Lawmakers Struggle To Create Transportation Financing Plan

State subsidies for transit operations would continue, public schools would be cut slightly less and the effective date of several tax breaks postponed under a complicated transportation-financing proposal being stitched together by state lawmakers.

The proposal is part of a series of cost-cutting measures the Legislature is acting on before February 21 to help erase a $20 billion gap between spending commitments and revenues over the next 18 months.

Elements of the plan come from Gov. Arnold Schwarzenegger’s January budget proposal in which he eliminates the 6 percent sales tax on gasoline and increases the 18-cent excise tax on fuel by nearly 11 cents.

Doing so reduces the amount of gasoline tax revenue by nearly $1 billion.

Article XIX of the state constitution prohibits excise taxes being used for mass transit. Under the current gas tax structure, transit agencies would receive $1.6 billion in the fiscal year beginning July 1 thanks in part to a mechanism that gives them more money when gas prices climb.

“The bulk of transit funds, more than 90 percent come from three sources: federal funds, local fare box revenue and local sales taxes,” said H.D. Palmer, spokesman for Schwarzenegger’s Department of Finance.

“It’s only in the last couple years where you’ve had this anomaly of spikes in gas prices causing revenues to shoot up to these historic levels.”

Schwarzenegger seeks to spend the $1.8 billion in excise taxes on streets and roads and highway projects — $629 million each – and the remaining $603 million to pay debt on transportation bonds, freeing up $603 million in the state’s cash-starved general fund.

Previously, the GOP governor had used the “excess” funds for transit agencies to pay the debt service but was prohibited from doing so by a court ruling.

An initiative backed by cities and transit agencies was drafted in part to halt that practice. Proposed for the November ballot, it would prevent any gas tax revenue being used to pay past debt service. 

A side effect of the GOP governor’s plan is that public schools would receive more than $800 million less. Sales taxes flow into the general fund, excise taxes don’t. The state constitution guarantees public schools roughly 40 cents on each dollar that comes to the general fund. By switching to excise taxes, schools are shorted.

“That was a byproduct of the transaction, not the reason we did it,” Palmer said.

Democratic lawmakers keep the central part of Schwarzenegger’s proposal – eliminating the sales tax on gasoline and switching to excise taxes – but search for a way to provide money for transit operations and further reduce the general fund shortfall.

They propose keeping the sales tax on diesel fuel, which generates $313 million annually, and earmarking that to transit operations.

Public schools would receive a percentage of that sales tax revenue.

The state constitution requires a two-thirds vote on tax increases and the budget. However, measures that are revenue neutral need just a simple majority.

That means that since $2.8 billion is currently generated by gas taxes and the governor’s plan spends only $1.8 billion, lawmakers can fill that $1 billion difference and still not need a two-thirds vote, eliminating the ability of Republicans to block it.

In his spending plan, Schwarzenegger says that if federal funds do not come in at a level to balance the state budget – an unlikely $6.9 billion – he would extend the suspension and postpone the operative date of several tax breaks.

Lawmakers want to fill some $600 million of the $1 billion hole in the transportation plan by implementing some of the extensions and delays proposed by Schwarzenegger.

While still unsettled, the two most likely candidates appear to be postponing the ability of allied businesses to swap tax credits, saving $315 million, and allowing companies doing business in multiple states to calculate their California taxes in a more favorable way. In its first year the latter tax change is expected to cost the state $300 million, increasing to over $1 billion in several years.

Adding several more cents to the excise tax increase would fill the remaining $400 million.

Another component being considered is giving cities and counties the authority to raise fees by majority vote to help pay for transit operations. Unlike state excise taxes, local fees can be used for transit.

A legislative budget-writing committee is expected to finalize the plan the week of February 15.

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