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California Sustainable Aviation Fuel (SAF) Tax Credit

Governor Newsom's 2026-27 budget includes a proposal that would create a new diesel excise tax credit for producers of sustainable aviation fuel (SAF). The credit would be worth $1 to $2 per gallon depending on the fuel's carbon intensity and would apply to fuel produced between January 2026 and December 2035. Producers could only claim the credit against diesel excise tax liability they already owe in California, which pulls money directly out of the revenue stream that funds the state's roads, highways, and local streets. The diesel excise tax currently generates about $1.5 billion annually, supporting Caltrans highway maintenance and funding to cities and counties for local streets and roads. IFA opposes the credit as proposed and is urging the California Legislature to keep it out of the final budget package.

The nonpartisan Legislative Analyst's Office has already reviewed the proposal and recommended against its adoption. Governor Newsom’s Administration estimates the credit would reduce diesel excise tax revenue by as much as $165 million annually at first, growing to $300 million per year over time. The LAO's own assessment is that the credit is not a cost-effective way to reduce emissions, could deliver smaller environmental benefits than projected, and runs counter to the intent of the voter-approved restrictions on how diesel tax revenue can be used.

Independent economic modeling from UC Berkeley's Energy Institute at Haas reaches a similar conclusion. SAF and renewable diesel draw from the same limited feedstock supply, and renewable diesel already makes up roughly 70 percent of diesel sold in California. Diverting that supply toward aviation would cut diesel excise tax receipts by 20 to 75 percent and raise gasoline and diesel prices by an estimated 10 to 15 cents per gallon while delivering only small and expensive net emissions reductions, since the fuel is simply being redirected rather than newly created.

Concerns with the Proposed SAF Tax Credit

• Draws directly from diesel excise tax revenue that voters dedicated to road, transit, and freight infrastructure at a time when the state's transportation funding is already strained.
• Competes with renewable diesel for the same feedstock supply, since SAF and renewable diesel are produced from the same materials and, in many cases, the same refineries.
• Operates entirely at the producer level, with no requirement that any benefit reach consumers at the retail pump.
• Independent analysis projects the credit will raise gasoline and diesel prices for drivers and truckers while delivering limited, expensive emissions reductions.