Transportation

Frequently Asked Questions

• Transit
• How Is Transit Funded?
• How Is Funding for Transit Spent?
• Transportation Taxes and Fees
• What Taxes Apply to Gasoline in California?
• How Does the State Spend Gasoline Tax Revenues?
• How Have Gasoline Taxes Changed Over Time?

Transit

How Is Transit Funded?

Many Agencies Provide a Variety of Transit Services. For the purposes of this page, transit services includes bus, rail, paratransit, vanpool, and ferries. (In addition to transit, there are other mass transportation services, such as intercity rail and commercial aviation.) Transit services are provided by over 200 operators in California, including cities, counties, independent special districts, transportation planning agencies, private nonprofit organizations, universities, and tribes.

Transit Funding Comes From Variety of Sources. Transit operators that receive federal funds are required to regularly report their financial information to the federal government, which publishes a national report each federal reporting year (FRY). In total, transit services in California were funded at $12 billion in FRY 2018. As shown in Figure 1, this funding came from various sources, including local, federal, and state taxes, as well as from passenger fares and fees.

Local Government Contributed Almost One-Half of Transit Funding. Local funds are generated in multiple ways, but 79 percent of these funds came from sales tax revenues. Local sales tax revenues include both counties’ share of the Local Transportation Fund (LTF), as well as local sales tax measures. Through LTF, counties receive revenues from a one-quarter percent sales tax applied to all goods statewide. All counties receive LTF revenues, which must be used for transportation purposes, including transit services. In addition, in 25 “self-help” counties, voters have passed a one-half percent sales tax for transportation, a portion of which goes towards transit.

State and Federal Funds Make Up Roughly One-Third of Funding. State and federal funds come from multiple sources, but the majority comes from state and federal taxes on gasoline and diesel. Federal funds are largely disbursed through the Fixing America’s Surface Transportation (FAST) Act, which is funded by the federal tax on gasoline. There are 33 programs under the FAST Act with five programs making up 89 percent of federal funds for transit in California: (1) the Urbanized Area Formula Program, (2) the Rural Area Formula Program, (3) the State of Good Repair Program, (4) the Bus and Bus Facilities Grant Program, and (5) the Capital Investment Grants Program. Most of these funds are disbursed on a formula basis.

State Transit Assistance, which is funded through the state sales tax on diesel, makes up the largest share of state funds for transit, distributing about $700 million to planning organizations and operators on a formula basis in 2017‑18. Other state programs that specifically fund transit include the Low Carbon Transit Operations Program (LCTOP) and the State of Good Repair Program (SGR), which are disbursed on a formula basis, as well as the Transit and Intercity Rail Capital Program (TIRCP), a competitive fund. In 2017‑18, LCTOP was funded at $71 million, SGR at $105 million, and TIRCP at $209 million. Transit may also receive funding through other state programs—such as the Solutions for Congested Corridors and the State Transportation Improvement Program—that also support projects to expand or repair highways and local streets and roads.

One-Fifth of Funding Comes From Fares and Fees. Users of transit services pay providers fares to use their services and operators generate additional revenues from users through auxiliary fees, such as for park and ride services, concessions, and advertising. However, these fares and fees only make up a small share of total revenues for transit.

(Last updated: January 2020)

How Is Funding for Transit Spent?

$12 Billion Spent on Local Transit in California. Expenditures for transit generally are categorized as operations or capital. Operations include compensation for transit drivers and other staff, as well as vehicle and facilities maintenance. Capital includes the costs to purchase equipment—such as new buses and rail cars—and construct facilities, such as stations and rail systems. As shown in Figure 2, 64 percent of transit expenditures in California were for operations in FRY 2018.

More Than One-Half of Operating Expenses Were Spent on Buses. Buses are the most popular mode of transit. In FRY 2018, 63 percent of all passenger trips on transit in California were made on buses, contributing to transit operators spending more than one-half of the operating expenses on this mode. In contrast, operators spent about one-third of the operating expenses on rail service.

Majority of Capital Expenditures Are Spent on Rail. In FRY 2018, about one-third of all passenger trips on transit in California were made on rail. Although rail is a less commonly used mode of transit than buses, rail typically requires more extensive infrastructure and equipment to operate. As such, rail projects accounted for more than 70 percent of transit capital expenditures.

Federal Funds Are Largely Spent on Capital Projects. Operators spend local, state, and federal funds differently depending on funding program guidelines. For example, federal funding programs for transit generally provide a 90 percent maximum matching share for capital projects and a 50 percent maximum share for operating expenses. As such, local operators have to cover a greater share of costs if they use federal funds for operations than for capital projects. Because capital projects tend to be more expensive than operations, transit operators typically use federal funds for capital projects. Consequently, federal funds provide 35 percent of total capital expenditures by California transit agencies and only 11 percent of operations spending. About 80 percent of operations expenditures are supported by fares, fees, and local funds.

(Last updated: January 2020)

Transportation Taxes and Fees

What Taxes Apply to Gasoline in California?

Several Different Taxes Affect Gasoline Prices. Many people refer to “the gas tax” when talking about transportation taxes and fees. Typically, people mean the state excise tax on gasoline because this is the primary source of state funding for highways and roads. However, federal excise taxes and state and local sales taxes also apply to gasoline in California. (Various state, federal, and local taxes are also placed on diesel fuel.) The figure below shows how much a driver pays for each tax when purchasing a gallon of gasoline costing $5.50 (the average gasoline price in California at the time this analysis was prepared). In this example, the taxes make up about 18 percent of the price, with the state excise tax accounting for over half of all the taxes paid.

As shown in the figure, the specific taxes on gasoline include:

• State Excise Tax (57.9 Cents Per Gallon). The state charges this tax to gasoline suppliers before they deliver gasoline to retail stations. However, research indicates that most, if not all, of the tax is passed along to drivers through higher prices at the pump. Because the tax is set per gallon, the amount of tax paid depends only on the number of gallons of gasoline a driver purchases, irrespective of the price of each gallon. The state excise tax is adjusted each July for inflation.

• Federal Excise Tax (18.4 Cents Per Gallon). In addition to the state excise tax, California drivers pay a federal excise tax on gasoline. This tax works similarly to the state excise tax—that is, the tax is not paid directly by drivers though it does increase gasoline prices they pay at the pump. The federal excise tax is not adjusted annually for inflation.

• State and Local Sales Taxes (3.8 Percent, on Average). Sales taxes are set as a percent of the price of gasoline. Unlike excise taxes, drivers are charged these taxes directly at the pump, although gasoline stations include the tax in the prices they advertise. The current average state and local sales tax rate on gasoline is 3.8 percent, though the rate can vary from as low as 2.25 percent to as high as 5.75 percent depending on the locality. (The sales tax on gasoline in California is notably lower than the sales tax on most other goods—which averages 8.8 percent—mainly because gasoline is exempt from the portions of the sales tax that support the state General Fund and 2011 Realignment.)

Storage Fees and Other State Policies and Programs Also Affect Gasoline Prices. In addition to the taxes described above, the state levies a fee of 2 cents per gallon on owners of underground storage tanks that contain petroleum. The state also has other programs and regulations that impact gasoline prices. For instance, the state’s cap-and-trade program affects gasoline prices because it requires fuel suppliers to purchase permits that cover the greenhouse gases emitted when the fuel is burned. We estimate that this currently adds 27 cents per gallon to the price of gasoline. The state also has a low carbon fuel standard program that requires suppliers of high carbon fuels (such as gasoline) to purchase credits from suppliers of low carbon fuels (such as renewable diesel). We estimate that this currently adds 9 cents per gallon to gasoline prices.

(Last updated: October 2023)

How Does the State Spend Gasoline Tax Revenues?

State Excise Tax Pays for Highways and Roads. In 2023-24, the state gasoline excise tax is set at 57.9 cents per gallon, and the tax is expected to raise $7.4 billion from gasoline purchases for vehicles using public roads. In effect, the 57.9 cent tax is comprised of three distinct components, each of which is adjusted for inflation in July and allocated based on formulas set forth in state law. The figure below shows a simplified version of how of each of these taxes are allocated to major transportation accounts and programs.

As shown in the figure, the state excise tax on gasoline consists of the following:

• Base Tax. In 2023-24, this part of the excise tax equals 22 cents per gallon and is expected to raise $2.8 billion. Of this amount, 64 percent is deposited into the State Highway Account (SHA) to pay for state highway maintenance, rehabilitation, and related administration. The remaining 36 percent is provided to cities and counties to support their streets and roads.

• Incremental Tax. In 2023-24, this part of the excise tax (formerly referred to as the “swap tax”) equals 21.2 cents per gallon and is expected to raise $2.7 billion. First call on these revenues is to “backfill” SHA for truck weight fee revenues that have been redirected in recent years from SHA to instead pay for transportation bond debt service. In 2023-24, this amount equals $1.3 billion and is available for highway maintenance, rehabilitation, and related administration. The remaining revenues are allocated as follows: (1) 44 percent to cities and counties for their streets and roads; (2) 44 percent to SHA for the State Transportation Improvement Program, which funds highway, transit, and roadway capacity expansions; and (3) 12 percent to SHA for the State Highway Operation and Protection Program, which mainly funds state highway rehabilitation projects.

• Senate Bill 1 Tax. In 2023-24, this part of the excise tax equals 14.7 cents per gallon and is expected to raise $1.9 billion. (Senate Bill 1 is discussed in more detail later in this post.) All of the associated revenues are deposited into the Road Maintenance and Rehabilitation Account (RMRA)—in addition to the other tax and fee increases from SB 1. In RMRA, $757 million is set aside annually to fund specified transportation programs, such as active transportation, bridge and culvert repairs, and transportation research. We estimate that roughly $360 million of the SB 1 gasoline excise tax revenues are used for such programs. Of the remaining $1.5 billion, half stays within RMRA to fund state highway maintenance and rehabilitation, while the other half is provided to cities and counties for their streets and roads.

State Excise Tax Also Pays for a Few Other Programs and Costs. Not counted above or shown in the figure is an additional $430 million in state gasoline excise tax revenues. Most of these revenues come from gasoline purchases for off-highway vehicles, agricultural vehicles, boats, and aircrafts. The state does not spend these funds on highways and road programs since these vehicles do not use this infrastructure. Instead, the state dedicates these revenues to the General Fund, state parks (for general park purposes, off-highway vehicle programs, and boating programs), agricultural programs, and aeronautics programs. In addition, a small portion of state gasoline excise tax revenues pay for the costs associated with collecting and distributing the revenues.

Federal Excise Tax Pays for Highways and Transit. The federal government dedicates about 85 percent of federal gasoline excise tax revenues to highways, with the remainder primarily supporting transit. The federal government distributes the associated revenues to states through various highway and transit grant programs.

State and Local Sales Taxes Pay for Various Local Programs. Revenues from sales taxes on gasoline are allocated in the same manner as revenues from sales taxes applied to most other goods (except gasoline is exempt from certain portions of the sales tax). These revenues pay for various city and county programs, including transportation programs.

(Last updated: October 2023)

How Have Gasoline Taxes Changed Over Time?

State Excise Tax and Sales Taxes. The state excise tax and sales taxes on gasoline have a connected history. The figure below shows the major changes to these taxes over roughly the past 100 years.

Below, we summarize how certain gasoline taxes have changed over time.

• Base Excise Tax. In 1923, the state created a 2 cent per gallon excise tax to pay for road and highway maintenance. It then increased the rate periodically over the next several decades to increase funding for roads and highways. Most recently, in 1990, voters passed Proposition 111, which doubled the rate from 9 cents per gallon to 18 cents per gallon.

• Swap Excise Tax and Sales Taxes. In 1933, the state established a sales tax on tangible goods, but exempted gasoline. In 1971, the state extended the sales tax to gasoline, with most of the associated revenues going to the state General Fund. In 2000, the state began redirecting gasoline sales tax revenues from the General Fund to pay for various transportation programs. Then, in 2010, the state enacted a tax “swap” in order to have more flexibility over how it could spend these revenues. Specifically, the state eliminated the portion of the sales tax on gasoline that had been redirected from the General Fund to transportation programs (a 5 percent sales tax rate) and replaced it with an equivalent price-based excise tax, which became known as the swap excise tax. Each year, the state would adjust the swap excise tax rate based on the projected price of gasoline to raise an equivalent amount of revenue as would have been raised by the 5 percent sales tax it eliminated. The portion of the state sales tax that historically did not go to the General Fund (currently 2.25 percent statewide) still applies to gasoline.

• Senate Bill 1 Tax. In 2017, the Legislature enacted Chapter 5 (SB 1, Beall), which augmented funding for the state’s transportation system. Among other changes, the legislation increased the excise tax on gasoline by 12 cents per gallon, which went into effect on November 1, 2017. In addition, the swap excise tax—now called the incremental tax—was modified from being administratively determined to being set at 17.3 cents per gallon on July 1, 2019. The legislation also established annual inflation adjustments to each of the three components of the excise tax on gasoline beginning in 2020.

Federal Excise Tax. In 1932, the federal government imposed a 1 cent per gallon excise tax on gasoline to help reduce the federal deficit. It subsequently increased the rate by another cent during the 1940s and 1950s to help pay for World War II and the Korean War. In 1956, the federal government increased the rate to 3 cents and dedicated all the revenues to the construction of the interstate highway system. The next major change occurred in 1983, when the federal government increased the rate to 9 cents and began to use a portion of gasoline excise tax revenues for transit programs. In the early 1990s, the federal government again increased the rate on two occasions to help reduce the federal deficit, though within a few years it had redirected all the revenues back to highway and transit programs. In the decades since, the federal excise tax rate has remained at 18.4 cents.

(Last updated: November 2022)