California will lose billions in revenue from its gas tax over the next decade as the state’s stringent environmental regulations take effect, magnifying Gov. Gavin Newsom‘s (D-CA) budget battles.
With the decline of gas-powered vehicles on California roads, the state will face a steep drop in revenue from its gas tax. The gas tax generated $6.5 billion in revenue in fiscal 2022 and produced an estimated $7.4 billion in fiscal 2023. Effective July 1, the state’s tax on gasoline will be 59.6 cents, up from 57.9 cents.
According to a state analysis, California will lose nearly $6 billion in gas tax revenue over the next decade as California phases out gas-powered cars. With California navigating a $45 billion budget deficit just two years after the Golden State enjoyed the flush of a $100 billion surplus, the news spells more trouble for Newsom’s budget battles.
California’s work to ban the sale of new gas-powered cars by 2035, and the subsequent rise of electric vehicles, comes as the state ramps up efforts to curb tailpipe emissions. Touted by environmentalists as the clean alternative to gas-powered vehicles, the Golden State imposed a de facto mandate on EV production by adopting the Advanced Clean Cars II in 2022. ACC II, which goes into effect in January 2025, requires zero-emission vehicles to make up at least 22% of all new car sales in participating states by the end of the year. The rule requires zero-emission vehicles to represent 100% of new cars by 2035. Beginning next year, the mandate also imposes penalties on California manufacturers that fail to meet the EV sales targets — which could be as high as $20,000 per vehicle sold.
California State Transportation Secretary Toks Omishakin downplayed the urgency of the loss of revenue from the gas tax during an interview with Politico.
“We are not at a place where we’re losing gas tax funding yet. Some people say that we are, but we’re not,” Omishakin said. “Instead of urgent, I would say it’s critically important that we start to really see what the future’s going to be related to this issue.”
The state’s tax on registered electric vehicles will bring in increasing revenue as more EVs hit the roads. However, the state’s analysis reports that EV taxes will only offset a portion of the lost gas tax funds.
California is also considering a proposal to implement a “road charge” program that would address the looming deficit. The plan is a mileage tax, aiming to charge drivers for using the roads based on how many miles they’ve traveled. The program is not guaranteed, and the California Legislative Analyst’s Office analysis worries about pushback from residents regarding privacy and security concerns.
“A road charge would involve collecting mileage information — potentially via several different reporting options — and payments from the state’s 27 million licensed drivers,” the report said.
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California plans to do a pilot program for the road-charge mileage tax in July. Omishakin addressed its prospects during an interview last week.
“What we’re trying to do on this one is see how the revenue collection process is really going to work. It’s likely going to be our last pilot because this will be the fourth one,” he said. “Now we’ll be able to hand over that information to the legislature if they decide at some point they want to possibly move in this direction.”