The Board of Equalization got the last laugh on a gas tax increase

In a normal universe, the rejection of a gas tax increase by a state agency would be based primarily on policy grounds. But in a strange mix of wonkish tax policy, political turf fighting and revenge, California drivers will be spared — temporarily — from a 4 cent per gallon tax increase on gasoline.

On Feb. 27, the Board of Equalization was expected to approve a routine request by the governor’s Department of Finance to raise the tax. But it did not. As a result, the state treasury will miss out on a little more than $600 million (much to the relief of California drivers, however).

Because California already has one of the highest gas taxes in the nation, citizens may not care one bit about why the Board of Equalization rejected the tax increase. But understanding how this happened is an object lesson in the strangeness that is California. It begins with the “gas tax swap.” In 2010, Gov. Arnold Schwarzenegger signed into law two fuel tax measures commonly referred to as the gas tax swap, which adjusted the rates of the sales and excise tax on gasoline. (The excise tax is a “gallonage” tax based on the amount of gas purchased). The fuel tax swap legislation was designed to be “revenue neutral,” meaning the total taxes paid at the pump would not increase because of the change in the law.

But ensuring that the gas tax swap was actually revenue neutral required some backward-looking calculations, because the price of gasoline can greatly fluctuate. In short, the state had to determine how much sales taxes would have been collected had the law not been changed and then adjust the excise tax in an attempt to even things out. Yes, it’s weird, and the reason they did this is beyond the scope of this column.

For the last several years, the Board of Equalization was tasked with making that annual adjustment after receiving a recommendation from the California Department of Finance. That annual adjustment has always been viewed as routine and non-controversial.

All that changed last year because of two notable events: First, a massive increase in the gas tax and, second, a turf battle between the legislature and the Board of Equalization.

When the legislature enacted the infamous Senate Bill 1 raising the gas tax to a stratospheric level, which taxpayers are now trying to undo with an initiative measure, it also took away the Board of Equalization’s authority to make the annual adjustment. The adjustment that was to occur last month was to be the last exercise of that authority by the board.

In the meantime, progressives in the legislature were increasing their criticism of the Board of Equalization which they viewed as being a bit too sympathetic to taxpayers. (The Board of Equalization is the only popularly elected tax board in the nation and would actually give taxpayers a fair hearing when there are disputes over tax liability of individuals and businesses.)

In recent years, the Board of Equalization has endured a few minor (by Sacramento standards) scandals involving office space and political activity. The Legislature then saw these issues as an opportunity to pounce and deprive the Board of Equalization of the bulk of its authority, shifting much of its responsibilities to a new bureaucracy-driven California Department of Tax and Fee Administration that has no direct political accountability.

It is with that background that members of the Board of Equalization, including one Democrat, refused to adjust upward the gas excise tax, an otherwise ministerial act. And although the members who spoke against the increase cast their positions as looking out for California taxpayers, no one who has observed the Board of Equalization over several years missed the real message being delivered to the Legislature. The board’s decision leaves the fuel excise tax at 29 cents per gallon, instead of 33 cents, for another year unless the legislature finds a clever way to bypass the process.

When one considers all the machinations of politics and the manner in which legislation is enacted, it’s no wonder people refer to the California Legislature as a sausage factory. Actually, that’s an insult to sausage factories.