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New California gas tax arrives with a whimper, not a bang for July 4 Holiday

On June 20, I accurately predicted a major price spike despite an abundance
of surplus fuel.

In the days that followed, retail prices surged above $4 a gallon to $4.11, and
wholesale prices increased by as much as 64¢ a gallon to some independent gasoline
retailers.  Now, I am predicting that prices will drop, or increase only a penny or two
going into the July 4 Holiday, despite a State-mandated increase of 3.5¢ in your gas
taxes.

First, I'll explain the so-called "Tax Swap" and then explain why I think prices
should remain flat, or actually drop, on average, before Thursday, July 4.

The Gas Tax Swap explained ... sort of

Californians pay an 18¢ flat tax, called an excise tax to the Federal government
on every gallon of gasoline sold. Prior to today, we also paid 35.3¢ a gallon in State
excise taxes, plus an average of 2.5% in percentage-based State taxes, plus another
three to four percent in local city taxes depending on where you live.

In 2010, in order to deal with the California "budget crisis du jour," lawmakers decided
to raid the State gas tax. But to do it, they had to change the way your gasoline was 
taxed. Under the law, the state of California was mandated to spend tax revenues from
its percentage-based taxes on highway funds. In 2010, the State took a 5% sales tax.

To circumvent the law, California's legislators engaged in a "gas tax swap" where
the percentage based tax was reduced by 2.5%, and the flat gasoline excise taxe was
increased to 35.3¢ a gallon (as of today it is 38.5¢). It was billed as a "revenue neutral
tax swap," that allowed lawmakers to spend money that was formerly earmarked for road
repairs and  construction. But what the State didn't count on was the fact that gasoline
became so expensive that people started buying less fuel and driving more efficient cars.
In addition, businesses that have been harmed by our lackluster economy are also using
less fuel. In fact, since the crash of 2008, gasoline consumption has dropped every year
in California, reversing consumption trends for the last 100 years.

Why the flat tax backfired.

The new "flat tax" failed because gas prices went up. When gas prices went up, people
began buying less gasoline. If the State had stuck to its original taxation system, it would be
making more money, because it would benefit from a higher percentage of the higher gas
prices we've been forced to pay since 2010. But because they charged a flat tax, the State
of California is claiming that it has missed its tax revenue projections, and must therefore
increase the flat excise tax by another 3.5¢ a gallon.

FEEL your taxes at work as you drive down pothole strewn highways.

This new adjustment allows the State to make up  for revenue it hasn't received because it
lowered its percentage based tax in favor of a flat tax. Had they continued with the old tax
of 5%, all of that money would have gone into highway maintenance. Arguably, it is a
difference you can feel, because the "new tax" while legal, cuts deeply into road maintenance
funds.


July 4, GASOLINE FORECAST:

I predict that even with a new 3.5¢ tax increase in the pipeline,  the average price of gas in Southern
California will probably drop going into the July 4 driving season. If it does increase, it will only
be a couple of pennies per gallon.


ANALYSIS

The new tax increase that goes into effect today is unlikely to move gas prices up because
right now the price momentum is down, even as we go into a peak drive-time holiday. While
it is possible that some gas stations will raise prices to take advantage of hurried motorists
over the holiday, the prices hikes will be minimal and offset by more discounting from
independently owned unbranded stations. When Exxon's refinery was taken offline in the third
week of June, it created a massive price spike that pushed wholesale prices up for independent
dealers by 40 to 70¢ a gallon. This effect, called a "rack inversion" hits the unbranded independent
dealers the hardest. And because unbranded stations are usually the most competitive, a
rack inversion almost always raises the averag price of gasoline. 

This price spike was immediately followd by a massive price decline.

Margins for gasoline retailers are strong for brand name stations and extremely healthy for the
Indies. Even though we have seen reports of wholesale price hikes today, at this time the only
thing that could spike prices significantly higher in time for the Fourth of July is a major refinery
disaster, or a rumor of a major disaster.

Charles Langley can be reached at 858-752-4600