California gas prices will drop 2.2 cents a gallon because of excise tax — so what's an excise tax?

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California drivers will see the price for a gallon of gas fall by 2.2 cents this summer.

The California Board of Equalization on Tuesday approved a cut to the gasoline excise tax on a 3-2 vote. The tax had been 30 cents per gallon. It will drop to 27.8 cents starting in July and stay that way through the end of June 2017.

So what is an excise tax, anyway, and why are they changing it now?

The excise tax is a special fee added to each gallon of gasoline. It's collected in addition to the sales tax, a federal fuel tax and a state underground storage tank fee. 

The excise tax is one of the reasons drivers pay more at the pump in California than almost anywhere else in the country. The extra revenue it generates goes to help pay for roads and other infrastructure projects.

In 2010, Governor Arnold Schwarzenegger signed into law two measures that reset how the state calculates the tax. The changes allowed for more money to flow into the general fund to address a deficit at the time while still providing funding for transit and roads.

Under this newest formula, motorists pay slightly less on sales tax and slightly more for the excise tax. 

The Board of Equalization is required to adjust the excise tax every year by March 1, with the mandate that they maintain "revenue-neutrality." This is so residents pay the same at the pump in overall state taxes as they would have paid prior to 2010.

Look at it this way: Sales tax brings in revenue based on the dollars spent — you pay a certain percent in tax on whatever you buy. So as the price of gasoline fluctuates, so does the revenue collected by the state. But under a sales tax, that happens automatically. Because the excise tax is collected per gallon, the board has to calculate what it needs to be to equal what the state would have collected if it had left the sales tax alone in the first place.

It's an arcane system, and this video probably explains it best:


The board has lowered the excise tax for three consecutive years now. In 2014, it was lowered from 39.5 cents to 36 cents. The following year it was lowered to 30 cents, the current rate.

Because the tax is connected to infrastructure dollars, counties and transportation agencies feel every penny.

The board heard from a range of government agencies and their representatives on Tuesday. Most, if not all, were arguing for the board to rejigger its formula for calculating the excise tax, which they argued would result in a smaller reduction now but more consistent prices over the long term.

The board was divided, but ultimately went ahead with the reduction.

Board member George Runner said he shared agencies' concerns over the state's crumbling infrastructure, but he said it was the role of the governor and the legislature to decide when and how to fund such projects. 

"If indeed we were under the old system, and you were all receiving money just on the sales tax, you would be getting less money today," he told the audience and the agency representatives, stressing that there was "nothing magical going on right now."

Still, most board members expressed frustration with their  role. Board member Fiona Ma said the current system has the effect of requiring board members to act like economists.

Board Chairman Jerome Horton said they would likely request the Legislature look into a new methodology that would use a five-year average to smooth the changes from year to year. But as other members pointed out, they've tried this before, and the Legislature shot the proposal down.

For now, enjoy the 2.2 cent drop at the pump.

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