Assessing the California Fuel Tax Swap of 2010

In 2010, California replaced its state sales tax on gasoline with an annually adjusted per gallon excise tax designed to produce as much revenue each year as the sales tax did previously. This gas tax swap was intended to ( a) relieve the state’s general fund during a period of fiscal emergency by circumventing the narrowly defined transportation purposes for which gasoline sales tax revenues could be legally spent and ( b) protect the existing revenue streams for transportation purposes. Experience to date reveals that this experiment has not met its objectives because of unanticipated volatility in the revenue stream resulting from dramatic fuel price fluctuations. Although the new revenues are protected from diversion to nontransportation uses, the unpredictability of such revenue presents many challenges for state transportation planning and programming. Other states considering similar shifts to price-based transportation taxes to address the continuing decline in purchasing power from fixed-rate fuel excise taxes may draw valuable lessons from the California experience.