sales tax base.

Since July 1, 2010, the General Fund portion of the sales tax no longer applies to gasoline.Taxable sales, excluding gasoline, increased by 3.5 percent in 2015-16. Based on preliminarydata, it is estimated that taxable sales increased by 3.8 percent in 2016-17. Growth is expectedto increase to 4.6 percent in 2017-18, followed by 4.3 percent in 2018-19.





A General Fund sales tax exemption for manufacturing equipment commenced July 1, 2014.The sales tax exemption applies to purchases of manufacturing or biotechnology research anddevelopment equipment, valued at up to $200 million in qualifying purchases per business, peryear. Utilization of this exemption was about $182 million in 2016-17, and is forecast to be$235 million in 2017-18 and $291 million in 2018-19. The exemption was expanded beginning in2018 to include manufacturing equipment used in electric power generation and agriculturalprocessing, accounting for additional utilization of $43 million in 2017-18 and $88 million in2018-19.

Corporation Tax

The corporation tax is expected to generate $10.1 billion in 2016-17, $10.7 billion in 2017-18, and$11.2 billion in 2018-19. These figures reflect reductions of $95 million in 2016-17, $239 millionin 2017-18, and $24 million in 2018-19. Corporation tax revenues are expected to contribute8.3 percent of all General Fund revenues in 2018-19. These figures also reflect a reduction of$248 million in 2017-18 and $259 million in 2018-19 due to the managed care organization tax.

Insurance Tax

Most insurance policies written in California are subject to a 2.35-percent gross premiums tax.This tax takes the place of all other state and local taxes on insurance companies except thoseon real property and motor vehicles. In general, the basis of the tax is the amount of grosspremiums received, less returned premiums. The insurance tax is expected to generateGeneral Fund revenues of $2.4 billion in 2016-17, $2.4 billion in 2017-18, and $2.5 billion in2018-19. These figures reflect a reduction of $61 million in 2016-17, $100 million in 2017-18, and$90 million in 2018-19. These figures also include a $151 million reduction in 2017-18 and a$158 million reduction 2018-19 due to the managed care organization tax.

Alcoholic Beverage Taxes

In addition to the sales tax paid by retail purchasers, California levies an excise tax ondistributors of beer, wine, and distilled spirits. The tax rates per gallon are applied as follows:(1) $0.20 for beer, dry wine, and sweet wine; (2) $0.30 for sparkling wine; and (3) $3.30 fordistilled spirits.

Alcoholic beverage revenue estimates are based on projections of total per capita consumptionand population growth for each type of beverage. Overall, consumption of alcoholic beveragesis expected to grow by about 2 percent in 2017-18 and 1.5 percent in 2018-19. Revenues fromthis tax were $368 million in 2016-17 and are estimated to be $376 million in 2017-18 and



$382 million in 2018-19.

Cannabis Excise Taxes

Proposition 64, the Adult Use of Marijuana Act, levies new excise taxes on the cultivation andretail sale of both recreational and medical cannabis as of January 1, 2018. The cultivation tax is$9.25 per ounce of flower, $2.75 per ounce of leaves, and $1.29 per ounce of fresh cannabisplant to be paid on all recreational and medicinal cultivation of cannabis. In addition, there willbe a 15-percent tax on the retail price of cannabis. Cannabis excise taxes are expected togenerate $175 million in 2017-18 and $643 million in 2018-19. (See the Statewide Issues andVarious Departments Chapter for additional discussion.)

Cigarette Tax

The California Healthcare, Research and Prevention Tobacco Tax Act of 2016 (Proposition 56),passed by the voters in November 2016, increased the excise tax rate on cigarettes, tobaccoproducts, and electronic cigarettes. The excise tax increased by $2 from 87 cents to $2.87 perpack of 20 cigarettes on distributors selling cigarettes in California, effective April 1, 2017. Theequivalent excise tax on the distribution of other tobacco products such as cigars, chewingtobacco, pipe tobacco, and snuff also increased by $2 from a $1.37-equivalent to a$3.37-equivalent tax, effective July 1, 2017. Lastly, Proposition 56 newly imposes the$3.37-equivalent tobacco products tax to electronic cigarettes. The $1.37-equivalent portion ofthat tax was imposed beginning April 1, 2017 while the additional $2-equivalent tax wasimposed beginning July 1, 2017. The ad valorem excise tax rate on other tobacco products iscalculated annually by the California Department of Tax and Fee Administration based on thewholesale price of cigarettes and the excise tax on cigarettes.

Revenues from the tax on cigarettes and other tobacco products are distributed as follows:

• Ten cents of the per-pack tax is allocated to the General Fund.

• Fifty cents of the per-pack tax, and an equivalent rate levied on non-cigarette tobaccoproducts, goes to the California Children and Families First Trust Fund for distributionaccording to the provisions of Proposition 10 of 1998.

• Twenty-five cents of the per-pack tax, and a rate equivalent to 87 cents levied onnon-cigarette tobacco products and electronic cigarettes, is allocated to the Cigarette andTobacco Products Surtax Fund for distribution as determined by Proposition 99 of 1988.

• Two cents of the per-pack tax is deposited into the Breast Cancer Fund.

• As of April 1, 2017, two dollars of the per-pack tax, and an equivalent rate levied on



non-cigarette tobacco products and electronic cigarettes, goes to the California Healthcare,Research and Prevention Tobacco Tax Act of 2016 Fund for distribution according to theprovisions of Proposition 56 of 2016.

As of June 9, 2016, California raised the minimum age to legally purchase cigarettes and othertobacco products from 18 to 21 years, with an exemption for active-duty military personnel.Although raising the legal smoking age is expected to slow initiation rates among youngsmokers, the negative revenue impact is forecast to be small through 2018-19.

Projections of cigarette tax revenues are based on projected per capita consumption ofcigarettes, population growth, and the impact from the higher smoking age as well as theincreased prices due to Proposition 56. Revenue estimates for other tobacco products, whichnow include electronic cigarettes, also reflect recent law changes. The cumulative effect ofproduct price and tax increases, the increasingly restrictive environments for smokers, andanti-smoking campaigns (including state campaigns funded by Proposition 99 Tobacco Tax andHealth Protection Act revenues and revenues from the Master Tobacco Settlement) havereduced cigarette consumption considerably.

Annual per capita consumption (based on population ages 18-64) was 184 packs in 1980-81,123 packs in 1989-90, 84 packs in 1997-98, and 34 packs in 2016-17. Due primarily to higherprices from Proposition 56, per capita consumption is forecast to decline to 26 packs in 2017-18,the first full fiscal year that Proposition 56 is in effect. Tax-paid packs of cigarettes were 804million in 2016-17. In 2017-18, tax-paid packs of cigarettes are forecast to decline to 649 million.

Figure REV-11 shows the distribution of tobacco tax revenues for the General Fund and variousspecial funds for 2015-16 through 2017-18.

Other Revenues

Unclaimed Property

The Budget reflects receipts of $400 million in 2017-18 and $393 million in 2018-19. Thesenumbers reflect ongoing efforts to maintain holder compliance with Unclaimed Property Law.

Indian Gaming

The Budget reflects General Fund revenues from tribal gaming of $234.5 million in 2016-17,$31.6 million in 2017-18, and $1.8 million in 2018-19. This decline reflects the approval of recentcompacts which redirect payments away from the General Fund to dedicated funds.



Loan Repayments to Special Funds

The Budget reflects the repayment of loans to special funds based on the operational needs ofthe programs requiring these repayments. Total repayments are projected to be $128 millionand $186 million in 2017-18 and 2018-19, respectively.

Property Taxes

Although the property tax is a local revenue source, the amount of property tax generated eachyear has a substantial impact on the state budget because local property tax revenues allocatedto K-14 schools generally offset General Fund expenditures.

Assessed value growth is estimated based on statistical modeling and evaluations of real estatetrends. The median sales price of existing single-family homes rose by 5.5 percent in 2016,with activity in the 2016 calendar year driving fiscal year 2017-18 assessed valuations forproperty tax purposes. This is lower than the 6-percent increase in median sales prices thatoccurred in 2015. While both median prices and sales volumes declined slightly from 2015 to2016, the Budget anticipates property tax revenues will continue to show positive growth.Demand for homes continues to outpace supply in many major population centers, andCalifornia real estate continues to be an attractive investment for rental property investors aswell as long-term buyers.

Statewide property tax revenues are estimated to increase almost 6 percent in 2017-18 and5.6 percent in 2018-19. Approximately 42 percent ($29 billion) of 2018-19 property tax revenueswill go to K-14 schools. While this amount includes $1.6 billion that schools are expected to



receive in 2018-19 pursuant to the dissolution of the redevelopment agencies, it excludes the$8.5 billion shifted from schools to cities and counties to replace Vehicle License Fee (VLF)revenue losses stemming from the reduced VLF rate of 0.65 percent.

Special Fund Revenue

The California Constitution and state statutes specify into which funds certain revenues mustbe deposited and how they are to be spent.

Total special fund revenues, excluding transfers, are estimated to be $56.2 billion in 2018-19.Taxes and fees related to motor vehicles are expected to comprise 31.4 percent of all specialfund revenue in 2018-19. The principal sources are motor vehicle fees (registration, weight, andvehicle license fees) and motor vehicle fuel taxes. During 2018-19, it is expected that about$17.9 billion in revenues will be derived from the ownership or operation of motor vehicles.

Motor Vehicle Fees

Motor vehicle fees and taxes consist of vehicle license, registration, weight, driver license, andother charges related to vehicle operation. Figure REV-12 displays revenue from these sourcesfrom 2016-17 through 2018-19.

The Vehicle License Fee (VLF) is imposed onvehicles registered in California that travel onpublic highways. The current VLF tax rate is0.65 percent. In addition, the Road Repairand Accountability Act of 2017 (SB 1) added anew graduated fee at $25 to $175 per vehiclebeginning November 1, 2017. These taxesare imposed in lieu of a local personalproperty tax on automobiles and areadministered by the Department of MotorVehicles. The number of vehicles in the state, the ages of those vehicles, and their most recentsales price affect the amount of VLF collected. The total number of vehicles inCalifornia—autos, trucks, trailers, and motorcycles, including vehicles registered in multiplestates—is estimated to be 32.9 million in 2017-18 and will be 32.9 million in 2018-19. Theforecast projects 2.5 million new vehicles registered in both 2017-18 and 2018-19.

Beginning April 1, 2017, the base vehicle registration fee increased by $10 and is indexed toinflation. Including other fees in current law and inflation indexing, the total vehicle registrationfee is expected to be $82 in 2018.



In addition to the VLF, truck owners pay a fee based on vehicle weight. Due partly to theexpected increase in truck sales, weight fee revenues are expected to be $1.12 billion in 2017-18and increase 2.3 percent to $1.14 billion in 2018-19.

Motor Vehicle Fuel Taxes

The motor vehicle fuel tax, diesel fuel tax, and use fuel tax are the major sources of funds formaintaining, replacing, and constructing state highway and transportation facilities. Overone-third of these revenues are apportioned to local jurisdictions for a broad range of local roadprojects, including both maintenance of existing roads and construction of new roads. Inaddition, some jurisdictions choose to spend a portion of their allocation on improvements tothe state highway system in their region to decrease traffic congestion. Motor vehicle fuel taxcollections are shown in Figure REV-13.

Gasoline consumption increased 1.5 percent in2016-17 compared to the prior fiscal year. Whilecontinued gains in the average fuel economy ofcars and trucks on the road as well as the state’spolicies to reduce greenhouse gas emissions areexpected to support long-term declines ingasoline consumption, lower gasoline priceshave supported continued gains in consumptionthrough 2016-17. Gasoline consumption is expected to decline 0.1 percent in 2017-18 and0.6 percent in 2018-19 due to a combination of higher gas prices and a more fuel-efficient fleet.

Because most diesel fuel is consumed by the commercial trucking industry, consumption isaffected most significantly by general economic conditions. Robust industrial activitycontributed to an increase of 6.1 percent in diesel consumption in 2016-17. Diesel consumptionis expected to increase by 1 percent in 2017-18 and 0.5 percent in 2018-19.

The motor vehicle fuel tax (gas tax) is collected from distributors when fuel is loaded intoground transportation for transport to retail stations. This fuel was taxed at a rate of 29 centsper gallon in 2017-18 until November 1. With the passage of the Road Repair and AccountabilityAct of 2017 (SB 1), a new 12-cent excise tax was added to gasoline sales beginning November1, 2017, bringing the rate to 41.5 cents for the last eight months of 2017-18. The tax rate iscalculated at 45.7 cents per gallon in 2018-19. A portion of the excise rate is adjusted annuallyto maintain revenue neutrality under a fuel tax swap implemented in 2010-11 that exemptedgasoline from the General Fund sales tax and increased the excise tax rate. Fiscal year 2018-19is the last year that this adjustment will be made.



Distributors pay the diesel fuel tax, which applies to both pure diesel fuel and blends, at the fuelterminal. Diesel fuel for highway use is taxed at a rate of 16 cents per gallon in 2016-17. SB 1increased the excise tax rate by 20 cents on November 1, 2017. As such, the excise tax ondiesel was 16 cents for the first four months of 2017-18 before increasing to 36 cents for theremainder of 2017-18 and 2018-19. Dyed diesel fuel, which is used for off-highway purposessuch as farm equipment, is not taxed.

Beginning in 2020-21, the excise rates which apply to both gasoline and diesel will begin toincrease automatically to keep in line with inflation.

Summary of State Tax System

The state's tax system is outlined at the end of this section in Figure REV-14. Tax collectionsper capita and per $100 of personal income are displayed in Schedule 2 in the Appendix. Therevenue generated from each state tax from 1970-71 through 2018-19 is displayed in Schedule3 in the Appendix.





Documents

California Budget - R˚Î˚ÚÏ˚ EÓÌ˜ÛˇÌ˚Ó · 2018. 1. 17. · 2017. California does not automatically conform to federal tax law, which will limit the impact on revenues