The 2025-26 Budget

Update on Implementation of New Firearm and Ammunition Tax

Background

New Excise Tax on Firearms and Ammunition Created. Beginning July 2024, Chapter 231 of 2023 (AB 28, Gabriel) imposed a new excise tax on firearm dealers, firearm manufacturers, and ammunition vendors. Specifically, an 11 percent tax is applied to the gross retail sales of firearms, firearm precursor parts, and ammunition. Retail sales to law enforcement agencies and active or retired peace officers, as well as those that total less than $5,000 per quarter, are exempt from this tax. Entities paying this tax are required to submit an electronic return and pay taxes quarterly, no later than the quarter after the sales were made. As Chapter 231 went through the legislative policy process, the California Department of Tax and Fee Administration (CDTFA) preliminarily estimated that this new tax could generate $159 million.

CDTFA Responsible for Administration of New Tax. Chapter 231 designated CDTFA with the responsibility for administering, collecting, and enforcing this new tax. It required that all entities subject to the tax apply to CDTFA for a registration certificate that can be revoked or suspended for failing to pay the excise tax. CDTFA is also required to notify the Department of Justice (DOJ) if registration certificates are revoked, suspended, or reinstated. This is because Chapter 231 makes these registration certificates an additional requirement to be licensed by DOJ to sell firearms and ammunition. Accordingly, revocation of a registration certificate would make a business unable to sell firearms or ammunition in the state. Additionally, Chapter 231 requires DOJ provide CDTFA with the names and business locations of all firearm dealers, firearm manufacturers, and ammunition vendors at least quarterly to administer the tax.

Tax Revenue Designated for Specific Purposes. Chapter 231 directs that these excise tax monies be paid to CDTFA. After deducting CDTFA’s costs, monies are to be deposited into a new state special fund—the Gun Violence Prevention and School Safety (GVPSS) Fund. As shown in Figure 1, Chapter 231 prioritized seven specific programs and purposes to be funded from the GVPSS Fund. It also set the maximum amount available for each program or purposes (adjustable annually to account for inflation). For example, Chapter 231 specifies that the first $75 million deposited in the GVPSS Fund be designated for the California Violence Intervention and Prevention (CalVIP) Grant Program—which provides competitive grants for violence prevention activities. While funding for the CalVIP Program is continuously appropriated, funding for all other programs and purposes are subject to legislative appropriation through the annual budget. Any remaining funding after these seven priorities are satisfied would be available to support other activities and programs focused on preventing gun violence, supporting victims of gun violence, and remediating the harmful effects of gun violence.

Chapter 231 Requires Start-Up Loan for CDTFA. Chapter 231 directed the Director of the Department of Finance to transfer $2.4 million from the General Fund to CDTFA as a loan to implement this new tax. Chapter 231 also requires that the loan be repaid with collected excise tax revenues, prior to any of the expenditures from the new GVPSS Fund.

2024-25 Budget Package Specified One-Time Allowable Use of California Department of Education (CDE) 2025-26 Allocation. Chapter 231 provides flexibility for CDE to use its share of GVPSS monies to contract with other entities or to provide grants directly to school districts to enhance school safety. The 2024-25 budget package required CDE to set aside up to $35 million of its 2025-26 GVPSS allocation for providing youth behavioral health training to staff who work directly with students in grades 7 through 12. These funds would be allocated to school districts based on their share of statewide enrollment in grades 7 to 12. The budget package also required school districts to certify by July 2029 that a certain portion of their staff who work directly with students in grades 7 to 12 have received youth behavioral health training at least once. The behavioral health training requirement is not contingent upon districts receiving funding from the state. If there is insufficient revenue in the GVPSS Fund to cover the cost of this training, districts would likely need to cover the costs using their general-purpose funding.

Governor’s Proposal

Budget Reflects Lower Revenues Than First Estimated. The Governor’s budget reflects estimated revenues of $56.3 million in 2024-25 and $58.6 million in 2025-26—substantially lower than the preliminary estimate of $159 million. Additionally, the Governor’s budget reflects that the $2.4 million start-up loan required by Chapter 231 was never made. In the absence of this loan, CDTFA absorbed Chapter 231 implementation costs within its existing budget.

Funds Allocated to CDTFA and CalVIP. Chapter 231 first requires the deduction of CDTFA costs. The Governor’s budget estimates such costs to be $1.2 million in 2024-25 and $978,000 in 2025-26. After the deduction of CDTFA costs, Chapter 231 requires monies be allocated pursuant to the priority order listed in Figure 1. Accordingly, the Governor’s budget reflects an appropriation of $55.1 million in 2024-25 and $57.2 million in 2025-26 to CalVIP—the first priority, which is entitled to a total annual appropriation of $75 million. In a November 2024 meeting, the Board of State and Community Corrections—which administers the CalVIP program—indicated that they expected to start the grant solicitation process for these funds in February 2025 as they anticipated receiving their first GVPSS allocations in September 2025. The Governor’s budget includes no appropriations for any other programs.

LAO Comments

General Fund, Rather Than Tax Revenues Paid for 2023-24 Implementation Costs. Chapter 231 authorized a $2.4 million General Fund loan to CDTFA, which was supposed to be prioritized for repayment with the new excise tax revenues. It also required CDTFA’s administrative costs be addressed first prior to any other allocations. As such, the Legislature intended that administration of this new tax not impact the state General Fund or CDTFA’s existing programs and activities. However, as noted above, the General Fund loan was not made and CDTFA absorbed $312,000 in initial implementation costs within its existing General Fund resources—which was inconsistent with legislative intent and likely impacted other CDTFA program and activities that otherwise would have been funded with such monies.

Revenues Remain Uncertain…The revenue estimates included in the Governor’s budget are reasonable, but remain uncertain. This is because they are based on one quarter of preliminary data for 2024-25. These data, along with certain assumptions, are then used to estimate revenues in 2024-25 and 2025-26. Revised data for that quarter and new data for additional quarters will be available in the coming months, which will better refine the estimate. For example, the actual data could reflect that firearm purchases are disproportionately higher or lower at certain times of the year—thereby impacting annual revenue estimates. This means that revenues could either be higher or lower than currently projected. Our office will review the additional data released in the coming months and provide updated estimates around late February and late May.

…But Likely Below Original Projections. Given the current revenue estimates, we anticipate that annual revenues are likely to be lower than the $159 million estimated when Chapter 231 went through the policy process. Specifically, it is possible that CalVIP may not receive its entire $75 million continuous appropriation. Even if revenues perform better than expected, it is still unlikely that revenues will exceed $100 million. Under this scenario, CalVIP would receive its full allocation, but CDE would receive only some funding. It is unlikely that any of the other programs listed in Chapter 231 would receive funding.

Legislature May Want to Consider Adjusting Specified Amounts for Programs. Given that revenues are likely to be significantly lower than originally projected when Chapter 231 went through the policy process, the Legislature may want to consider adjusting the specific amounts designated for particular programs in Chapter 231 on an ongoing or one-time basis. Specifically, lowering the amounts provided to particular programs could increase the likelihood that more of the programs listed in Chapter 231 receive some level of funding. For example, the
2024-25 budget eliminated $9 million in General Fund support for CalVIP beginning in 2025-26 due to the anticipation of GVPSS Fund monies being available to support the program instead. Providing an amount less than $75 million annually could still provide CalVIP with a sizeable increase in stable funding—while freeing up some monies to support lower priority Chapter 231 programs, such as those at the judicial branch or DOJ. In another example, the Legislature could consider changing state law on a one-time basis to deviate from the priority order to provide CDE with $35 million in 2025-26 to ensure that GVPSS monies are available to support the required behavioral health training requirement. Under existing law, if GVPSS monies are unavailable, school districts would likely need to redirect funding from their local priorities to cover training costs.