State Budget Update

Governor Proposes Elimination of State Transit Funding

January 8, 2010

Governor Proposes Elimination of Public Transit Funding & Proposition 42

Governor Schwarzenegger’s proposed budget for FY 2010-11 includes a major restructuring of transportation funding. Specifically, it proposes to eliminate the sales tax on gasoline and diesel fuels that comprises a significant portion of the state’s current transportation funding mix. The budget proposes to partially backfill for this tax cut by increasing the per-gallon excise tax on gasoline and diesel fuel by 10.8 cents.

This results in a $976 million loss in annual transportation funding statewide and a complete elimination of the state’s ability to fund transit operations due to a restriction in Article XIX of the State Constitution on the use of motor vehicle fuel excise taxes. According to the Administration, drivers will save approximately 5 cents per gallon on fuel. However, based on average vehicle fuel efficiency, we estimate that this tax cut will save the average motorist less than $3 per month.

Of the $1.9 billion that would be generated by the new excise tax, $1.3 billion would go towards transportation programs that would otherwise be funded by the sales tax on gasoline, while $610 million would go to the General Fund to offset transportation debt service costs.

Budget Circumvents Court Ruling in Favor of Public Transit

In a lawsuit originally filed by the California Transit Association over funding raids in the 2007-08 budget, the Third District Court of Appeals ruled last June that diversions from the Public Transportation Account (PTA) to fill non-transit holes in the General Fund violated a series of statutory and constitutional amendments enacted by voters via four statewide initiatives dating back to 1990. Administration officials appealed that ruling to the State Supreme Court, which subsequently rejected the appeal, allowing the appellate court ruling to stand. More than $3.5 billion in transit funding has been illegally diverted over the previous three years, and last year budget crafters eliminated the State Transit Assistance (STA) program, which, since its creation in the early 1970s, had been the only ongoing source of state funding for day-to-day transit operations. As a result, transit operators throughout the state have had to resort to fare increases, service reductions and job eliminations to address the mounting shortfall.

Rather than comply with the courts, Schwarzenegger's plan would completely eliminate the sales tax in question and replace a portion of that revenue with an increase in the excise tax on fuels. Instead of diverting money from the PTA, the proposal would remove the funding stream that is supposed to flow into the PTA in the first place, effectively eliminating $1.5 billion in state funding for transit.

Impact on Bay Area

We are still analyzing the impact of this proposal on Bay Area transportation. With respect to local streets and roads and the State Transportation Improvement Program (STIP), which funds large highway and transit construction projects, the policy is designed to hold them at the same level of funding that they would have received under Proposition 42. Because Proposition 42 grows annually, along with the price of fuel, the proposal includes an annual increase in the per gallon fuel tax over a 10-year time frame. For FY 2009-10, Proposition 42 is estimated to provide local streets and roads and the STIP with $629 million each on a statewide basis.

With respect to public transit, however, the proposal represents a significant loss of funds. Whereas the region received an average of $92 million in STA from FY 2004-FY 2009 (including a high of $220 million in FY 2006 and a low of $37 million in FY 2004), under the proposal Bay Area transit agencies would no longer receive any state support for keeping their buses, trains and ferries running. Public transit could theoretically receive capital funding from a portion of the new per gallon tax increase from the portion of those funds put into the STIP, however, Article XIX of the State Constitution prohibits these funds from being used for rolling stock (bus or rail car purchases) or transit operations (including costs such as driver salaries or fuel).

With regard to intercity rail, including the Capitol Corridor, the proposal would require that it identify a new source of revenue beginning in FY 2011-12 when existing PTA funds would be fully exhausted.

Background: How Are The Existing Sales Taxes on Fuel Used?

Proposition 42

Approved by 69 percent of voters in 2002, Proposition 42 dedicates most of the sales tax on gasoline to transportation purposes, distributed as follows:

Local streets and roads (40 percent)
State Transportation Improvement Program (STIP) (40 percent)
Public Transportation Account (20 percent)

Proposition 42 generates an average of $1.4 billion annually.

Public Transportation Account

A portion of the sales tax on gasoline as well as 100 percent of the sales tax on diesel fuel currently go to the PTA, a trust fund restricted to public transportation and transportation planning purposes. In the current fiscal year, this account is estimated to generate $945 million in revenue dedicated to public transit. The PTA is funded by three key sources, all of which would be eliminated by the proposal. They include:

Spillover – a calculation mandated by statute that equates to the difference between a 5 percent state sales tax applied to all taxable goods except gasoline, and a 4¾ percent state sales tax applied to all taxable goods including gasoline. The spillover is generated when gasoline prices increase at a faster rate than all other taxable items. Since 2007-08, spillover has generated over $2.5 billion (roughly $800 million per year).
Sales tax on diesel: generates an average of $350 million per year since 2007-08.
Sales tax on 9 cents of the excise tax on gasoline: generates an average of $65 million per year.

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