BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 223                      HEARING:  4/27/11
          AUTHOR:  Leno                         FISCAL:  Yes
          VERSION:  2/9/11                      TAX LEVY:  No
          CONSULTANT:  Miller                   

                    LOCAL VOTER APPROVED VEHICLE LICENSE FEE
          

            Authorizes a county-wide local Vehicle License Fee (VLF) 
                            based on voter approval.


                           Background and Existing Law
                                         
          Existing state law imposes a vehicle license fee (VLF), in 
          lieu of a personal property tax on California motor 
          vehicles, at a rate based on the taxable value of the 
          vehicle. The taxable value of a vehicle is established by 
          the purchase price of the vehicle, depreciated annually 
          according to a statutory schedule. 

          The VLF tax rate is currently 1.15 percent of the value of 
          a vehicle, but historically the rate has been 2% of value.  
          Until May 19, 2009, the rate was 0.65%, after the passage 
          of AB 3XXX (Evans, 2009) temporarily increased the VLF rate 
          to 1.15% and dedicated revenue from the portion of the 
          increase from 0.65 percent to one percent to the state 
          General Fund and revenue from the additional increase of 
          0.15 percent to specific local public safety programs.  AB 
          3XXX (Evans, 2009) VLF rate increase became effective for 
          vehicle registrations on May 19, 2009 and expires on June 
          30, 2011 unless the Legislature extends the tax.

          For the taxpayer, VLF is deductible on both state and 
          federal income taxes.

                                   Proposed Law
                                         
          Senate Bill 223 authorizes a county to impose a vehicle 
          license fee.  The fee must first be authorized by the Board 
          of Supervisors by two-thirds and then also be placed before 
          the voters of that county for a vote.  






          SB 223 -- 2/9/11 -- Page 2



          This bill specifies that the assessment rate shall be equal 
          to the difference between the historical 2% state VLF rate 
          and the current state VLF rate.  For example, in January, 
          2011, when this bill takes effect, assuming the taxes have 
          not been extended, this would allow a county to impose a 
          local assessment rate of 1.35% on the depreciated value of 
          a county's residents' vehicles (2% minus the state VLF of 
          .65%).  The resulting total VLF imposed on residents of 
          counties adopting the assessment would be two percent (.65% 
          to the state, plus 1.35% to the county).  The bill provides 
          for the local assessment to adjust so that county residents 
          would never pay more than a maximum 2% rate.  The bill 
          allows a county imposing the local assessment to impose a 
          lower rate for low-emission vehicles, as defined.


          SB 223 any county imposing an assessment to contract with 
          the Department of Motor Vehicles (DMV) to collect and 
          administer the fee and to pay DMV for its initial setup and 
          programming costs.  The DMV must collect the local 
          assessment, report to the Franchise Tax Board (FTB) and 
          transmit the revenues to the counties.

          The bill specifies that any revenue generated by the local 
          VLF shall not supplant any moneys that the state 
          appropriates or apportions to the county.  

                               State Revenue Impact
           
          For counties that approve the tax, there could be 
          substantial potential net revenue; for example, if the City 
          and County of San Francisco were to impose the tax it would 
          generate as much as $60 million starting as early as 2011 
          and $60-90 million annually thereafter. 

                                     Comments  

          1.   Purpose of the bill  .  The author notes that the VLF is 
          one of the largest sources of general-purpose tax revenues 
          for California's counties.  These revenues fund vital 
          programs, including public safety, public health, social 
          services, fire protection, public works, and cultural 
          activities.  Much of this revenue was lost when the 
          Governor signed an executive order in 2003 reducing the VLF 
          to the 0.65 percent rate.  The author further states that 
          key public services are under constant budget pressures 





          SB 223 -- 2/9/11 -- Page 3



          from both increasing costs such as labor, fuel, and medical 
          expenses, as well as from expanding need for public 
          services resulting from homelessness, HIV/AIDS, and reduced 
          state and federal funding due to current economic 
          conditions.  The author introduced this bill to grant the 
          people of each county the right of voter determination to 
          levy a fee upon themselves to fund vital services and thus 
          give county voters a viable alternative to cutting 
          services.  

          2.   Taxes are too high.   Opponents of the so-called "car 
          tax" criticize any program that increases the VLF, stating 
          that the tax hurts working class people and is a guise to 
          increase government spending overall.  Furthermore, 
          opponents of the bill state that a property tax should not 
          exceed the 1% real property tax rate as an "in-lieu" tax.

          3.  Fourth time is a charm.   Last year, the author 
          introduced SB 10 (Leno, 2010) which was similar to SB 223 
          and was held in the Assembly.  Previously, the author 
          introduced two bills: AB 799 (Leno) of 2005 and AB 1590 
          (Leno) of 2007 were both very similar to this bill, except 
          they applied only to the City and County of San Francisco.  
          AB 1590 was never taken up in a Senate policy committee and 
          the Governor vetoed AB 799.  His veto message read in part: 


               Within hours of taking office in 2003, I signed an 
               Executive Order to reverse the car tax increase.  That 
               action returned $4 billion to the people of 
               California.  Putting that money back into the hands of 
               hard working Californians is one of the ways we have 
               helped our economy grow over the last three years. 

               This measure would, in effect, reinstate the car tax 
               for the people of San Francisco.  In fact, if the 
               vehicle license fee increase proposed by this bill 
               were enacted, the people of San Francisco could pay 
               more than twice the amount to register their vehicles 
               than anyone else in the state. 

               As noted in my veto messages of prior years, I am not 
               opposed to modest increases in fees if such increases 
               are approved by the impacted voters and not addressed 
               in a piecemeal fashion.  Although this bill requires 
               voter approval, it impacts only one county. 





          SB 223 -- 2/9/11 -- Page 4






          4.   Yesterday seems so far away.   AB 925 (Burton, 1993) 
          authorized the City and County of San Francisco to levy a 
          surcharge on the 2% VLF for purposes of public transit 
          financing so long as transit fares are not increased.  The 
          fee would have required a 2/3 vote of the electorate.  It 
          has never been enacted by the City and County.  At the time 
          of its enactment in the Legislature, it was estimated that 
          the surcharge could have yielded over $300 million for the 
          City and County.  However, the potential fee has 
          effectively been voided due to a recent increase in transit 
          fares. 



          5.   Pass the buck to the feds.   Since the IRS considers the 
          VLF to be in the nature of a property tax, the VLF is 
          deductible for both federal and state income tax purposes.  
          So for those who itemize deductions, up to 40% of the 
          additional VLF would effectively be borne by the state and 
          federal governments in the form of reduced income tax 
          payments.  The same would be true of a local VLF such as 
          that proposed by this bill.  The bill provides for 
          reimbursing the General Fund for this revenue loss from 
          amounts collected. 



          6.   I can't drive 55.    Opponents of the measure note that 
          a local VLF will directly impact the sales of vehicles and 
          that the auto industry has been particularly hard hit by 
          the recession and that this proposal will substantially 
          compound their difficulties.

          

          7.   The Constitution has the last word.   The California 
          Constitution prohibits any local government from imposing, 
          extending, or increasing any "general tax" unless and until 
          that tax is submitted to the electorate and approved by a 
          majority vote. A special tax, in turn, may only be imposed 
          if that tax is approved by a two-thirds vote of the local 
          electorate.  The California Constitution defines a general 
          tax as any tax imposed for general governmental purposes, 





          SB 223 -- 2/9/11 -- Page 5



          while the term "special tax" is defined as a tax imposed 
          for specific purposes.  This bill authorizes a county Board 
          of Supervisors, by a two-thirds vote, to place before the 
          voters of the county, an ordinance to levy a local 
          assessment for general revenue purposes.  As such, the 
          ordinance only needs to be approved by a majority of voters 
          and does not require the supermajority vote required for 
          special taxes.



          8.   Double referral.   This bill was heard and approved by 
          the Senate Transportation and Housing Committee on March 
          29th with a vote of 6-3.


          9.   Seeing double.   The local VLF in this bill is similar 
          to the one proposed in SB 653 (Steinberg) which authorizes 
          a local VLF, income tax, various excise taxes and a local 
          oil severance tax.   SB 653 is set to be heard in this 
          committee on May 4th. 

                        Support and Opposition  (04/21/11)

           Support  :  California State Association of Counties, City & 
          County of San Francisco; San Francisco Chamber of Commerce; 
          California Tax Reform Association. 

           Opposition  :  Alliance of Automobile Manufacturers; 
          California State Automobile Association; California New Car 
          Dealers Association; California Taxpayers Association; 
          Engineering and Utility Contractors Association.