Revenue Estimates

California’s exceptional economic performance over the past year, coupled with accumulated gains in the stock market, led to another year of robust revenue growth in fiscal year 2000-01 that is expected to moderate somewhat in 2001-02. Since enactment of the 2000 Budget Act, the General Fund revenue forecast for the past and current-year period has increased by $3.8 billion. In addition, General Fund revenues in 2001-02 are expected to be up $2.54 billion or 3.3 percent from 2000-01, reaching almost $80 billion.

This revenue strength builds on exceptionally strong gains in the current and past year. General Fund collections are expected to increase 6.9 percent on a year-over-year basis in 2000-01, bringing revenues to $76.9 billion. For 1999-00, total revenues were up 22.7 percent or $13.3 billion, to reach $71.9 billion, particularly impressive growth given the significant General Fund tax relief enacted over the last three years. The past year’s growth in part reflects the fact that 1999-00 was the first year in which California received revenue from tobacco company litigation. In 1999-00, $515 million was received from this source, and $393 million and $468 million are expected in the current and budget years, respectively.

California’s remarkable employment and income growth during 2000 were reflected strongly in revenues. Through November, personal income tax withholding paid in 2000 was over 19 percent above the previous year. The first three estimated payments for the personal income tax were up 39 percent. Taxable sales grew at a faster pace in inflation-adjusted terms than at any time since the early 1980s.

Much of the State’s revenue surge in recent years results from the extraordinary gains in the stock market. Taxpayers have realized record-level capital gains that have grown at year-over-year rates of between 22 and 58 percent for the last five years. In addition, stock options have become an increasingly common component in wage packages—particularly in California’s high tech sector. Taxpayers deriving income from retirement saving vehicles, such as Individual Retirement Accounts and 401(k)s, have also benefited from this growth. Together, these factors account for much of the rapid growth in personal income tax revenues. The stock market has also contributed to a sense of wealth among consumers, continuing to result in dramatic increases in sales tax revenue.

While this revenue surge has allowed the State to address critical needs such as education and transportation, the fact remains that revenues supporting the budget are increasingly dependent upon the stock market. Capital gains alone contribute about 11 percent of total General Fund revenues, and revenue from stock options represents another 10 percent. To put this in perspective, these two factors combined contributed less than 5 percent of General Fund revenues as recently as 1994-95. These market-driven revenue sources represent a significant fraction of the total Budget and a major portion of the State’s discretionary income. Although accumulated gains in the stock market continue to be substantial, the market stalled overall for the 2000 year. Moreover, on a daily basis the market remained volatile through the year. In one day alone last year, the high-tech NASDAQ index fell 10 percent. Therefore, the market’s ongoing influence on General Fund revenues—both positive and negative—must be recognized.

The revenue forecast for 2000-01 reflects continuing growth, but at a more modest rate than in the recent past. Given the volatility of the stock market, this cautionary approach is prudent. Following a slight decline in 2001, equities are assumed to grow modestly throughout the forecast period. For budget planning purposes, the uncertainty of future stock market performance argues against assuming that recent outsized growth rates will continue indefinitely.

• The Budget and the forecast also reflect the following targeted tax proposals to provide tax relief and assist economic development:
• A three-day State and local sales tax holiday for the fourth weekend in August for up to $200 in purchases of clothing and footwear, and up to $1,000 for computers and related equipment.
• An increase in the manufacturers’ investment credit from 6 percent to 7 percent and an extension of the sunset test date until January 1, 2008.
• An expansion of those who can claim the manufacturers’ investment exemption to include software developers.
• An expansion of the current sales tax exemption for qualified property used for the purpose of space flight, to include property used for the purpose of assembly, launch, or transport, and property used in spaceport operations.
• An increase in the small business capital gains exclusion from 50 percent to 100 percent.
• A graduated credit of 20 percent to 80 percent for employers who purchase subsidized transit passes or other commuter-fare media for their employees.
• A 50 percent credit for employers who loan employees to teach math and science courses, and to employers who open their in-house training courses to local educators.

Figure REV-1 provides a summary of the fiscal impact of these proposals.

Figure REV-2 provides a summary of the revenue forecast for 2000-01 and 2001-02, as well as a preliminary report of actual receipts for 1999-00.

Last year, for the second year of this Administration, significant tax relief measures were enacted. This package of bills provided taxpayers with approximately $1.6 billion and $2.3 billion in tax savings in 2000-01 and 2001-02, respectively. Figure REV-3 provides additional detail on the 2000 tax relief package.

These tax reductions are in addition to the substantial tax relief provided to both individual and corporate taxpayers under preexisting law. Based on the Department of Finance 2000-01 Tax Expenditure Report, these provisions are estimated to reduce State revenues by $21 billion annually—including $16 billion in personal income tax relief, $4 billion in corporate tax relief, and $1 billion in sales tax relief.

Key areas of tax reduction for individual taxpayers include the deductions for home mortgage interest and charitable contributions, the exclusion of employer contributions to health and pension plans, and the exclusion of capital gains on the sale of a principal residence and at death. On the corporate side, key areas of relief include a reduced rate of taxation for all corporations, special rate provisions for subchapter S corporations, carryover of net operating losses, and credits for manufacturing investment and research and development. Substantial reductions have also been enacted in vehicle license fees in recent years. Beginning with the 2001 calendar year, the State will pay 67.5 percent of local vehicle license fees, saving motor vehicle owners $3.7 billion in 2001-02.

Overall, General Fund revenues and transfers represent 82 percent of total revenues. The remaining 18 percent are special funds dedicated to specific programs. The three largest revenue sources (personal income, sales, and bank and corporation taxes) account for about 78 percent of total revenues.

Personal Income Tax: $44.810 Billion

The personal income tax, the State’s largest revenue source, is expected to contribute 56.4 percent of all General Fund revenues in 2001-02. Personal income tax revenues are forecast to increase by 9.4 percent for 2000-01 and 3.5 percent for 2001-02. The estimate incorporates the effect of tax relief legislation enacted in 2000.

The California personal income tax is closely modeled after the federal income tax law. California’s tax is imposed on net taxable income—gross income less exclusions and deductions. The tax is progressive, with rates ranging from 1 percent to 9.3 percent. Personal, dependent, and other credits are allowed against the gross tax liability.

In addition, taxpayers may be subject to an alternative minimum tax (AMT), which is much like the federal AMT. This feature is designed to ensure that excessive use of tax preferences does not reduce taxpayers’ liabilities below a minimum level. The AMT is equal to 7 percent of the alternative minimum taxable income that exceeds an exemption amount.

The personal income tax is adjusted annually by the change in the California Consumer Price Index to prevent taxpayers from being pushed into higher tax brackets by inflation only, without a real increase in income.

The challenge in forecasting personal income tax receipts is increased by the progressive nature of the tax. One dollar of income on a high-income tax return can generate nine times the revenue from a dollar on a low-income return. In addition, very high-income taxpayers usually have considerable discretion over the timing of income and deductions. Thus, substantial changes in the portfolios or tax planning of relatively few high-income taxpayers can have a dramatic impact on State revenues.

In tax year 1998, for example, the top 8.5 percent of State taxpayers—those with adjusted gross incomes of over $100,000—reported 42.9 percent of the total income and paid 69.9 percent of the personal income tax. At the same time, lower income taxpayers, those with adjusted gross incomes of less than $20,000, reported 7 percent of the total income and paid only 0.6 percent of the personal income tax in 1998, yet they represented 38.2 percent of all California taxpayers. Data for 1999 will be available in the spring.

The progressivity of California’s tax system is demonstrated in Figure REV-4, which displays the percent of total returns and tax paid by adjusted gross income class.

The volatility of capital gains also complicates personal income tax revenue forecasting. Not only are stock and real estate market gains inherently difficult to predict, but holders of capital assets are also usually very high-income taxpayers, who are subject to the maximum tax rate and can time the realization of gains and the payment of tax to their advantage.

Preliminary data indicate that 1999 was another remarkable year for capital gains realizations, increasing 48 percent from 1998, and to roughly five times the level of 1994. In this forecast, capital gains are expected to climb an additional 10 percent in 2000 from the 1999 level. Based on the assumption that stock market growth will continue to moderate, a 10-percent decline in capital gains is expected in 2001. The level of capital gains from 1972 through the forecast period is shown in Figure REV-5.

Stock options represent another component that adds volatility to personal income tax revenues. As noted previously, stock options have been an increasingly common component of wage packages over the past few years, and the growth in this component has been reflected in the strength of withholding receipts. At the time that this forecast was prepared, withholding through the first three quarters of 2000 was 19.3 percent above the same period a year ago, which in turn was 13.2 percent over the comparable 1998 level. Consistent with the capital gains assumption, the stock option component of this forecast is estimated to decline by roughly 10 percent in 2001, after rising 68 percent in 2000.

Revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are as follows:

Sales Tax:  $23.441 Billion

Sales and use taxes—the State’s second-largest revenue source—are expected to contribute 29.5 percent of all General Fund revenues in 2001-02. Sales and use taxes are imposed on the retail sale or use of tangible personal property in California. Most retail sales and leases are subject to the tax. However, exemptions are provided for certain necessities such as food for home consumption, prescription drugs, and electricity, making the tax more progressive than it would be otherwise. Additional exemptions provide targeted tax relief for a variety of sales ranging from custom computer programs to goods used in space flight.

A summary of the sales and use tax rates currently imposed at the State and local levels is presented in Figure REV-6. Combined State and local tax rates currently imposed in each county are summarized in Figure REV-7.

Taxable sales in 1999 grew 10 percent over 1998, following year-over-year increases of 6.2 percent and 5.2 percent in 1997 and 1998, respectively. Preliminary data received for the first three quarters of 2000 suggest that taxable sales are growing strongly: sales for 2000 are expected to be up by 11.3 percent over 1999.

Taxable sales are expected to grow during 2001, but at a slower pace—up 4.9 percent—due to the anticipated slowing in wages and modest decline in auto sales. In 2002, the rate of increase is expected to accelerate to 6.4 percent, consistent with economic growth. The forecast reflects broadly based gains in taxable sales across many sectors of the economy. However, the largest percentage increases are expected in the services, building, and specialty goods components.

A summary of the forecast for taxable sales growth is presented in Figure REV-8. A breakdown of sales by major component is presented in Figure REV-9.

The sales and use tax revenue forecast is prepared by relating taxable sales by type of goods purchased to economic factors such as income, employment, housing starts, new vehicle sales, and inflation. The forecast is then adjusted for significant legislation and other factors expected to affect sales tax revenues.

Sales Tax "Trigger"—Effective January 1, 2001, the State sales tax rate was reduced from 5 percent to 4.75 percent. This reduction was a result of a provision enacted in the early 1990s (Chapter 119, Statutes of 1991) that triggers a 0.25 percent reduction in the tax rate if the State surplus exceeds 4 percent of General Fund revenues and transfers during a two fiscal-year period. Under existing law, the tax rate will return to 5 percent effective January 1, 2002, unless the surplus again exceeds this statutory threshold. The reduction for the 2001 tax year was certified by the Director of Finance and is estimated to reduce sales tax revenue by $553 million in 2000-01 and $600 million in 2001-02. The forecast is based on the assumption that the surplus for the budget year will not be sufficient to trigger an extension of that lower rate into 2002.

Sales Tax Revenue for Transportation Purposes—Current law specifies that certain State revenues from the sales tax on gasoline and diesel fuel sales be transferred to the Public Transportation Account. The combined transfer to this account is estimated to be $224 million in 2000-01 and $293 million in 2001-02. This money is excluded from the General Fund total.

Chapter 91, Statutes of 2000, created the Traffic Congestion Relief Fund. During 2000-01, $500 million will be transferred from the Retail Sales Tax Fund to this new fund from the sales tax on gasoline. Like the transfer to the Public Transportation Account, this money is excluded from the General Fund total. Beginning in the budget year, the sales tax on gasoline will be transferred from the General Fund to the Transportation Investment Fund. For 2001-02, this transfer will be $1.1 billion.

Revenues from State-imposed sales tax rates are shown in Figure REV-10. The table below shows the General Fund sales tax revenue forecast for 2000-01 and 2001-02, compared with preliminary 1999-00 collections:

Bank and corporation tax revenues are expected to contribute 8.7 percent of all General Fund revenues in 2001-02. These revenues are derived from four taxes:

• The franchise tax and the corporate income tax are levied at an 8.84 percent rate on profits. The former is imposed on corporations for the privilege of doing business in California, while the latter is imposed on corporations that do not do business in the State but derive income from California sources. An example of this type of out-of-state company would be a corporation that maintains a stock of goods in California from which deliveries are made to fill orders taken by independent dealers or brokers. Corporations that have a limited number of shareholders and meet other requirements to qualify for State Subchapter S status are taxed at a 1.5 percent rate rather than the 8.84 percent imposed on other corporations. (Subchapter S status provides the limited liability of corporate status combined with the tax advantages of partnerships—i.e., the S-corporation’s profits and losses flow through to its shareholders and are subject to tax at the appropriate personal income tax rate.)
• Banks and other financial corporations pay an additional 2 percent tax (i.e., "bank tax") on their net income. This tax is in lieu of local personal property taxes and business license taxes, but in addition to the franchise tax.
• The alternative minimum tax is similar to that in federal law. Imposed at a rate of 6.65 percent, the alternative minimum tax ensures that high-income taxpayers do not make excessive use of deductions and exemptions to avoid paying a minimum level of tax.
• A minimum franchise tax of $800 is imposed on corporations subject to the franchise tax but not on those subject to the corporate income tax. Starting in 2000, new corporations are exempted from the prepayment of minimum tax to the Secretary of State as well as the payment of the second year’s minimum franchise tax.

In forecasting the bank and corporation tax, the relationship of California taxable profits to national corporate tax liability is important. The forecast also involves analysis of the trend in California’s nonfarm employment level, California’ s unemployment rate relative to that of the nation’s, as well as recent actual cash experience for this tax.

The forecast incorporates the latest economic outlook and the impact of legislation enacted in 2000. Consistent with the economic outlook, taxable profits are estimated to grow at a modest rate through the forecast period. Tax revenue data from the Franchise Tax Board indicate that while the level of 1998 income-year profits was up 3.3 percent from 1997, the tax liability actually declined by 3.7 percent during the same period. S-corporation activity and credit usage (largely the research and development credit and the manufacturers’ investment credit) are considered to be the primary factors contributing to the divergence between profit and liability growth. The utilization of S-corporation status results in a reduced corporate rate, with the income and tax liability on that income shifted to the personal income tax. S-corporations accounted for 26.2 percent of total taxable profits in 1998. For comparison purposes, their share was only 14.7 percent in 1991. This diverging trend between profits and liabilities can be seen in Figure REV-11.

Overall, bank and corporation tax revenues are expected to increase by 3.4 percent in 2000-01 and 1.0 percent in 2001-02. The estimate includes the fiscal impact of legislation enacted in 2000.

Revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are as follows:

The majority of insurance written in California is subject to a 2.35 percent gross premiums tax. This premium tax takes the place of all other State and local taxes except those on real property and motor vehicles. The basis of the tax is the amount of "gross premiums" received, less return premiums, upon business done in California.

There are some exceptions. Insurers transacting title insurance are taxed upon all income received in this state, with the exceptions of interest, dividends, rents from real property, profits from the sale or disposition of investments, and income arising out of investments. Ocean marine insurers are taxed upon underwriting profits at a 5 percent rate. Other exceptions to the 2.35 percent rate include certain pension and profit-sharing plans, including qualified annuities, which are taxed at the lesser rate of 0.5 percent, and certain specialized lines of insurance that are taxed at 3 percent.

The Department of Finance conducts an annual survey to project insurance premium growth. Responses are obtained from about 300 insurance companies, which account for over one-half of the insurance written in California.

Figure REV-12 illustrates the proportion of premiums written by insurance type from which the revenue is derived. For 1999, $57.6 billion in taxable premiums written were reported, an increase of 1.1 percent over 1998. The most recent survey indicates that premiums written will increase by 2.5 percent in 2000 and by 3.6 percent in 2001. Since taxes are deferred on some lines of insurance, others are averaged over several years, and various tax rates are applied, the revenue grows at different rates than premiums written. On a calendar year basis, revenues are expected to grow by 0.7 percent in 2000 and by 1.9 percent in 2001 based on survey responses.

The expectation that premium growth will remain relatively sluggish in 2000 is driven primarily by intense price competition, particularly in the private passenger auto line. The premium outlook for 2001 is being driven by a variety of factors including the expectation that insurers will be expanding distribution efforts and advertising, as well as gaining more leverage in passing through price increases.

Revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are as follows:

Proposition 6, an initiative measure adopted by voters statewide in June 1982, repealed the inheritance and gift taxes and imposed instead an estate tax known as "the pick-up tax," because it is designed to pick up the maximum credit allowed against the federal estate tax. The pick-up tax is computed on the basis of the federal "taxable estate," with tax rates that range from 0.8 percent to 16 percent. This tax does not increase the liability of the estate due to the fact that it would otherwise be paid to the federal government.

Revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are as follows:

Taxes on alcoholic beverages are levied on the sale of beer, wine, and distilled spirits. The rates vary with the type of alcoholic beverage. The tax rate per gallon for beer, dry wine, and sweet wine is $0.20. The tax rates per gallon for sparkling wine and distilled spirits are $0.30 and $3.30, respectively.

Alcoholic beverage revenue estimates are based on projections of total and per capita consumption for each type of beverage. Overall, consumption of alcoholic beverages is expected to remain relatively flat over the forecast period.

Revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are shown in Figure REV-13.

Proposition 10 increased the excise tax imposed on distributors selling cigarettes in California to 87 cents per pack effective January 1, 1999. At the same time, this proposition imposed a new excise tax on cigars, chewing tobacco, pipe tobacco, and snuff at a rate equivalent to the tax increase on cigarettes of 50 cents per pack. In addition, the higher excise tax on cigarettes automatically triggered an additional increase in the tax on other tobacco products effective July 1, 1999, with the proceeds going to the Cigarette and Tobacco Products Surtax Fund. Thus, this proposition increased the total excise tax on other tobacco products by an amount equivalent to an increase in the cigarette tax of one dollar per pack.

The State excise tax on cigarettes of 87 cents per pack is allocated as follows:

• Fifty cents of the per-pack tax on cigarettes, and the equivalent rate levied on non-cigarette tobacco products, goes to the California Children and Families First Trust Fund for distribution as specified in Proposition 10.
• Twenty-five cents of the per-pack tax on cigarettes, and the equivalent rates levied on non-cigarette tobacco products, is allocated to the Cigarette and Tobacco Products Surtax Fund for distribution as determined by Proposition 99 of 1988.
• Ten cents of the per-pack tax is allocated to the State’s General Fund.
• The remaining two cents of the per-pack tax is deposited into the Breast Cancer Fund.

Projections of total and per capita consumption of cigarettes provide the basis for the cigarette tax estimate. The cumulative effect of product price increases, the increasingly restrictive environment for smokers, and State antismoking campaigns funded by Proposition 99 revenues have all significantly reduced cigarette consumption.

Per capita consumption declined on average 3 percent annually from 1983-84 through 1987-88, and then decreased even more rapidly with the onset of Proposition 99. During 1989-90, per capita consumption was about 123 packs versus 83 packs in 1997-98—a 32 percent decrease over eight years. However, price increases stemming from tobacco litigation—in conjunction with the State’s excise tax hike—reduced per capita consumption by approximately 22 percent over two years to 65 packs in 1999-00. The long-term downward trend in taxable consumption should continue to reduce cigarette sales in the range of 3 percent annually.

Wholesale price data provide the basis for the revenue estimate for other tobacco products, which include items such as cigars, chewing tobacco, and snuff. Sales of cigars and some other tobacco products, which grew steadily from 1993-94 through 1996-97, declined approximately 27 percent in 1997-98, the last year unaffected by Proposition 10. Sales declined an additional 27 percent through 1999-00. Based on recent consumption patterns, the long-term use of other tobacco products is expected to decrease at a rate similar to cigarettes.

Per capita consumption of cigarette packs from 1986-87 through 2001-02 is illustrated in Figure REV-14. Total tobacco tax revenues forecasted for 2000-01 and 2001-02, as compared with preliminary 1999-00 collections, are shown in Figure REV-15.

The California Constitution, codes, and statutes specify the uses of certain revenues, with receipts accounted for in various special funds. In general, special fund revenues comprise three categories of income:

• Receipts from tax levies that are allocated to specified functions such as motor vehicle taxes and fees.
• Charges for special services provided for specific functions, including such items as business and professional license fees.
• Rental royalties and other receipts designated for particular purposes—for example, oil and gas royalties.

Taxes and fees related to motor vehicles comprise over 50 percent of all special fund revenue. Principal sources are motor vehicle fuel taxes, registration and weight fees, and vehicle license fees. During 2001-02, $8.7 billion in revenues will be derived from the ownership or operation of motor vehicles, a 4.7 percent increase above the 2000-01 level. Approximately 53 percent of this revenue will be returned to local governments. The remaining portion will be available for various State programs related to transportation and services to vehicle owners.

Chapter 85, Statutes of 1991, created the Local Revenue Fund for the purpose of local program realignment. Revenue attributable to a 0.5 percent sales tax rate is transferred to this special fund. During 2001-02, local governments are expected to receive $2.4 billion from this revenue source, up 4.5 percent from 2000-01. In addition to this revenue, approximately 24 percent of all vehicle license fees are transferred to the Local Revenue Fund.

Beginning in 1998-99, legislation reduced total vehicle license fees (VLF) and established a VLF offset program. For 2000-01 and 2001-02, vehicle license fees are reduced by 35 percent. An additional 32.5 percent reduction for these years will be returned to taxpayers in the form of a rebate. The total tax relief provided by the VLF offset and rebate is estimated to be $2.724 billion in 2000-01 and $3.680 billion in 2001-02.

Chapter 861, Statutes of 2000, replaces the current weight fee schedule for commercial trucks, which is based on unladen weight, with a gross vehicle weight schedule. This change was necessary to conform to the federal International Registration Plan by January 1, 2002. Chapter 861 also provided that the vehicle license fee will no longer be charged on commercial trailers, and the loss in revenue to local governments from that exclusion will be backfilled by the General Fund.

As noted earlier, tobacco-related taxes are collected primarily to support early childhood development programs as specified in Proposition 10. These proceeds are deposited in the California Children and Families First Trust Fund and are estimated at $672 million in 2000-01 and $662 million in 2001-02. Funds from the Proposition 99 tobacco-related taxes are allocated to a special fund for distribution to a variety of accounts as determined by the measure. Receipts for this fund are estimated at $360 million in 2000-01 and $355 million in 2001-02. An additional $26 million for breast cancer research will be generated in 2000-01 by the 2 cents per pack cigarette tax enacted in 1993, while $25.6 million will be generated in 2001-02 for this purpose. The original 10 cents per pack tax on cigarettes is allocated to the General Fund.

Motor Vehicle Fees: $5.434 billion—Motor vehicle fees consist of vehicle license, registration, weight, and driver’s license fees, and various other charges related to vehicle operation.

The vehicle license fee (VLF) is imposed for the privilege of operating a vehicle on the public highways in California. This tax is imposed in lieu of a local personal property tax on automobiles and is administered by the Department of Motor Vehicles. All of the revenues from this tax, other than administrative costs and fees on trailer coaches and mobile homes, are constitutionally dedicated to local governments.

The VLF is calculated on the vehicle’s "market value," which is the cost to the purchaser exclusive of sales tax, adjusted by a depreciation schedule. For motor vehicles, the schedule is based on an 11-year depreciation period; an 18-year depreciation period is used for trailer coaches. A 2 percent rate is applied to the depreciated value to determine the fee. Thus, revenue from this source is contingent on the number of vehicles in California, the ages of those vehicles, and their most recent sales prices.

As part of the State-local program "realignment," Chapter 87, Statutes of 1991, revised the vehicle license fee depreciation schedule and required the Department of Motor Vehicles to reclassify used vehicles based upon their actual purchase price each time the ownership of the vehicle is transferred. All of the revenue from this base change is transferred to local
governments.

Chapter 322, Statutes of 1998, established a program to offset a portion of the vehicle license fees paid by vehicle owners. This program is referred to as an "offset" rather than a tax credit, because the total amount of VLF legally due from the taxpayer was not changed. Instead, the State pays or "offsets" a portion of the amount due, and taxpayers pay the remaining balance. Beginning January 1, 1999, a permanent offset of 25 percent of the amount of the VLF owed became operative. Chapter 74, Statutes of 1999, increased the offset to 35 percent on a one-time basis for the 2000 calendar year. Chapters 106 and 107, Statutes of 2000, extended the 35 percent offset through calendar year 2002 and provided for an additional 32.5 percent VLF reduction, which will be returned to taxpayers in the form of a rebate. Beginning in 2003, the VLF will be permanently reduced by 67.5 percent. The amount by which the VLF is reduced is made up or "backfilled" by the General Fund to prevent any loss of revenues to local governments. This backfill is expected to total $1.858 billion in 2000-01 and $1.916 billion in 2001-02. The total rebate amount is estimated to be $866 million in 2000-01 and $1.764 billion in 2001-02. These amounts are also provided by the General Fund. Therefore, the total tax relief provided by the VLF offset and rebate is estimated to be $2.724 billion in 2000-01 and $3.680 billion in 2001-02.

The Department of Motor Vehicles administers the VLF for trailer coaches that are not installed on permanent foundations. Those that are installed on permanent foundations (mobile homes) are subject to either local property taxes or the VLF. Generally, if the mobile home was purchased new prior to July 1, 1980, it is subject to the VLF, which in this instance is administered by the Department of Housing and Community Development rather than the Department of Motor Vehicles. All other mobile homes are subject to the local property tax. Chapter 699, Statutes of 1992, provided that all trailer coach license fees that are administered by the Department of Motor Vehicles be deposited in the General Fund. Beginning in 1994-95, all other trailer coach license fees are also deposited in the General Fund.

Chapter 861, Statutes of 2000, replaces the current weight fee schedule for commercial trucks, which is based on unladen weight, with a gross vehicle weight schedule. This change was necessary to conform to the federal International Registration Plan by January 1, 2002. Chapter 861 also provided that the vehicle license fee will no longer be charged on commercial trailers, and the loss in revenue to local governments from that exclusion will be backfilled by the General Fund.

Allowing for scrappage and for vehicles entering and leaving California, the number of total fee-paid registrations, (autos, trucks, trailers, and motorcycles) including multi-state vehicles, is estimated at 27,179,000 for 2000-01 and 28,109,000 for 2001-02, a 3.4 percent increase. As can be seen in Figure REV-16, the 14.4 percent growth in new vehicle registrations in 1999-00 was at a 14-year high. This dramatic growth was due to extremely strong vehicle sales. We expect that vehicle sales will decline from these record highs in 2000-01 and 2001-02. Therefore, the forecast for new vehicle registrations assumes growth of 1.2 percent and 1.7 percent, respectively, which is closer to the long-run average growth of 1.3 percent.

Motor vehicle fees revenue is summarized in Figure REV-17.

Motor Vehicle Fuel Taxes:
$3.218 billion—The motor vehicle fuel tax (levied on gasoline), diesel fuel tax (levied on diesel), and the use fuel tax (levied on alternative fuels such as liquefied petroleum gas, natural gas, and alcohol fuel) provide the major sources of funds for maintaining, replacing, and constructing State highway and transportation facilities. Just over one-third of these revenues is apportioned to local jurisdictions for street and highway use.

The motor vehicle fuel tax (gas tax) is collected from distributors at the terminal rack level (i.e., the point at which fuel is loaded into ground transportation). Motor vehicle fuel is taxed at a rate of 18 cents per gallon. Fuels subject to the gas tax include gasoline, natural gasoline, and specified blends of gasoline and alcohol sold for vehicular use on California public streets and highways.

The Motor Vehicle Fuel Tax Law also applies an excise tax of 2 cents per gallon on aircraft jet fuel sold at the retail level. Certain sales are exempt from the aircraft jet fuel tax, including those to certified air common carriers, aircraft manufacturers and repairers, and the U.S. armed forces.

Chapter 912, Statutes of 1994, established the Diesel Fuel Tax Law. Prior to the operative date of Chapter 912, diesel fuel had been taxed under the Use Fuel Tax Law. The diesel fuel tax is collected from distributors at the terminal rack level and applies to diesel fuel and blended diesel fuel sold for use in propelling highway vehicles. Undyed diesel fuel for highway use is taxed at a rate of 18 cents per gallon. Dyed diesel fuel, which is destined for tax-exempt uses, is not taxed.

Chapter 1053, Statutes of 2000, requires that the State excise tax on gasoline be collected at the terminal rack level, rather than at the level at which the fuel changes ownership. Standardizing the point of collection conforms to federal law and is expected to increase compliance.

The use fuel tax is levied on sales of kerosene, liquefied petroleum gas (LPG), liquid natural gas (LNG), compressed natural gas (CNG), and alcohol fuel (ethanol and methanol containing 15 percent or less gasoline and diesel fuel). These fuels remain untaxed until they are dispensed into a motor vehicle that is operated on California highways or is suitable for highway operation. Current use fuel tax rates are 18 cents per gallon for kerosene, 6 cents per gallon for LPG and LNG, 7 cents per 100 cubic feet for CNG, and 9 cents per gallon for alcohol fuel. Users of LPG, LNG, or CNG may elect to pay a flat rate of tax based on vehicle weight in lieu of the 6 cents per gallon tax.

The Mills-Hayes Act specifies that a fuel tax rate of 1 cent per gallon be levied on fuel used by local transit systems, school and community college districts, and certain common carriers. This excise tax is imposed in lieu of the other fuel taxes described above.

Gasoline consumption has grown slowly over time, as conservation efforts have offset economic growth. Gasoline consumption rose 3.0 percent during 1999-00, but is estimated to increase by only 1.7 percent in 2000-01 and 2.2 percent in 2001-02. These slower growth rates are attributed primarily to the dramatic increase in fuel prices, which are expected to peak in early 2001 and then decrease through the rest of the forecast period.

Because the majority of diesel fuel is consumed by the commercial trucking industry, consumption is affected most significantly by the general health of the economy. Diesel fuel consumption increased by 8.3 percent in 1999-00 and is expected to rise by 4.2 percent and 4.9 percent in 2000-01 and 2001-02, respectively. These slower growth rates in 2000-01 and 2001-02 are a result of both the increase in fuel prices and a moderation of economic activity.

Proposition 111, enacted in June 1990 to generate new transportation funding, increased gasoline and diesel fuel tax rates by 5 cents per gallon each, effective August 1, 1990. Proposition 111 also increased gas and diesel fuel tax rates by an additional 1 cent per gallon each January 1 thereafter, until an 18-cent-per-gallon rate became effective January 1, 1994. The rates have remained constant since that time. Revenues raised by Proposition 111 equaled $1.47 billion during 1999-00 and are expected to be $1.52 billion and $1.56 billion during 2000-01 and 2001-02, respectively.

Motor vehicle fuel revenues are shown in Figure REV-18.

Figure REV-19

Figure REV-20

Figure REV-21