Higher Gas Prices Pump Up Sales Tax Revenues

For state and local government budget watchers, soaring gasoline prices may not be all bad news: As the cost of filling your tank rises, so does state sales tax revenue.

No one suggests that the potential windfall will last long or come anywhere near solving the state’s budget shortfall of as much as $35 billion. But if gasoline prices were to hover at current levels for a year, around $2.15 per gallon of regular, it could generate an extra $700 million, one official said.

At first glance, that might seem like found money, perhaps enough to restore the budget cuts that Gov. Gray Davis and the Legislature made last week to higher education, environmental protection, courts and prisons. It’s not quite that simple, however.

“Commodities go up and go down based upon a lot of things,” Senate Transportation Committee Chairman Kevin Murray (D-Los Angeles) said. “It may be a little more money. But I don’t think we can plan and act accordingly.”

The state raises $23 billion annually from sales taxes on consumer products. Sales tax on gasoline accounts for $1.1 billion annually for the state, and $400 million for local government.

Dave Hayes of the state Board of Equalization, which oversees sales tax collections, noted that gasoline prices are roughly 40% above levels early this year when budget revenue estimates were made. That means the state could receive an extra $700 million, Hayes noted.

But the prospect of a boost in tax revenue is tempered by several factors.

With a fleet of more than 70,000 government cars, state government itself is a major consumer of gasoline. Economists also believe that high fuel costs could cause the economy to slow even further than it already has. If high gasoline prices whittle away at profits, the state would lose revenue from income and corporate taxes.

If prices remain at current levels, Californians will pay $2.5 billion more per quarter than they paid a year ago to keep their gas tanks full -- cutting by a like amount money they will have for other purchases, said economist Brad Williams of the legislative analyst’s office.

Consumers may begin to think twice about buying new cars, particularly more expensive gas-guzzling sport utility vehicles. Taxes on vehicle sales are the largest single source of sales tax revenue, accounting for about $4 billion annually, according to the state Board of Equalization.

“Up front, you do get more sales tax on gasoline,” Williams said. “But it is money that no longer is available for other purchases. The loss of discretionary income is a negative force and could slow overall economic growth. From a budget perspective, I would like to see lower gasoline prices.”

Under a ballot measure approved by voters two years ago, sales tax revenue from gasoline sales must be spent on transportation programs.

But facing a massive budget shortfall, Davis wants to use that money for general government programs.

Such a move requires a two-thirds vote of the Legislature. Assembly Republican leader Dave Cox of Fair Oaks predicted that lawmakers would approve the shift, although some are urging that the state be required to repay the transportation fund once the fiscal situation improves.

It could turn out that there is no lasting sales tax boost from gasoline price spikes. Senate Budget Committee Vice Chairman Dick Ackerman (R-Irvine) is contemplating proposing that the state cut, at least temporarily, the taxes it levies on gasoline to help motorists weather the high prices.

“If we want to help consumers,” said Ackerman, the GOP’s lead on budget matters in the upper house, “maybe we ought lower the tax.”