California diesel prices surge due to tax rate increase, putting pressure on freight operators

The dual pressure of sluggish spot freight rates in September and high diesel prices has forced Khalid Masri, a trucking owner based in Pomona, California, to idle two of the four trucks at his company, KM Global Trans. Masri, who has been in the transportation industry for 27 years, has operated as an owner-operator since 2000 and has owned four trucks since 2016, hauling freight across the 48 contiguous states. He says this is the first time he has had to suspend half of his business.

"Even outside of California, fuel prices are still high," he said.

In recent months, highway diesel prices on the West Coast have risen sharply, especially in California. Last month, the state's average price broke above $6 per gallon and continued to climb during the most recent weekly reporting period before easing back to an average of $6.18 per gallon.

Higher taxes for interstate truckers add to operating pressures

Truckers pay fuel taxes in several ways. Pump prices reflect a portion of the cost, but interstate drivers also pay a quarterly tax that helps U.S. states and Canadian provinces maintain their infrastructure.

This quarterly fee involves the International Fuel Tax Agreement (IFTA), a system through which U.S. states and Canadian provinces obtain funding for transportation infrastructure based on where carriers actually consume fuel, rather than where it was purchased. Typically, this tax rate is adjusted about once a year—but over the past year, California carriers have faced multiple increases.

On October 1, California's combined rate rose from 89.3 cents per gallonto nearly $1.09 per gallon, adding to multiple increases implemented by the state on July 1 of this year and on the same date last yearthat were already in effect。

Bills under this tax system are due quarterly, requiring interstate trucking companies to reconcile the amounts owed to each state and province. Joe Rajkovacz, director of government affairs and communications for the Western States Trucking Association, said many of the association's members currently cannot afford this expense.

While other taxes are paid annually, the quarterly bills add up to a significant burden. Masri said he pays several thousand dollars every three months for IFTA taxes.

California's rate is the highest in the nation, and these taxes are in addition to other levies such as the federal diesel excise tax of 24.3 cents per gallon. Among other regions in the U.S. with high IFTA rates, Pennsylvaniahas a published rate of78.5 cents per gallon, and Illinois is at 78.8 cents per gallon.

California uses this revenue to build and maintain public roads and public transit systems. According to the California Department of Tax and Fee Administration, which now oversees these adjustments, the rate increases are based on the percentage change in the Consumer Price Index.

Refinery output falls to low levels as energy transition strategy advances

Avery Vise, vice president of FTR freight research firm, noted that even without the interstate tax, California diesel prices are significantly higher than in other states. The average price on the West Coast excluding California has exceeded $5 per gallon, but the next highest regions, the Mid-Atlantic and Rocky Mountain areas, are both around $4.72 per gallon.

"That's a huge gap," Vise said.

According to the California Energy Commission, an imbalance between fuel supply and demand helps explain the regional price difference.

"Like gasoline, diesel prices in California tend to move differently from the national average," the agency said in an email to Trucking Dive. "This is partly because California is an island for transportation fuel, with no pipeline infrastructure to bring out-of-state fuel into the state."

Over the past year, fuel supply issues in California have persisted, while state regulators have been pushing consumers and businesses away from fossil fuels in an effort to achieve carbon neutrality by 2045.

As part of that effort, the state is pushing to convert oil facilities to alternative energy sources. In early 2023, Phillips 66 ceased operations at its Santa Maria refinery and is working to convert its Rodeo facility at its San Francisco refinery to renewable fuel production.

"As that facility comes online, the amount of traditional diesel we are reducing is almost equal to the amount of renewable diesel we are putting into the market," CEO Mark Lashier told investors on an August 2earnings call.

The revamped facility, named "Rodeo Renewed," is planned to begin operations in early 2024, shifting from crude oil processing to handling waste oils, fats, greases, and vegetable oils to produce renewable diesel, renewable gasoline, and more sustainable aviation fuel.

Similarly, Marathon Petroleum is also converting its Martinez refinery in the San Francisco Bay Area. CEO Mike Hennigan said on an August 1earnings callcall that the facility is expected to reach full capacity by the end of 2023, producing 730 million gallons of renewable fuel annually.

Amid these changes, production of California-specification diesel has hit a 15-year low this year, with weekly output below 1 million barrels in July and at other times during the year, according tostate government data.

For some trucking operators, fuel costs have become a crushing factor in an already difficult market.

Masri expects to wait at least until early next year to determine whether market conditions are sufficient to bring drivers back to work. He has dipped into his savings to pay insurance premiums and has watched other trucking companies scale back operations, with some owner-operators leaving the industry.

"This year is worse than any other year," he said. "Fuel prices and taxes have eaten up a large portion of our profits."