State Budget Update

MTC Endorses Comprehensive Fix to Protect State Transportation Funding

February 2011
On January 26, 2011, MTC voted unanimously in favor of the comprehensive strategy endorsed by the California Alliance for Jobs, the California Transit Association, the California State Association of Counties, the League of California Cities and Transportation California to urge the Legislature to preserve transportation funding in the wake of Proposition 26.  The strategy, summarized in Attachment A (PDF), combines legislation to reaffirm the new taxes enacted under the swap with a proposal to shift vehicle weight fees to the General Fund to help pay for transportation bond debt service.

We agree with our colleagues that this is a reasonable compromise that will help address the General Fund’s $25 billion deficit, while also providing local and state transportation programs with a predictable level of funding similar to that which was assumed at the time of the gas tax swap. Additionally, thanks to Proposition 22, funding for State Transit Assistance, the STIP and local streets and roads is now more secure and predictable than ever. Given the severity of the budget deficit and the expectation that transportation funding will in some form be used to pay for debt service on general obligation bonds for transportation, staff recommends that MTC support the proposed comprehensive fix.

Impact of Proposition 26 on Transportation Funding

At issue is a provision in Proposition 26 that throws into jeopardy the taxes that were raised as part of the gasoline tax swap that was enacted by the Legislature in 2010 by less than a two-thirds vote. As a reminder, the swap eliminated the sales tax on gasoline and replaced it with an equivalent, and annually adjusted augmentation of the gasoline excise tax. It also reduced the diesel excise tax in exchange for raising the sales tax rate on diesel fuel by 1.75 percent in order to provide additional public transportation funding. Under a provision of Proposition 26 that is retroactive to January 1, 2010, any state tax increase enacted by a majority vote is repealed on November 2, 2011 if not reaffirmed by a two-thirds vote. Therefore, in order to retain the tax provisions of the gasoline tax swap, the Legislature would need to act by a two-thirds vote before November 2, 2011.

There is significant uncertainty regarding how Proposition 26 affects the gas tax swap that may ultimately only be clarified by a court decision. However, the worst case scenario is that the elements of the swap that lowered the sales tax would remain in effect, while the new excise tax and higher diesel sales tax would be repealed, leaving transportation accounts short by over $2.5 billion.

Further muddying the waters, Proposition 22 repealed provisions of the gas tax swap that provided for transportation bond debt service to be funded by the new excise tax. This provision results in an immediate $1 billion impact to the state’s General Fund and is therefore of urgent concern to the new Brown Administration and the Legislature.

Without Swift Action to Validate Swap, Significant Uncertainty Could Stall Transportation Projects

There are various interpretations about what Proposition 26 means for transportation funding and what would occur if the Legislature does not reenact the tax portions of the swap by a two-thirds vote. The differences of opinion will undoubtedly give pause to the California Transportation Commission as it releases its draft fund estimate for the State Transportation Improvement Program (STIP) next March. By urging the Legislature to adopt a comprehensive fix to reaffirm the gas tax swap, the coalition is hoping to avoid delays to transportation projects that could result amidst this significant uncertainty. For instance, the Legislative Analyst’s Office has stated that it believes the retroactive provision in Proposition 26 is “self-executing” and would automatically repeal the entire gas tax swap by November 2011, thereby restoring the sales tax on gasoline. Other organizations, including CSAC, disagree and believe there’s a legitimate interpretation of Proposition 26 that would invalidate only the tax increases in AB 8X 6, not the provisions that eliminated the sales tax on gasoline. A concise legal analysis by the counsel to the California State Association of Counties is attached (Attachment B).

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