1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 FEBRUARY 28, 2013 9 ADMINISTRATIVE SESSION 10 N CONSENT AGENDA 11 N1 2013/2014 EXCISE TAX 12 RATE SETTING (FUEL TAX SWAP) 13 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 Reported by: Juli Price Jackson 26 No. CSR 5214 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 George Runner Member 10 11 Marcy Jo Mandel Appearing for John 12 Chiang, State Controller (per 13 Government Code Section 7.9) 14 15 Claudia Madrigal Franchise Income 16 Tax Analyst Board Proceedings 17 Division 18 Randy Ferris Chief Counsel 19 Bill Benson 20 Acting Chief Research & 21 Statistics Division 22 Lou Feletto CEA 23 Special Taxes Audit & Carrier Division 24 25 26 ---oOo--- 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 FEBRUARY 28, 2013 4 ---oOo--- 5 MR. HORTON: Members, let us reconvene the 6 meeting of the Board of Equalization. 7 Miss Madrigal, what is our next item? 8 MS. MADRIGAL: Okay. Our next item is 9 administrative session, item N, N1, 2013/2014 excise tax 10 rate setting. 11 MR. HORTON: I would ask as staff comes 12 forward, please introduce yourself for the record and 13 commence with your presentation. 14 MR. BENSON: Mr. Chairman -- 15 MR. HORTON: Gentlemen, please pull the mike 16 forward that way. 17 MR. BENSON: Thank you. 18 MR. HORTON: Thank you. 19 MR. BENSON: Mr. Chairman, the Honorable 20 Jerome Horton, Madam Vice Chair, the Honorable Michelle 21 Steel and to all the honorable Members of the Board of 22 Equalization. 23 My name is Bill Benson, Junior. I am the 24 Acting Chief of Research and Statistics. I've been 25 tasked with calculating the annual adjustment to the 26 excise tax rate on gasoline and diesel fuel. 27 The -- if I may defer a little bit here, just 28 to relax myself -- the last time I was down here was 3 1 kind of on the hot seat too and that had to do with the 2 lumber -- lumber fee. I really enjoy Southern 3 California. 4 You know, and I -- in the December hearing I 5 also presented the timber tax. And I thought that that 6 would be my chance to redeem myself. And, sure enough, 7 at the end of the day, it was just rushed through. I 8 didn't even get a chance to speak to you. 9 So -- so, I look at this opportunity not so 10 much as redemption, but just survival. But I'm -- I'm 11 here. 12 First of all, I want to say that the BOE does 13 not have the independent authority to raise taxes. In 14 2010 Governor Schwarzenegger signed into law a revenue 15 neutral legislation that, among other things, raised the 16 excise tax and lowered the sales tax on gasoline. 17 This legislation required that these rate 18 adjustments offset each other and provide the same level 19 of revenue. The law was referred to as the fuel tax 20 swap. 21 The law mandated that the Board -- the BOE make 22 an adjustment to the excite tax rate each year to 23 prevent a net change in State revenues. The law 24 requires that projected sales tax, which would have -- 25 which would have been collected, but for the swap, be an 26 offset with the excise tax to avoid a net change in the 27 overall tax revenues on gasoline purchases, in effect, 28 balancing the two. 4 1 Due to the unfortunate rise in gasoline prices, 2 the sales tax loss that must loss that must be recovered 3 is also rising. In compliance with the law, the 3.5 4 cents per gallon reflects the necessary adjustment to 5 the excise tax rate for fiscal year 2013/14 in order to 6 maintain revenue neutrality. 7 That's my opening statement. I'm open for any 8 comments that this elected Board would have. 9 MR. HORTON: Is there -- does that conclude 10 your presentation? 11 MR. BENSON: Yes. 12 MR. HORTON: Okay. Discussion, Members? 13 Member Runner. 14 MR. RUNNER: Just to -- to clarify and, I 15 guess, kind of try to get some discussion going on this 16 particular item -- 17 MR. BENSON: Uh-huh. 18 MR. RUNNER: -- well, first of all, I think we 19 were given a chart here that kind of helps explain -- 20 MR. BENSON: It does. 21 MR. RUNNER: -- the full -- what it was prior 22 to -- 23 MR. BENSON: Correct. 24 MR. RUNNER: -- the fuel tax swap and -- 25 MR. BENSON: A break even point -- 26 MR. RUNNER: Right. And how it is -- 27 MR. BENSON: -- per gallon. 28 MR. RUNNER: -- sales tax is shifted and excise 5 1 tax is shifted and -- 2 MR. BENSON: Correct. 3 MR. RUNNER: -- whatnot. 4 And I think this is a good -- good explanation 5 in regards to that transition that -- that took place. 6 Let me start off by saying, I was in the 7 legislature when this was done and voted no. Because, 8 again, this was not done as a piece of good -- what I 9 would think of as public policy, let's get some clear 10 taxation policy done. 11 This was done in order to try to find about a 12 billion 2, I think, in order to help balance the budget 13 about three years ago. 14 And, so -- and, so, as a result of that, I 15 think rather than having a policy which creates clear 16 public policy or clear tax policy, what we ended up is 17 backing into something and trying to find some money and 18 then trying to figure out how to then make sure that the 19 swap could take place. At that time it had to take 20 place with a -- with a simple majority vote process. 21 And, so, it had to be "revenue neutral" and, so, that's 22 the swap that all took place in regards to that. 23 So, at that time there were concerns in regards 24 to why it would be done and the consequence of it 25 happening. And one of the concerns that was talked 26 about is the BOE's going to be exactly in this position. 27 Let me just go to some of the specifics. For 28 the -- we've obviously done this for two years now. 6 1 MR. BENSON: Correct. 2 MR. RUNNER: The previous increases were 3 negligible but yet gas prices were still rising during 4 that period of time. 5 I guess my question is, what -- what happened 6 or why is it that we -- that even though gas prices were 7 rising in the past, we had negligible increases and -- 8 but yet this is a much more significant increase? 9 What -- what -- what in the formula created 10 that particular change? 11 MR. BENSON: Well, there's -- there's two 12 things involved in the calculation. One is to look back 13 to see how well we -- we calculated the over under in 14 prior years. 15 In '10-'11 we overcollected in the amount of 16 $56 million. '11-'12 we were down in terms of 17 collection on the excise tax of $213 million. So, that 18 made it a net amount of $157 (verbatim) that we're 19 trying to make up in the excise tax because of the -- I 20 guess you would call it foregone revenue -- 21 MR. RUNNER: Uh-huh. 22 MR. BENSON: -- in the general fund from the 23 five percent rate increase -- or the five percent State 24 tax rate. 25 MR. RUNNER: So, the forecast that was done 26 last year -- 27 MR. BENSON: Uh-huh. 28 MR. RUNNER: -- to anticipate what the cost of 7 1 gasoline is going to be -- 2 MR. BENSON: Uh-huh. 3 MR. RUNNER: -- was -- 4 MR. BENSON: That was based on calendar year 5 '12 forecasting. 6 MR. RUNNER: Right. Was -- was incorrect. 7 And, as a result, created -- I shouldn't say it was 8 incorrect, it was just not -- it just was different. 9 MR. BENSON: It was different. 10 MR. RUNNER: I don't want to say it was 11 incorrect -- 12 MR. BENSON: As all -- 13 MR. RUNNER: -- with all your forecasting, it's 14 hard to decide what's right and wrong. 15 MR. BENSON: -- that's correct. 16 MR. RUNNER: It's just a matter of a forecast. 17 MR. BENSON: And also it's fluid. They change 18 over time. 19 You know, forecasting, just like the 20 international company that we use to -- to grow the 21 Department of Finance's numbers, well, they forecast 22 monthly. 23 MR. RUNNER: Right. 24 MR. BENSON: And things change in the world on 25 a monthly basis. 26 MR. RUNNER: So, part of the increase and the 27 reason for the change then is the fact that the -- that 28 the -- there was undercollection, if you will -- 8 1 MR. BENSON: That's correct. 2 MR. RUNNER: -- and then, therefore, part of 3 the formula requires a recapturing of that? 4 MR. BENSON: Right. In order to ensure revenue 5 neutrality, that's -- that's the mechanism of -- of the 6 -- of the model that -- 7 MR. RUNNER: Right, right. And that's an 8 important phrase because we're -- what we're not talking 9 about is price neutrality, we're talking about revenue 10 neutrality. 11 MR. BENSON: That's correct. 12 MR. RUNNER: So, I think -- again, I think I've 13 heard from folks that think "neutrality," that means 14 everything's supposed to stay the same, but it's not 15 supposed to stay the same in the sense of -- of -- of 16 price, it stays the same in the sense of what the State 17 would have received -- 18 MR. BENSON: That's correct. 19 MR. RUNNER: -- in regards to the -- in regards 20 to the -- if -- if, indeed, tax was the way it was back 21 prior to 2010. 22 So, it's revenue neutrality to the State that 23 is the -- that is the deciding factor, not price 24 neutrality. 25 MR. BENSON: That's correct. 26 MR. RUNNER: Okay. Let me just ask then, okay, 27 so, that's one portion of the increase. 28 What about the forecasting? Did -- did we end 9 1 up increasing the price this year based upon some 2 forecasting? 3 MR. BENSON: We did -- we did. The numbers 4 that we initially used, based on Finance's estimate -- 5 and Finance also uses Global Insight to do their 6 forecasting for fuel prices. 7 In terms of consumption, Finance's uses -- uses 8 their own internally developed regression analysis to 9 determine consumption and future consumption. 10 But in December Finance had a number in terms 11 what the average prices of fuel would be for calendar 12 year '13. And they do it by quarter. 13 MR. RUNNER: Uh-huh. 14 MR. BENSON: We took their number and we used 15 Global Insight's numbers as -- as of February 6th, 16 that's the day before the information was required to be 17 provided to Board Proceedings. 18 We used that number in order to grow -- in 19 order to ensure that we did have revenue neutrality. 20 And it did change the rate. The Finance number 21 would have been an increase of 2.9 cents, but since we 22 did grow the numbers from December to February, it ended 23 up being an increase of 3.5 cents that we -- that we're 24 suggesting that the Board -- 25 MR. RUNNER: Does the law require us -- 26 MR. BENSON: -- approve. 27 MR. RUNNER: -- to add the future forecast? 28 MR. BENSON: It requires us to -- to come up 10 1 with a model to ensure revenue neutrality. 2 MR. RUNNER: But revenue neutrality can be 3 achieved either forward or backward, correct? 4 MR. BENSON: That is correct. I mean -- 5 MR. RUNNER: Okay. 6 MR. BENSON: -- it can be. 7 MR. RUNNER: So, we could -- I mean, so -- 8 again, our revenue neutrality doesn't have to be based 9 upon a forecast. It could be based on a look back? 10 MR. BENSON: It can be, but -- but what we're 11 trying to do with our model is to mimic what will 12 actually occur during the fiscal year -- 13 MR. RUNNER: Well, we didn't do that very well 14 last year. 15 MR. BENSON: These are estimates, sir, these 16 are not -- 17 MR. RUNNER: Right, right. That's -- that 18 would be exactly my point. 19 My point isn't that -- isn't that we did a poor 20 job -- 21 MR. BENSON: Uh-huh. 22 MR. RUNNER: -- I think it's just the idea that 23 forecasting future costs of gasoline is a -- is probably 24 a pretty treacherous activity. 25 MR. BENSON: And -- and if I could do that, I 26 wouldn't be sitting here. 27 MR. RUNNER: But yet -- but yet we have done 28 that based -- that is included in -- in the -- in the 11 1 increase? 2 MR. BENSON: We do -- we -- we use -- we use 3 what we think is a -- is a company that's reputable. 4 MR. RUNNER: Right. 5 MR. BENSON: A company that other government 6 agencies use -- 7 MR. RUNNER: Right. 8 MR. BENSON: -- as well as major corporations 9 and we base that on what's reasonable -- 10 MR. RUNNER: Right. 11 MR. BENSON: -- that we feel -- 12 MR. RUNNER: Okay. I don't -- I don't doubt -- 13 I don't doubt the reasonableness. I don't doubt the -- 14 the -- the intention. 15 I don't doubt that the -- that these are -- 16 that these are well thought out calculations. 17 It's just that they're trying to predict gas 18 prices. That's all. I mean, I don't -- I don't -- and, 19 so -- 20 MR. BENSON: And they're hard to predict. 21 MR. RUNNER: And they're hard to predict. 22 So, that's one of my concerns is that 23 actually -- here's my -- here's my overall concern is so 24 much of this, quite frankly, the Board has very little 25 to do with. 26 MR. BENSON: That's right. 27 MR. RUNNER: And that's a frustration to me. 28 MR. BENSON: Uh-huh. 12 1 MR. RUNNER: I almost feel -- I almost feel 2 like the Board is almost set up as stooges in this 3 process, if you will. 4 You know, in the sense that this is all done. 5 It's pre-calculated. The numbers that you get, other 6 than this forecast number, I believe -- 7 MR. BENSON: Uh-huh. 8 MR. RUNNER: -- is -- is basically coming from 9 Finance, right? 10 MR. BENSON: It's coming from Finance, but -- 11 but they also use the Energy Information Administration. 12 They also -- 13 MR. RUNNER: Who is "they," when you say 14 "they"? 15 MR. BENSON: "They" being the Department of 16 Finance. 17 MR. RUNNER: Well, that's what I mean. I mean, 18 I don't -- I don't -- I don't -- I am not questioning 19 where they get their numbers -- 20 MR. BENSON: Uh-huh. 21 MR. RUNNER: -- I'm just saying but we get 22 numbers from Finance? 23 MR. BENSON: That's correct. 24 MR. RUNNER: And -- 25 MR. BENSON: We have a collaborative 26 relationship with Finance. We work hand in hand with 27 Finance on a regular basis -- whether it's this 28 particular program or other programs, for example. 13 1 MR. RUNNER: Is Finance required to get you the 2 numbers -- 3 MR. BENSON: Not necessarily, no. 4 MR. RUNNER: -- in the legislation? 5 MR. BENSON: No. 6 MR. RUNNER: No? But we go ahead and take 7 their numbers? 8 MR. BENSON: We use their numbers. 9 MR. RUNNER: We use their numbers. 10 MR. BENSON: We use their numbers because, one, 11 we feel that they're reliable. They're the Department 12 of Finance of the State of California. 13 MR. RUNNER: Okay. 14 MR. BENSON: They're an arm of the Governor's 15 office, obviously. 16 MR. RUNNER: Right. 17 MR. BENSON: They've got an excellent 18 reputation. 19 MR. RUNNER: Right. 20 MR. BENSON: And we feel that it's -- 21 MR. RUNNER: And that's why -- that's why I 22 kind of think they should be responsible for the 23 increase -- for the calculation and for the 24 implementation. 25 I get the fact that we are the Board of 26 Equalization, so, therefore, we have to then inform 27 people -- 28 MR. BENSON: Correct. 14 1 MR. RUNNER: -- about what the new rates are 2 going to be. 3 MR. BENSON: Right. 4 MR. RUNNER: But that's a lot different than 5 what's before us. 6 We are actually approving the new rates. 7 That's the action that's actually before us. 8 Again, even though much of this calculation 9 didn't -- basically came from -- from Finance. 10 MR. BENSON: But I would it's more of a 11 collaborative effort because they get information. 12 MR. RUNNER: So, what happens if we disagree 13 with Finance, if it's a collaborative effort? 14 MR. BENSON: We normally come to agreement on 15 most things. 16 MR. RUNNER: What happens if this Board 17 disagrees with Finance? 18 MR. FERRIS: Randy Ferris -- 19 MR. BENSON: I can't -- 20 MR. FERRIS: -- the Board's Chief Counsel. 21 MR. RUNNER: Okay. 22 MR. FERRIS: It's the Board that is mandated to 23 make the estimate. And, so, it's the Board's sole 24 responsibility. 25 MR. RUNNER: Okay. So, I mean, basically, if 26 we didn't -- if we didn't agree with Finance, we have 27 the capacity and the authority to calculate the number? 28 MR. FERRIS: That's correct. 15 1 MR. RUNNER: Okay. Let me just -- I guess 2 that's the other thing that -- that I don't like about 3 the way this is set up and that is -- is the timetable. 4 Now I think a lot of the timetable is again in 5 statute -- when it is that the calculations have got to 6 be used and when it is that the increase has got to be 7 done. 8 'Cause one of the issues that concerns me a 9 little bit is there's -- that there's almost -- and, 10 again, I -- I fault this to the legislation, not to the 11 Board, not to the -- 'cause we are just, like I said, 12 victims in this process -- in that there appears to be a 13 public aspect to this. 14 'Cause here we are in a public meeting adopting 15 something. So, there appears to be public aspect to it, 16 but the reality is the calendar doesn't really engage 17 the public very well, simply because of the timing of 18 it. 19 And, so, again that's a frustration that I have 20 as a Member. And it should be a frustration I think we 21 all have, is that it doesn't allow us, for instance -- 22 for instance, if we were to question right now as a 23 Board or I was as a Member to say, 24 "I really would like to see how these 25 calculations were done, let's go ahead and put 26 this off to next month." 27 We couldn't do that, could we? 28 MR. FERRIS: That would result in the Board 16 1 violating the law. 2 MR. RUNNER: Right. And that -- 3 MR. FERRIS: The Board is required on or before 4 March 1st to set the rate. 5 MR. RUNNER: -- right. And that's a 6 frustration, because here it is that we're asked to act 7 on something. We need to then figure out what -- how to 8 do the calculations. 9 We're in a public meeting where either we would 10 ask it or the public would ask, but yet we don't really 11 have the capacity to say, "You are right, public," or 12 "You're right, Member. Let's go ahead and take another 13 look at this", because the calendar has been set, again, 14 in statute. 15 So, I guess those are my frustrations with 16 what's before us. Again, you know, when they were 17 negligible issues in the past, it was, you know, kind of 18 like, I think, you know, it was like .004, I think, .003 19 in the past, this, obviously, is a much different issue. 20 And, you know, and I think that that is what kind of 21 brings this -- this discussion a little -- a little -- a 22 little more focused, I guess, at this point. 23 I guess the specific issue I want -- that I 24 would like to just kind of leave with then is this fact 25 that -- that -- that we actually did some calculations 26 going forward that are not necessary to be added into 27 the -- the -- the -- what -- that we are required to 28 actually pass. 17 1 Do I -- do you understand? 2 MR. FERRIS: Yes, I do. 3 MR. RUNNER: Let me go to Counsel -- 4 MR. FERRIS: Yeah -- 5 MR. RUNNER: -- and ask that. 6 MR. FERRIS: -- Senator Runner, I think that -- 7 that Revenue and Taxation Code 7360, subdivision (b)(2) 8 does require the Board to estimate what the rate needs 9 to be on July 1st in order to ensure revenue neutrality. 10 So, you can't just deal with the legislative 11 mandate through true-ups that look back. 12 MR. RUNNER: Uh-huh. 13 MR. FERRIS: You also have to look forward. 14 You have to set the rate based on the Board's best 15 estimate as to what will maintain that revenue 16 neutrality. 17 So, it's -- it's -- it's a two-fold process. 18 You have to look forward and then you also look back to 19 see what you did. 20 Actually, you're looking back to the last 21 complete fiscal year for which we have actual data. So, 22 you're actually truing up the '11-'12 fiscal year, not 23 what you voted on last year. 24 MR. RUNNER: But if we chose, for instance, to 25 just say, 26 "Hey, look, gas estimates are really 27 difficult, even with the best science and the 28 best economists doing it." 18 1 MR. FERRIS: True. 2 MR. RUNNER: Therefore, we're going to go ahead 3 and decide that -- that prices are going to -- we 4 believe that there is a potential that prices stay 5 level, we could do that. 6 And then -- and then basically then if we were 7 wrong, it would get trued up in the -- in the following 8 year? 9 MR. FERRIS: Two years -- 10 MR. RUNNER: Two years. 11 MR. FERRIS: -- from then. 12 MR. RUNNER: Okay, okay, it would get trued 13 up -- 14 MR. FERRIS: Later. 15 MR. RUNNER: -- later. 16 MR. FERRIS: Within a three-year period it 17 always ensures revenue neutrality. 18 MR. RUNNER: It would get trued up later. 19 So, we do have the capacity of that and still 20 be consistent with the law? 21 MR. FERRIS: Well, the law just requires the 22 Board to make its estimate. 23 MR. RUNNER: Okay, okay, okay. 24 You know, at this point, you know, these are my 25 concerns. And again it's on top of the fact that we 26 have a significant change, at the same time folks are 27 already suffering at the pump. 28 I would rather -- I would rather be 19 1 conservative in creating as low an impact on the public 2 right now as we can. 3 And, you know -- and again I would certainly be 4 supportive of us even looking at change the law, which 5 would say, 6 "Hey, look, if this is driven so much by 7 Finance, then let's go ahead and just make this 8 an -- an administrative process." 9 'Cause it appears to be a lot of 10 administrative process to this. 11 MR. BENSON: Yeah, it is. 12 MR. RUNNER: And let's go ahead and make -- let 13 Finance do the administrative process and our job is 14 simply to inform the taxpayers and the -- and the 15 retailers about the change, just like we do with, for 16 instance, Prop. 30. 17 You know, Prop. 30 was passed by the public. 18 We have a responsibility but our responsibility isn't 19 to, you know, change around what -- what was done. Our 20 responsibility is just to inform the public and the 21 retailers of what the new tax rate is. 22 So, it seems to me that we're kind of caught 23 between there. And I certainly would support the idea 24 of just us going back to Finance, saying, "Hey, look," 25 or to the legislature, for that matter, 26 "This is an administrative process. Let's 27 not -- let's not it's give it the appearance 28 that it's not just a simple administrative 20 1 process, that there is really is some -- 2 some -- some deliberate dialogue that goes on." 3 And -- because I think that's what kind of has 4 the public a little bit fooled right now. 5 MR. BENSON: Uh-huh. 6 MR. RUNNER: 'Cause they're saying, 7 "Hey, this has come before an elected 8 Board. Why don't you guys just do something 9 about it?" 10 And, unfortunately, like you said, it's an 11 administrative process where our hands are -- you know, 12 we don't have a lot of flexibility. 13 Thank you. 14 MR. BENSON: That's correct. 15 MR. HORTON: Member Steel. 16 MS. STEEL: You tried to explain just little 17 bit about the Department of Finance forecasted for 18 2.9 cents, but BOE came up with 3.5 cents. So -- 19 MR. BENSON: Yeah. 20 MS. STEEL: -- how did you figure it out for 21 that? 22 MR. BENSON: The numbers -- the numbers that 23 Finance used in their budget, '13-'14 budget, we were -- 24 we received those just before January 10th. 25 What we were trying to do is -- is -- is use 26 the best available information available by way of due 27 diligence -- 28 MS. STEEL: But it's all -- 21 1 MR. BENSON: -- in order to -- 2 MS. STEEL: -- guessing game here because, you 3 know, you don't know. 4 Right now when gas prices really high, but last 5 year around this time that we had very high gas price 6 too. So -- and then it started going down. So, this is 7 all guessing game. 8 So, even you try to get the best possible right 9 number, you don't even know. So, Department of Finance 10 came out with the much lower number -- not much, but, 11 you know, lower number than BOE. 12 So, when you try to figure it out that you say 13 you are collaborating with Department of Finance, but 14 something number came out much bigger than, you know, 15 what they forecast. 16 MR. BENSON: Again the only reason that number 17 changed between what Finance had in December and what 18 our number is as of February is we grew the number. 19 We grew Finance's number based on -- 20 MS. STEEL: Because the gasoline price? 21 MR. BENSON: -- exactly, exactly -- because of 22 the overall increase in gas prices. 23 MS. STEEL: So, for the -- 24 MR. BENSON: Nationally -- national increase in 25 gas prices. We grew that. 26 MS. STEEL: -- right. But gas prices always 27 fluctuate. So, it just goes down. You don't know when 28 it's going to really go down like last year, maybe fall 22 1 it went down -- 2 MR. BENSON: Right. 3 MS. STEEL: -- and then, you know, it's going 4 to come back up. 5 So -- 6 MR. BENSON: Right. But it could also go up. 7 It could go up to 6 or $7 a gallon. 8 We don't know. There is a lot of -- 9 MS. STEEL: Have they ever been over $7? No, 10 I -- well, I drive -- 11 MR. BENSON: It's been $5 a gallon. 12 MS. STEEL: Right, that one I saw it. 13 MR. BENSON: But there are some estimates, 14 there are some economists that think it could go that 15 high. It's possible. 16 MS. STEEL: That's all guessing game, that's 17 what I'm saying, yeah. 18 MR. BENSON: It's -- yeah, the market is based 19 on speculation and other things that occur in the world. 20 And there is -- there's just all kinds of 21 things. Unfortunately for the US, because most of our 22 gas supply now is -- is created by us and we're less 23 dependent on foreign oil, there may be a possibility 24 that fuel prices could -- could stabilize in the future. 25 We don't know. We don't know. 26 MS. STEEL: Okay. So, we collected -- actually 27 overcollected -- two years ago. And last year -- 28 MR. BENSON: Correct. 23 1 MS. STEEL: -- 2012 cycle that we 2 undercollected? 3 MR. BENSON: That's correct. 4 MS. STEEL: So, if we undercollect, we still 5 adjusting for next year coming up. So, if we 6 undercollect for 2013 tax year then -- 7 MR. BENSON: We have to make an adjustment for 8 that undercollection. 9 MS. STEEL: But this really interesting because 10 it's -- the sales tax and the excise tax are apple and 11 oranges here because, you know, it's -- one is actually 12 measuring what different -- both of them actually have a 13 different sets of that one is by the gallon, one is by 14 the -- 15 MR. BENSON: Right. That's part of the reason 16 why we have to look back to see how -- how well the 17 estimate was -- 18 MS. STEEL: Right. 19 MR. BENSON: -- up or down. Because it could 20 go down. 21 MS. STEEL: Right. So, looking back is good, 22 but looking future, by the law we have to look at it, 23 but it's -- it's -- you know, I really don't understand 24 that, you know, how you going to look at the future of 25 the gas price and how much you going to sell? 26 So, that -- that's really confusing there. So, 27 when we -- for example, the -- if we say, so, 2013 year 28 we collect $200 million less than what we suppose 24 1 collect -- 2 MR. BENSON: Uh-huh. 3 MS. STEEL: -- then what happen? 4 MR. BENSON: It will impact the rate that we'll 5 set next year. 6 It will -- 7 MS. STEEL: So, then -- 8 MR. FERRIS: Two years from now. 9 MS. STEEL: -- year goes on, it's going to -- 10 MR. FELETTO: Two years from now. 11 MS. STEEL: -- to be same -- two years back? 12 So -- so, if we go -- move forward that -- with 13 the lower just stay the way it is, then next year you 14 have to raise much higher? 15 MR. BENSON: We don't know that. 16 MS. STEEL: No, if we -- if we undercollected 17 then -- 18 MR. BENSON: If we undercollected, yes. 19 MS. STEEL: So, it's going to just keep going, 20 but still we can set this price the way it is. 21 And then we can stay with the same price right 22 now for 2013 year. And then if we can look at it for 23 next year, so, maybe gas prices goes down, then maybe 24 it's going to match up? So -- 25 MR. BENSON: I don't know whether or not the 26 law provides the latitude to do that. But -- 27 MR. FERRIS: I've already commented on that. 28 MS. YEE: Yeah. 25 1 MR. BENSON: So, I -- I can't -- I don't know 2 if we have latitude. 3 MR. HORTON: Members, I don't want a question 4 unanswered, even though we may have answered it 5 before. 6 MR. FERRIS: Yes. So, the -- the law -- again 7 Revenue and Taxation Code Section 7360, subdivision 8 (b)(2) -- requires the Board to set the rate to be 9 effective for July 1st of the -- of the fiscal year 10 that's coming, to set the rate that the Board -- based 11 on the Board's estimate, the Board believes will 12 maintain revenue neutrality. 13 So, it has to look forward. And it has to take 14 into account consumption and prices in the fiscal year 15 23 -- 2013-14. So, it has to do that. 16 And in another subdivision it has to also take 17 into account what it did in the past. And, so, once the 18 complete data comes in for any fiscal year that the 19 Board has set the rate for, so, now, this year, the 20 Board's looking at the fiscal year '11-'12 because we 21 have all the data in now, the actual data, of what 22 happened -- 23 MS. STEEL: Not all -- 24 MR. BENSON: Right. 25 MR. FERRIS: -- in fiscal year '11-'12. 26 So, the Board is making a correction because in 27 '11-'12 the -- the rate was set too low. 28 MR. BENSON: Right. 26 1 MR. FERRIS: And, so, now, of that 3 and a half 2 cents, one cent of it is to correct for undersetting the 3 rate in fiscal year '11-'12. 4 And, so, for what the Board is doing this year, 5 that true-up correction will occur two years from now, 6 when the Board will have the complete data in, the 7 actual data for fiscal year 2013-14. 8 MS. STEEL: Okay. Thank you. 9 MR. HORTON: Member Yee. 10 MS. YEE: Thank you, Mr. Chairman. I wanted to 11 just make a couple comments. 12 One, the statute is clear with respect to this 13 Board's responsibility with respect to setting the 14 excise tax rate by March 1st. So, that is a mandate. I 15 don't think we have any option to not take that 16 responsibility on. And we do have a deadline by which 17 we need to act on that. 18 Secondly, I think this provides actually a 19 really wonderful opportunity to do some broader public 20 education about the sales tax and excise tax on 21 gasoline. It's going to become an issue and continue to 22 be an issue as we see gas prices increase in the future. 23 And I just want to also comment with respect to 24 Mr. Benson and your team and the work that you do to 25 bring the estimates to us and the recommended rate. 26 We cannot look forward in terms of what the 27 rate ought to be for the next fiscal year without taking 28 into consideration what we're seeing today and what I 27 1 think is a safe speculation about prices continuing to 2 increase in the near futures. 3 We have to do due diligence with respect to 4 what we're seeing happening in the market. And I think 5 the more we believe that we don't have that 6 responsibility and the true-up won't be all that 7 pleasant, you know, going forward, even if we had that 8 flexibility to -- to do that kind of a, you know, double 9 true-up, you know, going forward. 10 So, it's -- 11 MR. BENSON: It kicks the -- 12 MS. YEE: -- there's no -- 13 MR. BENSON: -- can down the road. 14 MS. YEE: -- yeah, exactly, exactly. 15 So, there's no easy way to do this. But I 16 actually had hoped that we could have taken this issue 17 and done a broader public education campaign around 18 this. And I'll -- and this is what -- where I see some 19 benefit. 20 MR. BENSON: I would agree with that based on 21 the last -- 22 MS. YEE: Well, hold on -- 23 MR. BENSON: -- week's -- 24 MS. YEE: -- hold on, hold on. 25 I don't know about my colleagues on this Board, 26 but the constituents that I care about, frankly, are the 27 gas station owners who are going to bear the brunt of 28 the public unhappiness. 28 1 And as -- there's a chart that I am glad to see 2 up here in front of us. But gas station owners have 3 very little to do with what we're doing here. And, in 4 fact, even in a normal situation they aren't making a 5 whole lot of profit because the prices are set without a 6 whole lot of input from gas station owners. 7 But the variable here is really the price. 8 MR. BENSON: Yes. 9 MS. YEE: I think consumption, we have a pretty 10 good comfort around what consumption looks like going 11 forward. 12 MR. BENSON: Correct. 13 MS. YEE: There generally aren't these steep 14 increases or ups and downs with respect to consumption. 15 But when you look at price, it's complicated by 16 the fact that gasoline prices includes the State and 17 federal excise tax. 18 MR. BENSON: Right. 19 MS. YEE: And, so, as we're trying to comply 20 with this provision of the law that has us calculating 21 sales tax, which is, uhmm, applied on the price of 22 gasoline, which includes the State and federal excise 23 tax -- 24 MR. BENSON: Right. 25 MS. YEE: -- we come up with the figure and in 26 this case I think you had that equivalent to a little 27 bit over $3 billion. 28 MR. BENSON: Correct. 29 1 MS. YEE: And that's what we're trying to, 2 essentially, replace with the excise tax -- 3 MR. BENSON: Exactly. 4 MS. YEE: -- increase. 5 Okay. And the excise tax is a flat rate that's 6 applied on per gallon of fuel. 7 So, we've got all these apples and oranges in 8 terms of how we're looking at these different taxes. 9 MR. BENSON: Right. 10 MS. YEE: And I think we have a responsibility 11 to just educate the public about this. 12 There will be an outcry in terms of any time 13 there is a sensitivity -- well, there will be 14 sensitivity in terms of any time there's an increase in 15 gas prices, but there is a reason for that. 16 There is very, frankly, little flexibility for 17 us to do much about it, given our mandate, given how 18 prices are set, which is out of our control, and also 19 what the price includes. 20 So, I do think that what's before us today is 21 reasonable. I believe the staff has done, uhmm, its due 22 diligence relative to looking at all the factors that 23 come into play that would suggest that the 24 recommendation before us is appropriate with respect to 25 looking at the most recent information about consumption 26 going forward, about prices going forward and then also 27 doing the true-up of looking back with respect to how we 28 had set the price in the previous years. 30 1 So, I would also like to just thank you, 2 Mr. Chairman. The fact sheet that we have before us 3 that was developed by the staff under your direction I 4 think is a wonderful, wonderful educational tool that I 5 would like to see somehow put into some sort of a visual 6 form that begins to -- as we begin to have complaints 7 about what the public may be feeling in their 8 pocketbook, at least some opportunity for educating the 9 public about what it is that they're actually paying for 10 and the structure of the price for which they're paying 11 per gallon of gas. 12 MR. HORTON: Thank you, Member Yee. 13 The legislation that was passed in 2010 and 14 signed by the Governor is confusing. And, quite 15 frankly, I had just left the legislature in 2009. Had I 16 been there, I would have had concerns about it because 17 of the confusion that it's creating and would have 18 created and, of course, shifting the burden and the 19 responsibility over to another agency is just 20 inappropriate from my perspective. 21 And, of course, I echo Member Yee's -- that we 22 need to educate the public. Because if there is a 23 desire to -- to make a change here, there is a desire to 24 overturn this law, if there is some protest that needs 25 to occur. 26 Unfortunately, the Board of Equalization simply 27 does not have the authority as an administrative body in 28 order to resolve that concern. That concern is 31 1 directly -- directed directly to the legislature. 2 I too don't want to pay higher gasoline prices, 3 don't want the taxes to go up. And, quite frankly, if I 4 had any control whatsoever, I would vote to not have 5 that happen. 6 Unfortunate, as Member Runner has indicated, 7 the Board of Equalization has been saddled with a 8 mandate, an administrative responsibility. 9 But I have a couple of questions, primarily for 10 clarification, if you will, of the Chief Legal Counsel. 11 What happens if the Board of Equalization 12 decides to violate the law? 13 MR. FERRIS: The statute doesn't provide for 14 what the consequence would be. 15 MR. HORTON: So, it -- 16 MR. FERRIS: But it would be a clear violation 17 of the law. 18 MR. HORTON: -- so, we, theoretically, could 19 violate the law and could protest the 2010 legislation? 20 And what would happen? 21 MR. FERRIS: I'm sure that it would create 22 concern in the other branches of government. 23 MS. YEE: Are you asking, Mr. Chairman, excuse 24 me, from a practical level what would happen relative to 25 the rate going forward? 26 MR. HORTON: Both. 27 MS. YEE: Okay. 28 MR. HORTON: So, I think it's a question of 32 1 Chief Counsel from a legal perspective and then it's a 2 question of Mr. Benson from a practical perspective. 3 MR. FERRIS: Well, your -- your Chief Counsel 4 would advise you not to violate the law. 5 MR. HORTON: Okay. All right, we appreciate 6 that. 7 Mr. Benson, from a practical perspective? 8 MR. BENSON: Uhmm -- well, I've ran the 9 calculations. 10 If we were to look back at, let's say, calendar 11 year '12 numbers, the rate would increase instead of 3.5 12 cents, it would increase 1.7 cents. 13 MR. HORTON: Okay. 14 MR. BENSON: If we use Finance's December 15 numbers, the rate would increase 2.9 cents as opposed to 16 3.5 cents. So -- 17 MR. HORTON: Okay. That's helpful. 18 MR. BENSON: -- yeah, okay. 19 MR. HORTON: Personally I'd like to take the 20 most conservative number we have out there if we're 21 going to project, to be quite honest with you -- only 22 because I have to pay it as well and these are tough 23 times. And we certainly want to be conscious of that 24 and hopeful, if you will, that there is a reduction in 25 the overall consumption, which history says has never 26 happened and a reduction in gas prices, which when 27 recent history says doesn't seem to be happening from a 28 national perspective. 33 1 Is there -- is there any reason that that 2 should not be the case -- could not be the case? 3 MR. BENSON: With respect to using Finance's 4 December numbers? 5 MR. HORTON: Yes. 6 MR. BENSON: I don't think that that would be a 7 violation of the law. 8 MR. FERRIS: No, the law just requires the 9 Board to make an estimate. 10 MR. BENSON: Yeah. 11 MR. FERRIS: If that -- if that is the Board's 12 opinion that that's the most reasonable estimate based 13 on all the facts, then that would the Board's 14 decision. 15 MR. HORTON: From a historical perspective, 16 this whole notion of equalizing the tax, if you will, 17 the confusing part -- we might want to start the 18 education now. 19 So, I'm going to ask a few questions relative 20 to that. In 2010, when the legislature signed -- 21 enacted this -- this legislation, what actually 22 happened? Did the sales tax go down at all at that 23 time? Did -- 24 MR. BENSON: In 2010? 25 MR. HORTON: 2010 -- I mean as a result of the 26 legislation over the last couple of years has California 27 consumers been paying sales tax on gasoline? And, if 28 so, did it go down? And what rate did it go down? 34 1 MR. BENSON: It went down in 2010-'11 from -- 2 at that time, the Statewide rate was 8 -- 8 and a 3 quarter percent. 4 The State rate on -- or the statewide tax rate 5 on gasoline went down to 2 and a quarter percent, where 6 it's -- currently is, 2 and a quarter percent. 7 In addition to that there is a special district 8 tax and we have 147 new special districts and that's 9 about -- the average -- with the average of those is 10 about .88 percent. 11 MR. HORTON: So, the State tax rate has gone 12 down, has been down over the last two years or so? 13 MR. BENSON: State tax rate on gasoline. 14 MR. HORTON: On gasoline, not -- everything 15 else -- 16 MR. BENSON: Right. 17 MR. HORTON: -- we're paying too much taxes, 18 but we're paying them. 19 State tax rate went down? 20 MR. BENSON: Uh-huh. 21 MR. HORTON: And the excise tax rate is where 22 the Board of Equalization comes in seeking to adjust in 23 order to offset so that this revenue neutral -- this 24 whole term of revenue neutral in itself is confusing, 25 though. 26 MR. BENSON: The -- I'm sorry. 27 MR. HORTON: Can you explain that? 28 MR. BENSON: The first -- the first year the 35 1 State -- the rate was set by statute. 2 MR. HORTON: Statute. 3 MR. BENSON: 17.3 cents -- 4 MR. HORTON: Right. 5 MR. BENSON: -- was the increase. So, we -- we 6 didn't have anything to -- to do or say with that. It 7 was -- it was set at 17.3 cents. 8 In subsequent periods we did adjust the rate in 9 order to, you know, again ensure revenue neutrality. 10 Last two times we adjusted the rate, the first 11 time was 35.3 to 35.7, very small change. Last year we 12 adjusted from 35.7 to 36, again a very small change. 13 It was this year that, you know, because we're 14 also truing up the first two years -- 15 MR. HORTON: What does "truing up" mean? 16 MR. BENSON: Truing up means -- recovering what 17 the -- the revenue loss that occurred and primarily in 18 fiscal year '11-'12 there was a -- a revenue loss of 19 $213 million in fiscal year '11-'12. 20 And in fiscal year '10-'11 there was actually 21 more excise tax revenue that we collected than -- than 22 was required or to obtain revenue neutrality. 23 Combined we're truing up or ensuring revenue 24 neutrality on $157 million and that's the look back. 25 And that, again, would -- Randy had alluded to 26 earlier -- adds one cents of the 3.5 cents to -- that 27 we're recommending that the Board adopt. 28 MR. HORTON: The notion of projecting forward 36 1 and so using the estimates to -- well, first, let me -- 2 let me digress a little bit. 3 I understand the necessity to equalize, if you 4 will, or make neutral the amount of sales tax that would 5 have been charged to the consumers by an adjustment of 6 1. -- 1 and a quarter percent in order to adjust that. 7 So, I get the 1 and a quarter percent. 8 I also understand and appreciate the work that 9 staff has done in order to estimate going forward how 10 much sales tax the consumer would have had to have paid 11 had the legislation not reduced the sales tax. And, so, 12 in order to offset it so there isn't an increase. 13 And I certainly appreciate the responsibility 14 that the Board of Equalization has been given. Concern 15 about the confusing, concern about the shifting 16 responsibility, but there's -- if there is an up side, 17 we're certainly in a position to protect the taxpayer, 18 to make sure that there isn't an increase, that there is 19 some neutrality here, that sales tax doesn't go up, that 20 it stays down on fuel at 2.25 percent. And that it 21 doesn't go up. So that we're not paying higher sales 22 tax and we're actually neutralizing it. 23 'Cause without that neutralization, then the 24 government or the legislature may very well come back 25 and raise taxes again. 26 So, maintaining some neutrality has a benefit, 27 despite the frustration or the confusion it seems to -- 28 that has occurred, in my mind, by some misinformation, 37 1 if you will, that has been put out into the general 2 public. 3 So, it's important that we go forward and 4 adequately educate the public. The Board of 5 Equalization deals with millions of California 6 taxpayers. And we should let them all know what the 7 truth is. We should get that information out into the 8 general public and use whatever resources we have to 9 correct any misinformation that may have been 10 communicated relative to this item. 11 But, at the same time, going forward, if we 12 have the authority to be conservative in our estimates 13 and -- we should consider that as well. 14 The estimates that you're going forward, you 15 indicated you used Department of Finance's numbers? 16 MR. BENSON: Correct. 17 MR. HORTON: Where did those numbers come from? 18 MR. BENSON: What they -- what they use is 19 actual numbers that -- that occurred during -- during 20 calendar year '12 and grew that. 21 They also used Global Insight as a -- to 22 forecast their future -- future fuel prices. 23 And, again, the reason why we used Global 24 Insight to -- because they don't have the information in 25 December. 26 MR. HORTON: Who is Global Insight? 27 MR. BENSON: Well, it's a -- Global Insight is 28 a -- recognized as the most consistently accurate 38 1 forecasting company in the world. 2 Global Insight has over 3800 clients in 3 industry, finance, government. Revenues in excess -- 4 they have revenues in excess of 95 million. They have 5 600 employees, 23 offices in 13 countries, covering 6 North -- North and South America, Europe, Africa, the 7 Middle East and Asia. 8 MR. HORTON: Okay. Continue your testimony. 9 MR. BENSON: That's all I have about the -- in 10 terms of Global Insight. That's -- 11 MR. HORTON: Are there any other -- is there 12 any other data out there that would conflict with the 13 data that you have that we're using to project forward? 14 MR. BENSON: I don't believe there is, sir. 15 I -- I haven't looked into it personally, but I haven't 16 had the need for it. We -- we respect Global Insight 17 and -- and the work that they do. 18 Again, it's used by Department of Finance, used 19 by other State agencies as well. I have no problem 20 personally with them. We've -- we've enjoyed the 21 relationship that we've had with them over the last two 22 or three years. 23 I see no need for it. 24 MS. STEEL: Mr. Chairman? 25 MR. HORTON: Member Steel. 26 MS. STEEL: Bad economy. So, if we decide to 27 just stay the way it is, like last year, then is that 28 violating the law? 39 1 MR. FERRIS: Well -- 2 MS. STEEL: Because it's all guessing game. 3 And then, you know, we just say BOE can set the rate 4 then if we stay the way it is. 5 MR. FERRIS: -- the law requires the Board to 6 make -- 7 MS. STEEL: Not increase? 8 MR. FERRIS: -- its estimate. And -- 9 MS. STEEL: Its estimate? 10 MR. FERRIS: -- to make its estimate that looks 11 forward and looks back. 12 MS. STEEL: Okay. Thank you. 13 MR. HORTON: Further discussion, Members? 14 MR. RUNNER: Just to clarify -- and what was 15 the amount if we just looked back? 16 What was -- what would the increase be, just I 17 guess, would be true-up number, if you will? 18 MR. BENSON: If we looked back? 19 MR. RUNNER: Uh-huh. 20 MR. FERRIS: One cent is the -- 21 MR. BENSON: One cents is the true-up. 22 MR. FERRIS: -- true-up. 23 MR. RUNNER: One cent is the true-up? 24 MR. BENSON: Right. One cents is the true-up, 25 2 and a half cents is the future look. 26 MR. HORTON: Further discussion, Members? Is 27 there a motion? 28 MS. YEE: Move to adopt the staff 40 1 recommendation. 2 MR. HORTON: Member Yee moves to adopt staff 3 recommendation. 4 Is there a second? 5 MS. MANDEL: Second. 6 MR. HORTON: Second by Member Mandel. 7 MS. STEEL: Objection. 8 MR. HORTON: Objection noted. 9 I'm only pausing to make sure I get Mrs. 10 name -- correct -- Madrigal. 11 Okay, Miss Madrigal, would you please call the 12 roll? 13 MS. MADRIGAL: Mr. Horton? 14 MR. HORTON: Aye. 15 MS. MADRIGAL: Ms. Steel? 16 MS. STEEL: No. 17 MS. MADRIGAL: Mr. Runner? 18 MR. RUNNER: No. 19 MS. MADRIGAL: Ms. Yee? 20 MS. YEE: Aye. 21 MS. MADRIGAL: Ms. Mandel? 22 MS. MANDEL: Aye. 23 MR. HORTON: Let me just also thank Mr. Runner 24 and Ms. Steel for what I believe to be a protest vote 25 and, hopefully, that sends a message to the legislature 26 that its consensus with the -- all of the thoughts of 27 the Members is that we are in protest of us -- of have 28 this mandate mandating the Board of Equalization to deal 41 1 with the true-up or the adjusting and so forth. 2 And I would believe that the Board would be in 3 protest of not being true and honest to the California 4 consumers as to the source of this particular change. 5 But, unfortunately, we all don't have the 6 luxury of protesting. In order for the agency as a 7 whole to be in compliance with the law, at least three 8 Members of the Board has to follow the law. 9 With that said, thank you very much. 10 And Miss -- do it again, I will get there -- 11 Madrigal. 12 MR. BENSON: Thank you. 13 ---o0o--- 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 42 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 FEBRUARY 28, 2013 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 42 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MARCH 7, 2013 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 43