The Associated Press March 4, 2010, 5:40PM ET

Calif. passes gas tax changes to help $20B deficit

California lawmakers on Thursday passed a complicated change to the gasoline tax to address part of the state's $20 billion budget deficit and said it's enough to get the state through its financial problems for now.

The state Senate passed the Democratic package on a majority vote, largely along partisan lines. The Assembly also passed the bills, which now head to Gov. Arnold Schwarzenegger's desk.

The legislation is modeled after Schwarzenegger's proposal to replace the sales tax on gasoline with a larger excise tax. The swap allows some accounting maneuvers that would funnel more money into the state's general fund, where the deficit exists.

The tax exchange is estimated to generate $1.1 billion for the general fund while continuing to provide close to the current level of funding for public transit and repairs to highways and streets.

Californians would see no difference in prices at the pump.

The gas tax proposal passed Thursday was the centerpiece of a $4 billion Democratic package to deal with California's overall deficit projected through mid-2011. Essentially, the state is ending a 6 percent sales tax on gasoline and replacing it with a 17.3 cent per gallon excise tax on gas. The change allows the state to use the excise tax to pay off transit bond debt, which would free up more general fund money.

In January, Schwarzenegger had called the Legislature into a special session to whittle down the deficit by $8.9 billion, largely through cuts to public schools, higher education and social services.

But Democrats refused to make deeper cuts and handed the governor the current package with changes including the gas tax swap, cuts to state government payroll and a reduction in prison health care spending. The other measures already have been passed and sent to the governor's desk.

Schwarzenegger still needs to review the bills.

"I can just tell you, tax increases is out of the question here," the governor said Wednesday.

Republicans opposed the gas swap, characterizing it as a bait-and-switch for Californians that eventually would result in higher taxes at the pump.

The sales tax is a percentage, so it fluctuates with the price of gas, but because the excise tax is a flat amount per gallon, drivers might not see as much savings when the cost of gas declines.

Senate Minority Leader Dennis Hollingsworth of Murrieta said the original plan offered by the Schwarzenegger administration proposed lowering overall gasoline taxes by about 5 cents per gallon. The Democrats' legislation, however, keeps overall taxes the same while applying more of the revenue to the general fund.

Hollingsworth said the legislation circumvents California's two-thirds requirement for passing tax increases. He described the maneuver as a lowering of one tax while raising fees to cover the difference, then redirecting the revenue.

Senate President Pro Tem Darrell Steinberg said the exchange from a sales tax to an excise tax did not require a two-thirds vote because it replaces taxes "dollar for dollar." He said it also maintains funding for transportation projects, which he said could create 10,000 jobs.

Assemblyman Mike Eng, a Democrat from Monterey Park, said the gas tax proposal will provide a stable source of funding for transit agencies to keep buses running.

"The one thing the bus riders want is certainty," Eng said. "If they're out there waiting in the rain for the bus to come, it will come."

The governor's office has indicated that Schwarzenegger is unlikely to call another special session even if he's dissatisfied with the Democrats' package. Unlike last year when Schwarzenegger and lawmakers were forced to make deep midyear cuts in the face of a cash crisis that delayed tax refunds, the current situation is far less dire.

Democrats, who hold a majority in both houses, said they are content to address the remaining deficit later in the year. They are hoping increased federal aid and an improved economy will help whittle the deficit by as much as $6 billion. That would leave lawmakers to address only a $10 billion shortfall.

"We know the work isn't done," Steinberg said.

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Associated Press Writer Cathy Bussewitz contributed to this report.


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