Sacramento, CA — While motorists fume over the skyrocketing cost of gasoline, state officials say the extra sales tax revenue from high prices at the pump is proving to be a boon as California faces an $8 billion budget deficit.

And lawmakers are likely to tussle in coming weeks over how to spend the unexpected revenue.

Sales tax receipts from gasoline have been rising sharply over the past five years – from $2.1 billion in 2003, when a gallon of regular unleaded cost an average of $1.88, to $3.8 billion in 2007, when the same gallon cost $3.12, according to the state Board of Equalization.

If gas hits an average of $4 a gallon this year – not an unrealistic possibility considering that fuel prices rose to an average of $3.63 on Monday – state and local governments could collect nearly $5 billion in sales tax on gasoline.

That would bring some welcome relief to the state’s revenue picture, which has been bleak in recent months as the meltdown in the housing market became a drag on the Golden State’s economy. In fact, the state’s fiscal year-to-date revenues were about $275 million lower than what was expected by the end of February.

The Legislature and Gov. Arnold Schwarzenegger, who declared a fiscal emergency in January, took emergency measures last month that included additional borrowing, delaying certain debt payments, withholding unspent education funds and deferring cost-of-living increases for some welfare recipients.

Still, those actions only cut the looming $16 billion budget deficit in half.

How the state will close the rest of the gap has been hotly debated in Sacramento, Republicans demanding cuts in spending and Democrats arguing for increased taxes.

But a sharp increase in gas prices might prove to be a welcome relief for lawmakers – and is about the only significant revenue source likely to see sizable growth.
Tug-of-war over windfall

Much of the revenue from the sale of gasoline is earmarked for transportation, although the governor and Legislature could suspend that rule or pass legislation to dip into those dollars.

"This will be a huge issue because there aren’t many moving parts of the budget that are moving up in revenue," said Assemblyman John Laird, D-Santa Cruz, chairman of the Budget Committee.

While as a matter of public policy it makes most sense to keep gasoline sales tax receipts for transportation projects, "we have an $8 billion hole. And if the governor is proposing cutting dental care for adults in California, how does that weigh?" Laird said.

Assemblyman Roger Niello, R-Fair Oaks (Sacramento County), who is vice chairman of the Budget Committee, said he’s open to using some of the sales tax on gasoline to help close the budget gap.

"That will be a discussion point, and I think that is perfectly legitimate," he said.

But Assembly Republican leader Mike Villines from Clovis (Fresno County) was more cautious about moving those funds to help ease the budget pain, arguing that the state needs to make fundamental changes in its spending.

Under Schwarzenegger’s current budget, only about $450 million of sales tax receipts from gas help pay for general fund spending. The governor’s budget doesn’t include suspending rules to tap into more of those tax dollars for spending outside of transportation projects, said H.D. Palmer, a spokesman for the Department of Finance.
AAA weighs in

Still, at least one transportation association is concerned that those dollars could get siphoned off.

"People paying the taxes should derive the benefit. It shouldn’t be a piggy bank that’s raided for other services," said Sean Comey, a spokesman for AAA of Northern California.

Delaying transportation projects would have more dire consequences in the future, he said.

"It’s kind of like your windshield when you have a teeny crack. It might cost you $50 to fix it, but if you wait, it can get bigger and bigger until you have to replace the entire windshield for $300," Comey said.

While there is debate on how the gas sales tax money should be used, one thing everyone agrees on is that gas prices are likely to continue rising.

Experts and lawmakers say the bump in gas sales tax might come at the expense of lower sales tax receipts from other areas as motorists reduce other discretionary spending.

"I think we’ve finally come closer, if not reached, a tipping point where gasoline prices are affecting people’s behavior," said Bill Leonard, a member of the Board of Equalization. One evidence is the slight decrease in gasoline consumption for the past couple of years, he said.

Judy Dugan, research director at Consumer Watchdog in Los Angeles, argued it might be time to reconsider the sales tax on gasoline altogether because of increasing pump prices.

"The state is certainly stressed and they need money, but to do it on the backs of motorists who are screaming for relief is not the way to go about it," she said.
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E-mail the author Matthew Yi at [email protected]