SAN FRANCISCO — California’s sales tax on gasoline is dead. But long live higher excise taxes on gasoline.

That is, unless Gov. Arnold Schwarzenegger puts the kibosh on the whole thing.

Last week, lawmakers approved bills to effectively exchange the state’s sales tax on gasoline for an equivalent increase in the per-gallon excise tax.

Schwarzenegger had not yet acted on the tax-swap bill as of Tuesday morning, even though he acted Monday night on eight other bills passed in the Legislature’s special budget session, signing seven and vetoing one.

The special session was called in January, after the governor declared a fiscal emergency because the state faced an estimated general fund shortfall of $19.9 billion through June 2011.

After the bills passed last week, spokeswoman Rachel Arrezola said Schwarzenegger may hold off because lawmakers had not acted on several job-creation proposals made at the same time by the governor.

The one bill Schwarzenegger vetoed Monday was the biggest one in terms of deficit reduction — a claimed $2.1 billion in spending cuts. But the savings are illusory, the governor said in his veto ­message.

“It does not actually implement spending reductions and make progress to close our budget gap,” the message said.

The tax-swap bill is a modified version of a plan Schwarzenegger himself proposed in January, when he released his fiscal 2011 budget proposal and declared a budget emergency, citing a $19.9 billion general fund deficit predicted through the end of fiscal 2011.

The package would generate $1.1 billion for the general fund without any net increase in taxes, according to a spokesperson for Senate President pro tempore Darrell Steinberg.

That’s because the bill would using the additional revenue from the higher excise tax to fund debt service on outstanding general obligation bonds issued for transportation projects.

In previous years’ budgets, Schwarzenegger attempted to use the same maneuver with the sales tax on fuel, which is earmarked for transportation.

But state courts ruled against the governor, saying a voter-approved constitutional amendment from 2002, which required the motor fuel sales tax to be used for transportation, does not allow those funds to be used to service GOs, which are typically serviced with general tax revenue.

The tax swap solves the problem neatly by eliminating the sales tax, and substituting for it the same amount of revenue from the per-gallon excise tax, which is not covered by the same constitutional provisions. The bill calls for the excise tax to be adjusted yearly so it will bring in the same amount of revenue as the sales tax would have. The state’s sales tax is currently 6%, dropping to 5% in July 2011 after ­temporary tax increases expire.

Revenue neutrality was key to getting the bills passed. The Legislature’s majority Democrats say they do not trigger the two-thirds supermajority requirement for tax increases. The bills passed without GOP support, which would have been needed to achieve the two-thirds level.

The Democratic majority tinkered with the Republican governor’s proposal. They didn’t want to completely eliminate state support for transit agencies, and they wanted to protect education funding guarantees. They kept a sales tax on diesel fuel, using that money to support transit agencies.

In a report to its members, the League of California Cities said the terms of the tax-swap proposal continue to direct a portion of the excise tax to cities for local transportation projects, but noted that the tax swap appears to weaken constitutional protections and makes cities vulnerable if state GO debt service increases in the future.

Meanwhile, JPMorgan priced for retail investors $2 billion of state GOs yesterday with a top yield of 5.72% in 2035, ahead of institutional pricing Thursday.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.