Summary
The Constitutional protections for both Proposition 42 sales tax revenues and excise tax revenues are similar with a few exceptions. Both revenue source “uses” are protected under the Constitution and both can have the program priorities for the expenditure of the funds changed in statute. For Proposition 42, this requires a 2/3 vote of the Legislature while excise tax only has a majority vote threshold. Furthermore, both revenues can be borrowed for the General Fund; however, Proposition 42 borrowing has more limits pursuant to Proposition 1A of 2006 than excise tax revenues and includes interest. Proposition 42 allows funding for transit purposes including operations, rolling stock, and capital projects; whereas, excise tax limits the use to planning, constructing, and maintaining transit/rail tracks and related facilities like stations. The following information provides additional details about the Constitutional protections provided to each transportation revenue stream.
Proposition 42 (Article XIX B)
Since 2002, Proposition 42 constitutionally requires that the portion of gasoline sales tax revenues that previously went to the General Fund be transferred to transportation purposes. The funds can be used for a broad range of projects including highways, local streets and roads, and transit (including rolling stock). Since 2007-08, 40 percent of these funds have been used for State Transportation Improvement Program (STIP) projects, 40 percent for local streets and road improvements, and 20 percent for transit purposes.
Under Proposition 42, the Legislature can change the funding allocation by a 2/3 vote.
Proposition 42 allowed the transfer to be suspended under certain conditions. Proposition 1A, passed in November 2006, limits the conditions of the transfer suspensions. This includes a limit of twice in a ten year period and requires that any transfers to the General Fund in any given year be repaid, with interest, before another transfer could take place. The repayment includes interest.
Excise Tax (Article XIX)
Currently, the state has an 18 cent excise tax on each gallon of gasoline and diesel fuel. Excise tax is protected by Article XIX of the State Constitution and restricts how state gasoline and diesel tax revenues are spent. These monies may only be used to plan, construct, maintain, and operate public streets and highways, and to plan, construct, and maintain transit/rail tracks and related facilities like stations. The revenues cannot be used to operate transit systems or to purchase rolling stock (trains, buses, or ferries).
Current law sets priorities for expending state funds as follows:
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Highway maintenance and operations, and local assistance.
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Highway rehabilitation and safety projects in the State Highway Operations and Protection Program.
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Capital Improvements (including capacity expansion projects such as additional highway lanes and new transit facilities) in the State Transportation Improvement Program (STIP).
Current law also sets very detailed priorities for the expenditure of local funds.
The Constitution provides under Article XIX, Section 3, that the Legislature provide for the allocation of the revenues to be used for purposes of public streets and highways in a manner that ensures the continuance of existing statutory allocation formulas for cities, counties, and areas of the state until the Legislature determines that another basis for an equitable, geographical, and jurisdictional distribution exists. This allocation can be changed with a majority vote of the Legislature and protection of local funding is uncertain.
The Constitution also allows for up to 25 percent of revenues to be used by a city, county, or state to be pledged and used for the payment of principal and interest on voter-approved bonds consistent with purposes specified in the Constitution. For purposes of the 25 percent calculation, truck weight fees may be included.
Furthermore, the Constitution allows for the loaning of the excise tax under certain circumstances to the General Fund. This includes:
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Any amount loaned is to be repaid in full to the fund during the same fiscal year in which the loan was made.
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Any amount loaned is to be repaid in full to the fund from which is was borrowed within three fiscal years from the date the loan was made and one of the following has occurred:
- The Governor has proclaimed a state of emergency with negative fiscal impacts to the General Fund.
- The aggregate amount of General Fund revenues for the current fiscal year is less than the aggregate amount of General Fund revenues for the previous fiscal year adjusted for change in population and cost-of-living.
Funding could also be loaned to local transportation agencies, cities, counties, or cities and counties for specific purposes authorized under Article X1X.
Governor’s Proposal
The Governor’s budget proposal intends to add an additional 10.8 cents per gallon of gasoline and diesel fuel and eliminate the sales tax on these fuels. This excise tax will escalate over the next ten years to provide funding for debt service while continuing to fund STIP and Local Streets and Roads consistent with estimated revenues if Prop 42 sales tax on gasoline was still in effect. Taxpayers would continue to receive a tax break over the ten year period of $.04 to $.07 per gallon in any given year.
The Governor’s proposal would statutorily provide funding to STIP, Local Streets and Roads, and the General Fund for debt service payments on transportation bonds. The funding for STIP and Local Streets and Roads is consistent with Prop 42 funding although there is no Constitutional restriction to ensure that excise tax revenues be prioritized in this manner and it can be changed by a majority vote of the Legislature.
It should be noted that the Administration’s position is that the Constitution does not require locals to get any funding and all of excise tax could go to the Department of Transportation with proper statutory changes. The Constitution is open to interpretation and there could be an attempt in the future to change statute and direct funds away from local entities and towards state transportation projects and debt service as seen in the 2009-10 Governor’s budget proposals.