Governor Arnold Schwarzenegger, already facing a $20 billion budget shortfall this year and currently hoping the feds hand over some $7 billion he says it owes the state, recently submitted his proposed budget for 2010-11, which focuses on streamlining government, reducing costs and reforming the state’s relationship with the federal government.

Part of the "reducing costs" element is a 5-cent reduction of the state gas tax, which has construction and engineering associations up in arms.

How many of you remember Proposition 42? This prop was approved by voters in 2002 and it amended the state constitution to dedicate most of the revenue from the sales tax on gas to transportation uses. The state has been in budget hell before, twice suspending Prop 42 in 2003-2004 and 2004-2005. Existing law requires that these suspended amounts, with interest, be repaid to transportation within three years. Under 2006’s Proposition 1A, the measure included a provision to further limit the conditions under which Prop 42 transfer of gas sales tax (different than gas tax) revenues for transportation can be suspended.

According to Paul Meyer, executive director of the American Council of Engineering Companies California, the governor’s budget proposes to eliminate the sales tax on fuel and replace it with a 10.8% increase in the
gas tax.

“That switch has complex ramifications, which will greatly reduce funding for state transportation infrastructure,” says Meyer. “Our transportation infrastructure has been woefully underfunded for decades and limiting funding now will only result in more job losses, further rapid deterioration of our roads and transit systems and increased stress for commuters.”

Meyer says ACEC is all in favor for the governor’s call for reforms in the state’s public pensions system, performance-based budgeting for state agencies and streamlining of California’s environmental permitting process. Plus, it likes the no-new-taxes stance. However, this complex “tax swap,” as Meyer calls it, will have net effect of eliminating “hundreds of millions of dollars in funding for much-needed transportation improvements.”

The Associated General Contractors of California has also come out swinging. CEO Tom Holsman says that while the association understands the “precarious times facing the state, this latest budget gimmick relating to transportation funding is short sighted and does nothing to help balance the budget. The governor’s proposal ignores that voters approved Proposition 42 as a secure funding source to repair some of the worst roads in the state. These gimmicks only serve to threaten the stability of highway and mass transit funding in the state.”

The proposed tax swap is in addition to the governor’s call for the enactment of a Business Net Receipts Tax (BNRT). The BNRT would be a new tax on services that would really be paid by consumers and would discourage business expansion, the ACEC says.

Meyer says the BNRT would “hamstring” many businesses in the state, including ACEC members firms providing engineering and land surveying services. “These are generally small firms, and these days they are struggling just to stay in business,” he says. “Our average sized firm has only 20 employees. This new tax on services would increase the cost of their projects, discourage investment, and lead to a loss in business and reduced revenues. It could not come at a worse time.

“The governor is on the right track in proposing to streamline the very complex environmental permitting process in California and we applaud that. He can help the state’s businesses to create jobs – especially more green jobs – and make everyday life less onerous for commuters, by restoring funding to the state’s vital transportation sector.”