Legislative Analyst's Office, February 1999

California's
Tax Expenditure Programs

Other Tax Programs--Part 2


Contents


Exclusion/Exemption:

Fuel For Common Carriers and the Military



Program Characteristics Estimated Revenue Reduction
Tax Type: Jet Fuel Tax.

Authorization: California Revenue and Taxation Code Section 7374.

(In Millions)
Fiscal Year Amount
1996-97 $73
1997-98 77
1998-99 80

Description

This program exempts from the aircraft jet fuel tax all fuel used by common carriers, the military, and persons engaged in the business of constructing or reconstructing aircraft.

Rationale

This program provides tax relief to qualified users of jet fuel and their customers, to the extent that taxes on such fuel ordinarily would be incorporated into its price and the prices charged for using planes burning such fuel.

According to the Board of Equalization, the underlying rationale for the program relates to the fact that the tax on jet fuel is used to finance small municipal airports, which are used primarily by private aircraft owners. (Large airports are funded primarily by landing fees and other user charges.) This program exempts common carriers and the military from paying the tax on jet fuel on the grounds that they receive limited benefits from the facilities supported by this tax.

Comments

The aircraft jet fuel tax is imposed upon aircraft jet fuel dealers at the rate of 2 cents per gallon. Recent legislation--Chapter 1027, Statutes of 1998 (AB 66, Baca)--altered the manner in which the local Bradley-Burns sales tax revenue on jet fuel is allocated among local jurisdictions. The new allocation formula generally is based on where the fuel is delivered as opposed to where negotiations for the fuel contract took place.


Exclusion/Exemption:

Fuel for Construction and Agricultural Machinery



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8652(b), 60100(a)(5)(A), and 60501(a)(4)(C).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the use fuel tax and diesel fuel tax the fuel used to propel construction equipment operated within the confines of a construction project, and certain machinery used in agricultural operations. For vehicles used in construction, the exemption from the diesel fuel tax is provided in the form of a reimbursement of the tax paid. To qualify, the equipment can be only incidentally operated on the highways, and must be exempt from vehicle registration under the California Vehicle Code.

Rationale

This program provides tax relief to the operators of qualified construction equipment and agricultural equipment that only incidentally is used on state highways. The underlying rationale for the program relates to the fact that fuel taxes primarily fund public street and highway construction and maintenance. Since equipment that only intermittently uses the streets and highways does not generally benefit from these improvements, taxing the fuel used to propel such equipment is viewed as inappropriate.

Comments

In theory, it would be possible to impose fuel taxes on that portion of fuel used in moving construction equipment and agricultural machinery on the public streets and highways. However, the revenues collected under such an approach probably would not offset the costs of administering it.


Exclusion/Exemption:

Fuel for Nontransportation Purposes



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8652(c) and 60501 (a)(4)(A).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the use fuel tax and diesel fuel tax fuel used for a purpose other than to propel a motor vehicle in California. The exemption under the diesel fuel tax is provided in the form of a reimbursement of the tax paid. Typical examples of exempt uses include fuel used in electric generators, to rotate cement mixer drums, or operate garbage compressors.

Rationale

This program provides tax relief to the operators of qualified equipment. The underlying rationale for the program relates to the fact that the use fuel tax primarily funds public streets and highway construction and maintenance. Because the qualifying equipment does not directly benefit from the public streets and highways, taxing the fuel used to operate such equipment is viewed as inappropriate.


Exclusion/Exemption:

Fuel for Off-Highway Vehicle Operations



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8653, 60100 (a)(5)(c), and 60501 (a)(4)(A).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the use fuel and diesel fuel tax, fuel that is used in the operation of a motor vehicle off-highway. For diesel fuel consumed by diesel powered train engines the tax is not paid in the first place. For other off-highway consumption--for example, by trucks--the exemption is in the form of a reimbursement of the tax paid. The exemption for off-highway use by state or local government vehicles could be provided either through an exemption or reimbursement.

Rationale

This program provides tax relief to the operators of off-highway vehicles. The rationale underlying the program relates to the fact that the use fuel tax funds public street and highway construction and maintenance. Because vehicles operated off of the public streets and highways do not directly benefit from the use of the tax revenues, levying the use fuel tax on such vehicles is viewed as inappropriate.


Special Tax Rate:

Fuel for Local Transit and School Bus Operators

Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8655, 60100 (a)(5)(D), 60502, and 60502.2.

(In Millions)
Fiscal Year Amount
1996-97 $25
1997-98 23
1998-99 22

Description

This program provides operators of local transit services and school buses a special use fuel and diesel fuel tax rate. Specifically, it permits qualified entities to pay a special payment of 1-cent-per-gallon instead of the normal tax rate of 18 cents.



In order to qualify for the program, the entity involved must be either (1) a transit district, (2) a school or community college district, or (3) a private entity providing local public transportation services in an urban or suburban area. These latter entities also must meet certain criteria and either: (1) be a passenger stage corporation subject to the jurisdiction of the Public Utilities Commission; (2) provide transportation services under contract to a public agency, school or community college district; or (3) be a common carrier operating over a route entirely within a single city. The program does not include charter carriers.

Rationale

This program provides tax relief to the above-specified local transportation agencies and providers. It also provides relief to public transportation users to the extent that the reduced tax liabilities are reflected in lower transit fares. The rationale underlying this program is that it promotes the establishment, maintenance, and use of public transportation systems, by lowering their operating costs. In the case of school buses, the program's rationale is that it supports the public education system by reducing the portion of budgeted funds needed for student transportation, thereby increasing the amount of funds available for classroom educational activities.


Exclusion/Exemption:

Fuel for Out-of-State Tour Buses



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8608(b), 60130, and 60116.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program relieves qualified interstate tour bus operators of the requirement to obtain a use fuel or diesel fuel tax permit from the Board of Equalization (BOE). The effect of this is to exempt such operators from any tax liability associated with their consumption of fuel within the state that has been purchased elsewhere. To qualify, the fuel must be used by an out-of-state passenger carrier whose operations consist solely of round-trip tours originating and terminating outside of California. In addition, any fuel purchased within California must be used solely for propulsion of the vehicle, and tax must be paid on it.

Rationale

This program provides tax relief to the operators of out-of-state tour buses, to the extent that the fuel they bring into the state exceeds that taken out of the state. Before the advent of this program, out-of-state tour bus operators were required to report the actual amount of fuel brought into California, purchased in California, and taken out of California. If the amount brought in exceeded that taken out (indicating net use of out-of-state fuel in California) the operator was required to pay a tax on the difference. Alternatively, the operator could claim a tax refund if the fuel taken out of the state exceeded that brought in.

This program relieves the qualified tour bus operators from having to register with and report to BOE regarding net use of fuel in California that is purchased out of state. Although the user pays tax to the vendor on the fuel purchased in California, there is no tax on any net use of fuel purchased out of the state.

The underlying rationale for the program is two-fold. First, it simplifies state tax administration and saves the state money, to the extent that the costs of collecting the tax would have exceeded the revenues generated. Second, it relieves tour bus operators of burdensome paperwork requirements.

Comments

Prior to this program, failure to register with the BOE could result in a fine of $500 for tour bus operators.


Exclusion/Exemption:

Fuel for Public Agency Vehicles Operated on Military Installations



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8654 and 60501 (a)(4)(E).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the use fuel tax and diesel fuel tax certain fuel used in a motor vehicle owned by a county, city, district, or other political subdivision. The exemption from the diesel fuel tax is provided in the form of a reimbursement of the tax paid. The program applies to fuel used to operate qualifying vehicles over a highway that is constructed and maintained by the U.S. government, and that is within a military installation. If the motor vehicle is operated on one continuous trip both over such a highway and over a public highway located outside the military installation, only the fuel used to operate the vehicle on the public highway is subject to the tax.

Rationale

This program provides tax relief to qualified agencies operating motor vehicles on military bases. The apparent rationale for the program relates to the fact that the roads on military bases are not supported by use fuel tax revenues. This rationale holds that public agencies, which may have to enter military bases to provide certain services, should be relieved of the use fuel tax on the portion of their fuel used on such roads.


Exclusion/Exemption:

Fuel for Operation of Vehicles on U.S. Department of Agriculture Roads



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax and Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 8653.1 and 60501(a)(4)(D).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the use fuel tax and the diesel fuel tax fuel used to operate a motor vehicle on any highway that is under the jurisdiction of the U.S. Department of Agriculture (USDA). For diesel fuel, the tax exemption is provided in the form of a reimbursement of the amount of diesel fuel tax paid. In order to qualify for the exemption, the user must pay, or contribute to, the cost of the highway's maintenance or construction under an agreement with the USDA.

Rationale

This program provides tax relief to the qualified users of USDA roads, such as logging roads in national forests. The underlying rationale for the program relates to the fact that fuel taxes primarily fund public streets and state highway construction and maintenance. Since these funds do not go to improve USDA roads, taxing the portion of fuel used on such roads is viewed as inappropriate. Limiting the exemption to individuals who contribute to road maintenance serves to confine favorable tax treatment to heavy users of USDA roads, such as logging trucks. A tax expenditure exists since absent the program, fuel consumed for these purposes would be taxed.


Exclusion/Exemption:

Fuel For the U.S. Government And its Instrumentalities



Program Characteristics Estimated Revenue Reduction
Tax Type: Diesel Fuel Tax.

Authorization: California Revenue and Taxation Code Sections 60100 (5)(e) and 60100 (a)(8).

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the diesel fuel tax, fuel used in vehicles owned by the U.S. government, and its agencies and instrumentalities. Under the program, fuel is sold by the retailer to the U.S. government at the consumer price less the 18 cents per gallon diesel fuel tax incorporated into the price. The retailer then files a claim for reimbursement of the tax paid based on the number of gallons sold to the government consumer.

Rationale

The basic rationale for the program is that federal government agencies are engaged in activities that benefit the public generally, and should not be subject to local taxation. In addition, when the diesel fuel tax was established as separate from the use fuel tax in 1995, an attempt was made to leave unchanged the treatment of fuel consumers. Since U.S. government consumption was not taxed under the more direct use fuel tax, this consumption was also granted an exemption under the diesel fuel tax.


Special Tax Rate:

Fuel Used in Public Transit Vehicles



Program Characteristics Estimated Revenue Reduction
Tax Type: Motor Vehicle Fuel Tax.

Authorization: California Revenue and Taxation Code Section 8101.6.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program provides a special motor vehicle fuel tax rate for motor vehicle fuel used in propelling qualified passenger-carrying vehicles. The special rate is provided in the form of a refund of 6 cents of the 18 cents per gallon general tax rate. To qualify for the program, the vehicles involved must be used in transporting persons for compensation, and must be used by the following:

Rationale

This program provides a tax incentive to encourage the operation and use of qualified public transit services, to the extent that fuel excise taxes ordinarily increase the costs and prices of such services. The underlying rationale for the program is to expand the state's reliance on public transit, thereby reducing traffic congestion and air pollution, and lessening the need for increased highway vehicle capacity.


Special Tax Rate:

Liquified Petroleum Gas



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax.

Authorization: California Revenue and Taxation Code Section 8651.5.

(In Millions)
Fiscal Year Amount
1996-97 $3
1997-98 2
1998-99 2

Description

This program provides a special use fuel tax rate to purchasers of liquified petroleum gas (LPG). The special tax rate is 6 cents per gallon on LPG, compared with the general use fuel tax rate in 1998 of 18 cents per gallon.

Rationale

This program provides a tax incentive for the use of LPG, rather than gasoline, in order to encourage the use of alternative fuel sources. Such alternative fuel sources produce lower levels of air pollutants.



In addition, the program has been rationalized on tax equity grounds. Each gallon of LPG has about 75 percent of the energy content of a gallon of gasoline. At the time that this program was established and prior to August 1990, the general use fuel tax rate on gasoline and diesel fuel was 9 cents per gallon. The 6 cents per gallon rate on LPG (67 percent of the general rate) thus approximately equalized the tax on LPG and gasoline in terms of relative energy content (which determines how far a vehicle can travel on a gallon of fuel).

Comments

Since 1994, the tax rate on LPG (6 cents per gallon) has been only one-third of the rate of the tax on gasoline (18 cents per gallon). As a consequence, the benefit provided by this program is larger than the amount needed to equalize tax treatment of LPG with gasoline on the basis of relative energy content (see above).



The revenue estimate cited above is based on data from the Board of Equalization (BOE). The estimates include the revenue effect of the special tax rate for liquified natural gas. This is because the two types of transactions are not reported separately to the BOE. According to the BOE, however, LPG represents the majority of sales taking place at the reduced tax rate of at 6 cents per gallon.


Special Tax Rate:

Ethanol and Methanol



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax.

Authorization: California Revenue and Taxation Code Section 8651.8

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program provides what is equivalent to a partial exemption from the use fuel tax to purchasers of ethanol and methanol. Specifically, the program provides that the excise tax on such alcohol fuels shall be one-half the rate imposed on gasoline and diesel fuels. In order to qualify for the program, the fuel cannot contain more than 15 percent gasoline or diesel fuels (the remainder of the fuel must be ethanol or methanol).

Rationale

Proponents argue that this program provides a tax incentive for the use of ethanol and methanol, in order to make the California economy less dependent on conventional petroleum products and to reduce the level of air pollution. In addition, the program has been rationalized on tax equity grounds. Each gallon of methanol or ethanol fuel has about half the energy content of a gallon of gasoline or diesel fuel. Thus, this program approximately equalizes the tax on alcohol fuels with the tax on diesel and gasoline fuels, based on their relative energy content (which determines how far a vehicle can travel on a gallon of fuel).

Comments

Unlike the special tax rates for liquified petroleum gases, liquified natural gas, and compressed natural gas, the special tax rate for alcohol fuels is set at a percentage of the general tax rate on diesel fuel and gasoline (rather than at a specific number of cents per gallon). Consequently, the tax on alcohol fuels maintains its approximate energy equivalence with the tax on gasoline and diesel fuels regardless of changes in the excise tax rate for gasoline and diesel fuels. The amount of revenue loss per gallon of alcohol fuel due to this program grows, however, as the tax rate on gasoline and diesel fuel increases.


Special Tax Rate:

Natural Gas



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax.

Authorization: California Revenue and Taxation Code Section 8651.6.

(In Millions)
Fiscal Year Amount
1996-97 Minor
1997-98 Minor
1998-99 Minor

Description

This program provides what amounts to a special use fuel tax rate to purchasers of compressed natural gas (CNG) or liquified natural gas (LNG). The reduced tax rate is 7 cents per 100 cubic feet of CNG and 6 cents per gallon of LNG, compared with the general use fuel tax rate of 18 cents per gallon in 1998.

Rationale

This program provides a tax incentive for the use of natural gas rather than gasoline in motor vehicles. The program's rationale is to encourage the use of alternative fuel sources, in order to make the California economy less dependent on conventional petroleum products and to reduce air pollution.

Comments

The energy content of a gallon of LNG or of 100 cubic feet of CNG is similar to that of a gallon of gasoline, so that this program cannot be rationalized on the grounds of equalizing tax treatment on the basis of relative energy content, as can the preceding two programs.



The estimated revenue loss cited above is based on data from the Board of Equalization (BOE). The estimate includes only the revenue loss due to the lower rate on CNG. The revenue loss on LNG is included in the estimate for liquified petroleum gas (LPG) (see the program entitled "Liquified Petroleum Gas"). This is because the LNG and LPG transactions are not reported separately to the BOE.


Special Tax Rate:

Flat Tax Rate for Liquified Petroleum Gas And Natural Gas Fuels



Program Characteristics Estimated Revenue Reduction
Tax Type: Use Fuel Tax.

Authorization: California Revenue and Taxation Code Section 8651.7.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program allows the owner or operator of a vehicle fueled by liquified petroleum gas (LPG), liquified natural gas (LNG), or compressed natural gas (CNG) (except an interstate user) to pay the use fuel tax at an annual flat rate based on the weight of the vehicle, as opposed to a per gallon rate. The flat rate varies from $36 for passenger cars and any other vehicles weighing 4,000 pounds or less, to a maximum of $168 for vehicles weighing 12,001 pounds or more.

The total amount of tax generated by these flat rates is approximately equivalent to the total amount of tax that would be paid at the per gallon tax rates for these fuels, assuming that vehicles are driven a typical number of miles each year and have typical fuel efficiency. For example, the flat rate of $36 for a passenger car equals the amount of tax at 6 cents per gallon that would be paid if an LPG fueled car were driven 12,000 miles at an average fuel efficiency of 20 miles per gallon.

For these typical assumptions, the flat-rate tax provides what amounts to a partial exemption from taxation to the same extent as is provided by the special per gallon rates for these fuels. The value of the benefit provided by the flat rate tax relative to the value of the benefit from the special per gallon rate, would be greater for vehicles that use more fuel each year than the typical vehicles on which the flat rates are based.

Rationale

This program has the same basic rationales as the special tax rates discussed in the immediately preceding reviews--namely, encouraging the use of alternative fuels, and reducing air pollution. It also serves to equalize taxation with gasoline on an energy-content basis. The program's tax savings and simplified reporting procedures also provide an incentive for taxpayers to convert engines to these alternative fuel sources. Furthermore, the program simplifies the administration of the use fuel tax.

Comments

The tax rates under this program have been unchanged in recent years, whereas the general tax rate on gasoline and diesel fuels has increased. Therefore, the revenue loss per vehicle under this program has increased in a manner similar to the revenue losses from the special per gallon (or per 100 cubic feet) rates on LPG, LNG, and CNG.


Special Tax Rate:

Employee Pension and Profit Sharing Plans



Program Characteristics Estimated Revenue Reduction
Tax Type: Insurance Tax.

Authorization: California Revenue and Taxation Code Section 12202.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program provides a reduced insurance tax rate for employee pension and profit sharing plans. The state's taxes on life insurance, disability insurance, and annuity contracts ordinarily are imposed on dollars of gross premiums written at a rate of 2.35 percent. Under this program, however, qualified insurers pay these taxes at the lower rate of 0.5 percent.

Rationale

This program provides tax relief to insurers that serve employee pension and profit sharing plans. It also provides relief to the individuals contributing to such plans, to the extent that the reduced taxes are reflected in lower insurance premium costs. The underlying rationale for the program is to encourage employers to provide insurance coverage under such plans by lowering the cost of the premiums they are charged.


Exclusion/Exemption:

Fraternal Benefit Societies



Program Characteristics Estimated Revenue Reduction
Tax Type: Insurance Tax.

Authorization: California Insurance Code Section 10993.

(In Millions)
Fiscal Year Amount
1996-97 NA
1997-98 NA
1998-99 NA

Description

This program exempts from the gross premiums insurance tax any insurance issued by a fraternal benefit society. Fraternal benefit societies include organizations such as Elks and Knights of Columbus.

Rationale

This program provides tax relief to fraternal benefit societies. It also provides relief to the individuals who are insured by such organizations, to the extent that the reduced taxes are reflected in lower insurance premiums. The rationale for this program is that fraternal benefit societies are charitable and benevolent institutions engaged in improving social welfare and, as such, they and their members are deserving of public financial support.


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