What can California do to tackle soaring gas prices? Tax cuts, rebates are up for discussion

California lawmakers are responding to surging gasoline prices by proposing tax rebates and holidays — but which measures will succeed, and how could they affect drivers?

The United States is experiencing an overall increase in gas prices that’s gotten worse following Russia’s invasion of Ukraine. California’s fuel costs are far higher than the country’s average, which is putting pressure on Gov. Gavin Newsom and state lawmakers to find some relief for drivers.

California’s average gas price was $5.69 per gallon on Thursday, while the national average was $4.32 per gallon, according to AAA.

State drivers pay about 51 cents per gallon in state taxes, the Legislative Analyst’s Office reported in February. The LAO projects California’s gas tax will raise $8.8 billion during the 2021-22 fiscal year.

Gas tax dollars fund transportation system improvements. State lawmakers in 2017 approved a state gas tax increase to fund more infrastructure fixes with Senate Bill 1 — a measure voters upheld in 2018.

But when gas prices go up, taxes become a prime political target.

Here’s what Newsom and lawmakers are proposing to help drivers and how the plans might affect the gas price situation.

Newsom tax hike postponement, rebate

Early in the year, Newsom anticipated rising fuel costs and added a proposal to postpone the annual gas tax increase in his January budget proposal.

However, waiting to implement the 5.6% tax hike scheduled to take effect July 1 would save drivers only about 3 cents per gallon, according to the LAO.

On Tuesday, Newsom expressed a need to do more to help drivers deal with fuel prices during his State of the State speech.

“In January, we proposed a pause to the gas taxes,” Newsom said. “Now it’s clear we have to go further. And that’s why — working with legislative leadership — I’ll be submitting a proposal to put money back in the pockets of Californians to address rising gas prices.”

Newsom’s office said the proposal he announced would take the form of a rebate, and the governor will likely add it to his May budget revisions.

Dee Dee Meyers, the governor’s senior economic adviser, told reporters after the speech that the rebate could potentially go to residents with cars registered in California

Republican gas tax suspension

Republican lawmakers are supporting three bills that would suspend or reduce the state gas tax.

The most high-profile measure is Assembly Bill 1638 from Assemblyman Kevin Kiley, R-Rocklin, which would suspend the state’s gas tax for six months and backfill the lost money with General Fund dollars.

“The cost of living for Californians continues to rise and the price of a tank of gas just hit another record high,” Kiley said in a statement after the State of the State. “I was thankful to hear the governor acknowledge that his initial proposal on the gas tax did not go far enough. I stand ready to work with him on providing real relief for hardworking families by passing AB 1638, my urgency legislation that would immediately save Californians 51 cents per gallon upon his signature.”

Following the State of the State, Republican leaders said they’re open to Newsom’s rebate proposal. But they also argued in support Kiley’s gas tax suspension bill, which they said would give drivers more immediate relief.

“I love giving taxpayers back their tax money,” said Assemblyman James Gallagher, R-Yuba City. “I mean, especially in these times. So if he wants to work on a tax rebate that goes back to every California taxpayer and helps them with the high cost of living, that’s certainly something we want to talk about as Republicans. But why not just suspend the gas tax? We have the money to do it. We have the money to suspend the gas tax and save people money right now — not wait till that rebate comes in the mail, but at the actual gas pump.”

Two other Republican bills would permanently curb the annual gas tax increase.

Senate Bill 1156 from Sen. Shannon Grove, R-Bakersfield, would end the annual gas tax inflation adjustments. Assembly Bill 1626 from Assemblywoman Janet Nguyen, R-Huntington Beach, would cap the yearly tax increase at 2%.

However, Assembly and Senate leaders said they oppose altering the gas tax following the State of the State. Senate President Pro Tem Toni Atkins, D-San Diego, and Assembly Speaker Anthony Rendon, D-Lakewood, said they would rather “seek tax relief from the General Fund.”

“Gas, food, and other prices are up, so our focus cannot be a small cut to the gas tax that might not get passed on to consumers,” Atkins and Rendon said.

Which gas price policy is best?

Views differ on the best way to help California drivers while maintaining an important transportation funding source.

Severin Borenstein, faculty director of the Energy Institute at UC Berkeley, cited several reasons he would oppose a gas tax suspension. He said it’s important to impose a tax on gas to help offset the environmental and societal costs of driving, such as pollution and traffic.

Gas prices are high because of oil prices, which suspending the fuel tax won’t solve, he said. Fuel costs also fluctuate, so they could go down by the time lawmakers implement their gas tax holiday, Borenstein said.

Although gas prices hit drivers’ wallets, fuel is simply the most visible expense people face — it’s not necessarily where most of their money goes. Housing, medical and utility bills tend to burden residents more, Borenstein said.

“When you really look at what is squeezing most Californians, it’s not the gas prices,” he said.

Borenstein thinks a rebate would be better because it would keep the tax intact and allow people more flexibility to spend the money on whatever they need. A general, stimulus-like rebate for all Californians would be most helpful, he said.

“It would help people with whatever challenge they’re facing, Borenstein said. “Not just people who drive, or people who drive gas guzzlers.”

Kiana Valentine, executive director of Transportation California, also said altering the gas tax would not solve high gas prices, which are “controlled by much larger external forces.”

Gas tax money helps fund infrastructure improvements and jobs that are essential to the state, she said.

“I think a lot of what’s being missed in this conversation are the consequences of a gas tax holiday,” Valentine said.

Politically, the gas tax has “always been a volatile issue,” said Rob Stutzman, a Republican political consultant.

It’s important for lawmakers to at least look like they’re providing relief, as not doing so can be a liability with voters, he said.

“If the Democrats don’t do anything, the Republicans have an issue to beat them up with,” he said.

However, suspending gas taxes means less funding for road repair, and it could also anger union members who work on infrastructure improvements, he said.

“When prices are like this, giving that kind of tax relief really isn’t felt by the consumer,” Stutzman said.

With a budget surplus, money to help drivers should come from the General Fund, not a special fund like that used to pay for road repairs, he said.

However, Stutzman questioned whether it would be helpful to provide a stimulus-like rebate in an inflationary economy.

“We have an overheated economy,” he said. “Does it really make sense to dump money back in?”

This story was originally published March 11, 2022 at 5:00 AM.