Understanding California’s New Transportation Package

Does California need significant new investments in its transportation infrastructure? Given our state’s deteriorating highways, roads, bridges, and other transportation infrastructure, not to mention billions of dollars in deferred maintenance, the answer should clearly be “yes.”

Governor Brown and state legislative leaders agree. They recently enacted Senate Bill 1, the Road Repair and Accountability Act of 2017, allocating $54 billion over the next 10 years in a transportation package that is split equally between state and local investments. This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, improving conditions for pedestrians and bicyclists, and facilitating goods movement. The revenue to pay for these investments comes from a 12-cent increase in the state excise tax on gasoline (the “gas tax”), increased diesel fuel taxes, and new transportation improvement fees.

The new transportation package seeks to address billions of dollars in deferred maintenance and represents the culmination of deliberations that started in 2015, with an initial proposal from the Governor and a special legislative session on transportation funding that ran from June 2015 to December 2016.

While the overriding question should be whether California needs these transportation investments and improvements, much of the attention leading up to and following the enactment of the package has focused on questions about the fairness of the gas tax, whether the funds actually will be spent on transportation improvements, and whether the package was hastily passed without sufficient debate. After briefly recapping what the package actually includes — on both the spending and revenue sides — we examine each of these questions, in part by adding some much-needed context.

How Will the Money Be Spent?

The funds from the $54 billion package will be split equally between state and local transportation programs.

Major state-level allocations include:

  • $15 billion for highway repairs.
  • $4 billion in bridge repairs.
  • $3 billion to improve trade corridors.
  • $2.5 billion to reduce congestion on major commute corridors.

Major local-level allocations include:

  • $15 billion for local road repairs.
  • $8 billion for public transit and intercity rail.
  • $2 billion for local “self-help” communities that are making their own investments in transportation improvements.
  • $1 billion for active transportation projects to better link travelers to transit facilities.

How Will the Money Be Generated?

The package generates $54 billion in new revenues over 10 years from a series of tax and fee increases:

  • $24.4 billion from a 12-cent increase in the base gas excise tax starting November 1, 2017.
  • $10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting November 1, 2017.
  • $16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range from $25 to $175 per vehicle based on the value of the vehicle. For instance, a vehicle valued at less than $5,000 would incur a fee of $25, while a vehicle valued at $60,000 or more would incur a $175 fee.
  • $200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.

In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting in 2020-21. Further, the base gas and diesel fuel excise taxes and new transportation improvement fee will be annually adjusted for inflation starting on July 1, 2020. The new road improvement fee will be annually adjusted for inflation starting on July 1, 2021.

The Question of Fairness: Gas Taxes and Vehicle Fees Are How We Fund Transportation

Whenever increases in the gas tax are considered, issues are raised about the fairness of the tax. As noted in our primer on California’s tax system, there are different ways to assess the fairness of taxes. Most people agree that a fair tax system asks taxpayers to contribute to the cost of public services based on their ability to pay. When lower-income households spend a larger share of their budgets on taxes than higher-income people do, we refer to those taxes as regressive. Conversely, taxes that require higher-income people to spend a larger share of their budgets on taxes are considered progressive. Lower-income households spend more of their incomes on daily necessities, such as basic transportation. In this respect, gas taxes are regressive.

However, this critique of the gas tax as a way to fund transportation improvements would be more concerning if we had other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that people pay to use highways, roads, transit facilities, ports and airports, and so on. While usage-based taxes and fees may be mostly regressive, they are fair in that they are paid as the cost of using the service. Even alternatives in transportation funding — toll roads and charges based on vehicle miles traveled (VMT), for instance — still raise revenues based on people’s use of highways and roads, and not with regard to users’ incomes. Another potential alternative, the carbon tax — a tax imposed on the burning of carbon-based fuels such as coal, oil, and gas — would still generate revenues based on the demand for and use of those fuels.

Some people contend that transportation should be funded from the state’s General Fund, or by general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because the General Fund in California is largely reliant upon the state’s progressive income tax. However, this raises a major concern: Using General Fund dollars would put transportation investments in competition with other vital programs and services for limited state funding. General Fund dollars should be reserved for services for which lower-income households are especially burdened by the cost of the service (e.g., health insurance) or programs from which the entire society benefits and which we want to encourage (e.g., K-12 education).

Usage-based taxes and fees also make sense as a source of transportation funding because they can be structured in ways that meet other policy goals. For instance, because driving creates emissions that are harmful to the environment, taxes and fees can be designed to encourage alternative forms of transportation. Further, concerns about the impacts on lower-income individuals can be addressed by providing offsets. For instance, California could expand its Earned Income Tax Credit (EITC) — a refundable credit for low-income Californians — as a means of offsetting increased gas costs.

There is another factor to consider as to the wisdom of the recently enacted increase in California’s gas tax: our state’s gas taxes have not been increased in 23 years. Since the state last increased the rate, the real (inflation-adjusted) buying power of the gas tax per mile driven has dropped significantly. (Miles driven is a good proxy for the deterioration of roads.) There are a few reasons for this. One is that the tax is not indexed to inflation. Second, it is imposed as a fixed amount per gallon, not a percentage of the sales price of gasoline, so it does not increase as gasoline prices increase. Finally, because cars are more fuel-efficient than years ago, drivers pay less per mile driven than they did in 1994, when the gas tax last rose. When gas tax revenues fail to keep up with both inflation and wear and tear, less money is available to maintain and build streets and highways, and a backlog of deferred maintenance accumulates. The cost of addressing the deferred maintenance on the state’s transportation assets (not even including local roads) is now $57 billion. The relatively large 12-cent-per-gallon increase in the gas tax, which represents an approximate 4 percent increase in the overall cost of gasoline, is partly the result of 23 years of no increases. Furthermore, since the new package starts to adjust the gas tax rate for inflation in 2020, it will result in much more gradual annual changes in the rate, in turn helping ensure that revenues keep up with ongoing needs.

Lastly, it is important to put the gas tax in the broader context of the transportation package overall. State leaders structured the transportation improvement fee on vehicles — another key piece of the package’s revenue mix — so that it is based more on people’s abilities to pay, with the fee increasing relative to the value of the vehicle.

The Question of Accountability: Funding Is Dedicated to Transportation and Related Activities

One of the other critiques offered about the new package is that the funds are not assured to go toward transportation improvements.

This critique is simply not based in fact. As noted in our quick summary above, the funds are all earmarked for state and local transportation investments. In addition, the package includes a set of accountability provisions designed to ensure that the revenues are spent as intended. Among these is a constitutional amendment (ACA 5) that will require voter approval on the June 2018 ballot. ACA 5 would 1) prohibit spending the funds on anything other than transportation and 2) create a state transportation inspector general within the California Department of Transportation (Caltrans) to ensure both that funds are spent as intended and that this spending complies with state and federal requirements.

The Question of Timing: State Leaders Have Been Working on a Transportation Package for Over Two Years

Opponents of the package have also charged that the package was “rammed through,” without enough opportunity for deliberation.

This simply is not the case. Governor Brown initially proposed a similar package in early 2015 and called a special legislative session that ran from June 2015 through the end of 2016, without resolution. The Governor then outlined the contours of a new package in his proposed budget for 2017-18, released in January, and state legislative leaders crafted alternative proposals in the weeks that followed. So, at a minimum, the new transportation package represents deliberations that had been underway for more than two years. And, given that the state has not increased the gas tax in 23 years, while billions of dollars in deferred maintenance has mounted, enacting a new transportation funding package was long overdue.

Ultimately, the most important question is whether California needs to invest more in its transportation infrastructure, improving its highways, roads, public transit and other alternative transportation options, and its ability to move people and goods efficiently. Years of neglect and billions of dollars in deferred maintenance, exacerbated by a lack of political will to increase taxes and fees, mean that the answer to that question is clearly “yes,” and that the recently enacted transportation package is a significant advance for California.

— Chris Hoene