California, Indiana Gas-Tax Changes Kick In Tuesday

State adjustments reflect recent legislative maneuvers

California gasoline tax rate adjustment

The California excise-tax rate is adjusted every year to ensure the overall state taxes consumers pay at the pump remain the same as they would have been under the prior tax structure. The graphic above illustrates how these tax laws work.

INDIANAPOLIS & SACRAMENTO -- Two states’ gas taxes will change effective July 1—but will not stay the same for long.

California’s Tax Swap

In California, the excise gas tax will drop from $0.395 to $0.36 per gallon for the 2014-2015 fiscal year, ending June 30, 2015, as reported by the Sierra Sun Times. It’s an annual adjustment that is mandated under two laws signed in 2010 by then Gov. Arnold Schwarzenegger. The laws—referred to as the “fuel-tax swap”—re-engineered the sales and excise taxes on gasoline in a way that would divert more money into the state’s general fund at a time when it was running low.

The swap lowered the state sales tax on gasoline, which funds local government, and is based on a percentage of price, to 2.25%. Then it required the excise tax, which pays for transportation infrastructure and is a flat rate, to be adjusted to make up the difference. The adjustment must be revenue neutral, meaning that the taxes customers pay at the pump would remain the same under the new laws as under the old tax structure.

Each spring, the California State Board of Equalization (BOE) votes on how much to adjust the excise tax rate, which is effective July 1 of each year, to keep it revenue neutral. The rate is based on estimates from the state Department of Finance and IHS Global Insight, an economic and financial data firm, of the expected price and number of gallons that would be purchased during the coming fiscal year.

“This is great news for California taxpayers,” said State Sen. George Runner, a member of the BOE who opposed the fuel-tax swap legislation, during a press conference announcing the rate change. “It comes at a great time for Californians when they’re on the road on their summer vacations.” The 3.5-cents-per-gallon (CPG) drop will shift the state from having the highest state gas taxes in the country to levying the second-highest, after New York.

Indiana Closes Loophole

In Indiana, the state will be switching from a prepaid sales tax on gasoline, which was collected from retailers, to a gasoline-use tax based on a rolling monthly statewide average that is collected from distributors. The tax rate could change from month to month depending on the average price for gasoline. For the month of July 2014, the tax will be 22.9 CPG.

The tax change was voted into law last year, after the Indiana Petroleum Marketers and Convenience Store Association (IPCA) lobbied for legislation that closed a loophole in how taxes were collected in the state, according to a report from last year in the Northwest Indiana Times.

In the original collection scenario, gas retailers would pay around 80% of the gasoline sales tax due to the distributor when it was delivering fuel, IPCA executive director Scot Imus explained to the newspaper. The retailers would then self-report and pay the rest at the end of the month. These “true ups” were vulnerable to competitors gaming the system and underreporting that remaining 20%, the IPCA believed.

“Up until now, it has basically been an honor system,” Imus told the newspaper. “It's as if you and I were paying our income taxes without a W-2.”

Some of these cheaters could potentially pocket the extra money or use it to undercut the prices of their competitors, the IPCA alleged. The association estimated that Indiana may have lost $50 billion in taxes in the past eight years because of this practice.

The new gasoline-use tax will be collected when a qualified distributor sells gasoline to a nonqualifieddistributor, according to the Indiana Department of Revenue (DOR), but not when a qualified distributor sells gasoline to another qualified distributor or exports it to another state. The qualified distributor would collect and remit the tax from the nonqualified distributor to DOR.

Retail stations should include the gasoline-use tax in the price at the pump and will be reimbursed in the same way as for other gasoline or special fuel taxes.