Democrats prepare to counter Schwarzenegger’s gas tax plan

After blasting Gov. Schwarzenegger’s budget proposals earlier this month, legislative Democrats are working on a plan to craft their own solutions to the state’s financial woes. Among the first proposals being drafted is a measure to counter Schwarzenegger’s scheme to swap gasoline taxes and gut funding for public transportation.

As part of his budget, Schwarzenegger proposed eliminating the 6 percent sales tax on gasoline and diesel fuel, replacing it with a new 10.8 cent per-gallon excise tax on each gallon of fuel.

His switch would effectively amount to an end-run around Proposition 42, which walled off gasoline sales tax revenues for state highways, local roads and public transit. The governor proposed backfilling money to state and local road projects, while eliminating funds for public transit.

The administration says the plan would create a dedicated revenue source to pay off transportation bonds, and save the general fund about $1.8 billion, while reducing taxes at the pump by about 5 cents per gallon.

The new Democratic proposal, which is still being finalized, would tweak Schwarzenegger’s plan. It  would eliminate the sales tax on gasoline, which generates about $2.9 billion per year, and raise the gasoline excise taxes. Democratic budget sources say they have not determined the amount of a new per-gallon excise tax for gasoline, but say it will be close to the 28.8 cents proposed by Schwarzenegger.

Unlike Schwarzenegger’s plan, the new Democrats’ proposal would maintain the sales tax on diesel. The diesel tax would still go to transit operators, ensuring they would get some continuing funding from Sacramento.

In addition, the Democratic plan would give local agencies new authority to levy fees at the gas pump to raise money for transit operators.

Democrats are hoping to finalize this proposal in the coming days, in hopes of proposing it as part of a mid-year budget fix. Senate leader Darrell Steinberg has said he would like to address the state’s $6 billion shortfall in the current budget year by mid-February.

While the Democrats’ plan would be more palatable to transit officials, there are still some potential political obstacles to the proposal. Chief among them may be education groups. Because of the way state taxes are calculated, sales taxes on gasoline are currently used as part of the formula to determine education funding under Proposition 98. Replacing the sales tax with an excise tax – which would not be part of the Proposition 98 formula – would reduce the funding guarantee for public schools and community colleges by more than $2 billion.

Schwarzenegger’s proposal was assailed by transit officials, who charged the governor stripped their funding as retribution for suing the administration over last year’s budget. Other Schwarzenegger allies also criticized the proposal, saying it would amount to cuts for local transportation projects as well.

Jim Earp, a close ally of the governor who is the head of the California Alliance for Jobs,  a consortium of construction companies and workers that has backed many major Schwarzenegger initiatives in the past, was critical of Schwarzenegger’s gas tax swap.

Complicating matters is the fact that Earp is campaign chairman of the governor’s water bond campaign, which is scheduled to come before voters in November.

“My concern is if we’re put in a completely defensive posture on transportation, it’s going to impact our ability to work for the water bond,” Earp said today. “It’s going to be hard for me to raise a lot of money and get a lot support  if our guys keep getting shot at.”

Earp said he hopes his members can reach an agreement with the governor that will limit potential funding cuts for transportation. “We have worked very closely with the governor,” he said. “I agree with his basic approach to try to rebuild California. I think that he’s just got some bad advice on this particular proposal.”

Earp said he is currently working with the administration and legislative staff on a counter-proposal. He said he would need to see more details about the Democrats’ counter-offer before determining whether his group would support the change.

“The main problem that we have is if they’re going to eliminate the sales tax on gas, they’re eliminating the only stable funding source for capital improvements,” he said.

“What concerns me over this, and none of these plans appear to resolve this at this point, the sales tax is the only funding source that responds to the price of gas. As gas increases, there’s more revenue available for transportation improvements.”

In the end, Earp said, he is optimistic that an agreement can be reached. “This is a wrinkle. I’ve talked to the governor about it. We’re going to try to work with him to iron it out.”