Chasing the Gas Tax in the Golden State

For more than 50 years, California has reliably called on growth in gasoline tax revenues to offset the maintenance cost of its massive freeway and highway system. But what if those revenues eventually peak, and then, decline?

Later this fall, the Golden State’s next round of higher gas taxes and vehicles fees will begin a two year rollout. As part of Senate Bill 1, passed this April, total state petrol taxes will rise from the current .27 cents to .47 cents per gallon, creating a wave of new revenues between $4.7 and $5.66 billion per year, for the next 10 years.

The problem lies in the bill’s potential success, however. Combined with the steady march of fuel efficiency gains in gas-driven cars, and the fast adoption of electric vehicles (EV), state gasoline consumption is already in decline on a per capita basis. And by 2020, the state may be chasing a downward sloping curve in consumption overall, and associated tax revenues.

Sudden alarm over the loss of gas tax revenue growth is spreading across a number of domains. When the British government announced the aspirational goal of banning sales of all gas and diesel cars by 2040, analysts quickly claimed that Westminster could face a loss of 170 billion pounds of avoided gas tax revenue.

The U.K. is well familiar with the effects of taxation and charges on consumption. A London-specific daily car charge starting in 2003 has produced a 25 percent reduction in drivers entering central London, according to The Economist.

As the saying goes, if you tax something heavily, you will get less of it. Cigarette taxes were instrumental in guiding the long, multi-decade decline of smoking. More recently, soda taxes have produced similar, hard-hitting results in cities like Philadelphia, and in Mexico. The question for California, therefore, is how to deal with a $130 billion backlog of state road repairs before the sun goes down on oil.

“The elephant in the room is that surface transportation funding mechanisms are dependent on continued consumption of fossil fuels,“ said Adam Fowler, a research manager with Los Angeles-based Beacon Economics and one of the co-authors of the recent report “Beyond the Gas Tax: Funding California Transportation in the 21st Century,” published by San Francisco-based Next 10.

“While the gas tax is simple to administer, it’s a very blunt instrument,” Fowler added. “I don’t think anyone is under the illusion this is a long term fix.” Indeed, California data may already indicate diminishing returns to higher tax rates on fuel.

A previous hike created an initial windfall for the state, lifting revenue to $5.7 billion in 2010 from $3.1 billion in 2009. But seven years later, greater fuel efficiency, a newfound preference for walkable neighborhoods and public transport—and lower gasoline prices at the pump—has California now projecting 2017 gas tax revenues at just $5.1 billion. And that’s despite a higher population, more registered cars on the road, and more miles travelled.

The state may have some solutions, however, to the blunt instrument of gas taxes. The California Road Charge initiative just completed a one year pilot program; an effort to explore whether actual, metered on-road usage might be an effective way to distribute the tax burden. 5000 vehicles statewide were fitted with tracking devices, and were part of the trial from July 2016 to July of this year.

While data findings have not been released yet, a third party will be hired to analyze the results and report them to the California legislature by December, according to Caltrans, the program’s administrator.

Interestingly, the state is quite upfront about a future of declining gas tax revenues. The California Road Charge program explains in a graphic that VMT (vehicle miles travelled) is expected to continue rising, while the fuel needed to drive those miles will decline. The funding gap, already underway, is expected to widen after the year 2020. Perhaps that’s not a coincidence.

The federal Energy Information Administration actually expects total petroleum consumption for the country to peak in 2019, and then enter gentle decline for a decade. As goes California, so goes the nation.

There is still the risk, however, that consumption doesn’t fall quite as soon as some models forecast.

Noel Perry, founder of Next 10, cautions that recent data over the past two years suggests any gains from efficiency might be increasingly “spent” on greater miles travelled.

“Yes, vehicle fleets are being updated more regularly, pushing efficiency higher. But total emissions from transportation have started rise to again,” Perry said.

In addition to the Beyond the Gas Tax report, Perry’s Next 10 has just released the 2017 California Green Innovation Index that shows a worrying trend: rising housing costs have forced workers into longer car commutes, and have also dampened growth of public transit ridership.

“It can be hard to know how this will play out,” Perry said. “On one hand, if there aren’t changes to how we commute, people may push [vehicle miles travelled] even higher. But we’re also going to see markets do what markets do best—people will opt for the most efficient vehicles, and eventually EV.”

California has nearly 300,000 zero-emission vehicles on the road already, with a goal to place 1.5 million ZEVs on the road by 2025.

According to Fowler, Caltrans had already modeled, even before passage of Senate Bill 1, that half of the projected revenue gains could be lost to efficiency by 2030.

“If California’s EV action plan was realized [1.5 million ZEV on the road by 2025] that in itself could reduce the revenue gains by a half billion,” Fowler said. “This bill is not perfect, but it’s in place; and will push us through a ten year window. The important idea is that this really is the transition phase.”

Revenue areas which California may tap in the future are higher vehicle fees, and possibly higher taxes and fees on trucks.

The Next 10 Gas Tax report, Perry and Fowler point out, goes into some detail on the structure of diesel taxes, suggesting these levels may need to be adjusted further to better account for the damage and wear the trucking industry has on all roads.

Senate Bill 1 is also introducing a new suite of fees on gas-powered cars, and will also—somewhat controversially—set a flat $100 fee on EV. Unlike the interruption in gas tax revenue growth, fees on vehicles have generated steady growth for California since 1970 (earliest available data). In this decade alone, this fee revenue has grown from $6.5 billion in 2010 to a projected $8.5 billion in the current year.

Those revenues now exceed gas tax revenues. Combined with the potential for a mileage based road charge program, perhaps California will successfully, in the next decade, find a way to equitably fund its very steep road maintenance costs.