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.