SB 1035 specifies a set of per‑gallon excise taxes on motor vehicle fuel and a framework for adjusting those rates over time. The statute establishes three distinct levies (subdivisions (a)–(c)), directs recalculation if the federal fuel tax falls, requires the State Board of Equalization (the board) to make annual revenue adjustments tied to a discrete statutory exemption, and mandates CPI indexing beginning in 2020.
For practitioners: the bill creates layered obligations for fuel suppliers and an ongoing administrative duty for the board to estimate revenue effects and set rates. It also ties state rate adjustments to federal changes and contains a rounding rule and an explicit rule treating later legislative increases as base rates for future CPI adjustments—details that will affect revenue forecasting, compliance processes, and downstream fuel pricing.
At a Glance
What It Does
The bill imposes three per‑gallon excise taxes (18¢, 17.3¢, and 12¢) and spells out how the state rate is recalculated if the federal fuel tax drops. It requires the board to adjust one rate annually to offset revenue loss from a named exemption and, starting July 1, 2020, to index the taxes to the California CPI with rounding rules.
Who It Affects
Fuel distributors and retailers who collect and remit the excise taxes, the State Board tasked with rate adjustments, state and local highway and exclusive mass transit funding streams, and end users whose pump prices reflect these levies.
Why It Matters
The statute creates a permanent administrative mechanism for keeping state fuel revenues aligned with federal changes and a past legislative exemption, while locking future increases into CPI indexing. That matters for anyone modeling transport costs, forecasting transportation funding, or managing fuel tax compliance.
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What This Bill Actually Does
SB 1035 lays out three separate per‑gallon excise charges on motor vehicle fuel. It locates them in subdivisions: an 18‑cent base charge, a 17.3‑cent charge enacted in 2010 with a mandated revenue‑neutral adjustment regime, and a 12‑cent charge enacted in 2017.
The text ties all three to the statutory definitions of taxable fuel in Sections 7362–7364 and explicitly excludes aviation gasoline.
The bill builds two interlocking adjustment rules. First, subdivision (a) contains a federal‑parity mechanism: if the federal fuel tax falls below 9¢ per gallon and federal highway/transit allocations to California decline accordingly, the state rate is recalculated so the combined federal plus state per‑gallon rate equals 27¢.
Second, subdivision (b) requires the board to adjust the 17.3¢ component annually (on or before March 1 for the upcoming fiscal year) to recover the estimated revenue loss tied to an exemption created by Section 6357.7, and to account for prior years’ actual results so the adjustment aims for revenue neutrality.The statute phases these procedural changes: the revenue‑neutral adjustments under (b) were meant to stop on July 1, 2019, after which the 17.3¢ rate is fixed as the base. Separately, starting July 1, 2020, subdivision (d) requires the board to increase the taxes each July 1 by the California Consumer Price Index change; the first CPI adjustment covers November 1, 2017 to November 1, 2019.
The bill also instructs that any legislative increases enacted after July 1, 2017 are treated as new base rates for future CPI calculations.Two technical implementation details worth flagging: the statute preserves any federal exemptions that applied at the time of a federal tax reduction, and it imposes a numeric rounding instruction for CPI adjustments (the text references rounding to the nearest one‑tenth of one cent with a parenthetical dollar amount). Those items, along with the board’s estimate process and the March 1 timing, are the actionable compliance levers agencies and industry will use each year.
The Five Things You Need to Know
Subdivision (a)(1) sets a base state excise tax of $0.18 per gallon on taxable motor vehicle fuel.
If the federal fuel tax falls below $0.09 per gallon and federal allocations to California for highways and exclusive public mass transit guideways fall correspondingly, the state rate is recalculated so federal plus state equals $0.27 per gallon (subdivision (a)(2)).
Subdivision (b)(1) imposes an additional $0.173 per gallon tax effective July 1, 2010, and subdivision (b)(2) requires the board, on or before March 1 each year, to adjust that rate to recoup revenue lost because of the exemption created by Section 6357.7.
The annual adjustment mechanism under subdivision (b) must account for prior‑year actual revenues so adjustments aim to maintain revenue neutrality; those adjustment duties cease on July 1, 2019, leaving the 17.3¢ rate as fixed thereafter (subdivision (b)(5)).
Beginning July 1, 2020, the board must index the taxes in subdivisions (a)–(c) to the California CPI each July 1, with the first adjustment covering Nov. 1, 2017–Nov. 1, 2019, and any post‑July 1, 2017 legislative increases treated as new base rates (subdivisions (d)–(e)).
Section-by-Section Breakdown
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18¢ base excise and federal‑parity recalculation
Subdivision (a)(1) imposes an 18‑cent per‑gallon state tax on the fuels defined in Sections 7362–7364. Paragraph (2) creates a mechanical trigger: if the federal excise falls below 9¢ and federal funding to California for highways and exclusive public mass transit guideways drops correspondingly, the board must recalculate the state rate so the combined federal plus state rate equals 27¢ per gallon. Paragraph (3) preserves any federal exemptions — a compliance safeguard that keeps exempt entities from becoming liable solely because of the state recalculation.
17.3¢ charge with annual revenue‑neutral adjustment for a statutory exemption
Subdivision (b)(1) adds a 17.3‑cent per‑gallon levy effective July 1, 2010. Paragraphs (2) and (3) direct the board to adjust that rate annually (on or before March 1 preceding the fiscal year) to generate revenue equal to the board’s estimate of the loss caused by the exemption in Section 6357.7, and to factor in whether prior years produced net gains or losses. Practically, this creates an estimation and reconciliation cycle that the board must run every year until the statutory cut‑off in paragraph (5).
Cessation of annual adjustments and fixation of the 17.3¢ rate
Paragraph (5) fixes the 17.3¢ rate as the permanent base beginning July 1, 2019, by terminating the annual adjustment regimen. That changes the board’s long‑term workload: the recurring estimate/reconciliation requirement ends, and the 17.3¢ figure becomes part of the permanent tax base for subsequent CPI indexing and accounting.
12¢ 2017 addition
Subdivision (c) imposes a 12‑cent per‑gallon tax effective November 1, 2017, layered on top of the taxes in (a) and (b). This provision increases the cumulative per‑gallon state levy and therefore affects baseline revenue calculations, CPI‑indexed adjustments, and the total tax remitted at the distributor/retailer level.
Annual CPI indexing, rounding, and treatment of later increases
Subdivision (d) requires the board to adjust the taxes every July 1 by the percentage change in the California CPI, with the first adjustment covering Nov. 1, 2017–Nov. 1, 2019; the statute directs rounding to the nearest one‑tenth of one cent and instructs the Department of Finance to calculate the CPI change. Subdivision (e) treats any increases enacted after July 1, 2017 as changes to the base rates for future CPI calculations. Together, these rules lock a predictable inflationary increase path into the tax structure but create a dependency on index calculations, rounding, and correct base‑rate accounting.
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Explore Transportation in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Highway and exclusive public mass transit guideway programs — the federal‑parity clause and CPI indexing preserve a predictable revenue path tied to fuel gallons, which supports budget planning for infrastructure and transit projects.
- Entities holding the federal exemption at the time of a federal tax reduction — subdivision (a)(3) explicitly preserves existing federal exemptions, so those parties avoid new state liability triggered by federal changes.
- State budget and treasury managers — the revenue‑neutral adjustment language and CPI indexing reduce year‑to‑year volatility in modeled fuel tax receipts, simplifying multi‑year fiscal forecasting.
- Local transit agencies and project sponsors — by tying state adjustments to federal funding changes and indexing to inflation, the statute reduces the risk of sudden revenue shortfalls for transit guideway programs that rely on stable fuel‑tax flows.
Who Bears the Cost
- Fuel distributors and retailers — they must continue to collect and remit layered excise taxes and implement annual rate changes and rounding increments, increasing compliance and recordkeeping burdens.
- Motorists and commercial fleets — the cumulative per‑gallon levies and CPI indexing increase operating fuel costs over time and make fuel a less predictable input in transport‑intensive businesses.
- The State Board tasked with adjustments — the board must produce annual estimates, run reconciliation calculations on revenue loss for a named exemption, administer CPI adjustments, and apply rounding rules, all of which consume staff time and modeling resources.
- Businesses that price competitively across state lines — higher, indexed pump taxes can affect competitiveness for trucking, distribution, and goods‑movement companies operating in and out of California.
Key Issues
The Core Tension
The statute balances two legitimate goals—protecting transportation revenue streams (by calibrating state rates to federal changes and indexing for inflation) and limiting fiscal surprises for taxpayers (via a revenue‑neutral adjustment for a specific exemption)—but the mechanisms that achieve revenue stability (complex annual estimates, conditional recalculations, and rigid base‑rate rules) increase administrative complexity and leave room for disputes about how and when adjustments should be made.
Implementation depends heavily on administrative judgments and numeric conventions. The board’s annual revenue adjustments under subdivision (b) rely on estimates of revenue loss attributable to Section 6357.7 and on reconciling prior‑year actuals — a process that can produce large retroactive shifts if estimates are off.
The statute also instructs a numerical rounding rule for CPI adjustments (a reference to rounding to the nearest one‑tenth of one cent accompanied by a parenthetical dollar figure), which creates a potential ambiguity practitioners will need the board to clarify.
Another practical tension arises from the federal‑parity clause: recalculating the state rate to reach a fixed federal‑plus‑state target depends on both the level of federal tax and an assumption that federal funding to California declines “correspondingly.” That phrase creates a conditionality that could be disputed administratively. Finally, treating post‑2017 legislative increases as new base rates for CPI calculations simplifies future indexing but embeds prior policy choices into the inflationary carriage of the tax—a trade‑off between predictability and the freedom to redesign base rates later.
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