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Give New Cities VLF Parity with Existing Cities

California’s cities and counties derive their revenues primarily from property taxes, including property taxes on real estate and motor vehicles. The property taxes on motor vehicles are components the fees people pay annually to register their motor vehicles. If you look on your DMV vehicle registration bill you will see a charge for "License Fee", with the explanation that it "May be an income tax deduction".  That's the "property tax" part of your vehicle registration, the Vehicle License Fee (VLF).

Established in 1935 as a uniform statewide tax, the VLF is a tax on the ownership of a registered vehicle in place of taxing vehicles as personal property. It is a property tax currently set at small percentage of a vehicle’s value, based upon its most recent purchase price and a fixed depreciation schedule. Revenues from the VLF fund are distributed to cities and counties based on population, as guarenteed by Proposition 47 of 1986. However, the state Legislature controls the tax rate and the allocation among cities and counties.

VLF became a political issue at the turn of the century. There were concerns about issues like how the tax was calculated and whether it was fair (regressive or progressive) that ultimately boiled down to transparency and accountability. The rate was racheted downward from 2% to .65% with cuts that, due to Prop 47,  forced the Legislature to "backfill" local governments' losses with money from the general fund. During that time the state budget was perilously dependent on a need for bipartisan agreement, which often led to one-time fixes that resulted in strange doings years later.

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This is how the Legislative Analyst explained VLF in 2004. It's complicated.

In 2004, the Legislature major changes regarding city and county VLF revenues. It permanently reduced the VLF tax rate and eliminated the  state general fund backfill to cities and counties. Instead, cities and counties received additional transfers of property tax revenues in lieu of VLF. The parts of the "budget deal" were:

  • Eliminating the state's obligation to appropriate funds to backfill local governments for the difference between the 0.65 percent rate paid by vehicle owners and the original 2 percent rate.
  • Modifying laws regarding the allocation of VLF revenues.
  • Replacing city and county reduced VLF revenues with a portion of K-14 school property taxes.

Elimination of the backfill payment reducing VLF fund revenues by two-thirds. County health and social services realignment programs would receive the same dollar amount of VLF revenues as under existing law, but general-purpose VLF revenues to cities and counties would change significantly. Counties would no longer receive general-purpose VLF revenues. Cities would receive the remaining nonrealignment VLF revenues, net of the state's administrative costs, or about $227 million. To offset these city and county VLF reductions, county auditors would reallocate property taxes from schools and community colleges to cities and counties, with K-14 district property tax losses offset through increased state education apportionments. (These property tax allocations from K-14 districts to cities and counties would be in addition to the property tax allocation required under existing law to replace reduced city and county sales taxes under the so-called "triple flip".) At the time, California had 478 cities. The budget solution of the day worked OK. Everyone heaved a sigh of relief.

Then two more cities - Wildomar and Menifee - became incorporated in 2008. And Eastvale and Jurupa Valley became cities in 2010 and 2011, respectively. All four were in Riverside County, in the Inland Empire that's the bleeding edge of the Southern California mega-metro area. Those four cities were left out of the math that was used to pacify the VLF trauma of a few years earlier. Not having access to some kind of VLF-related revenues punched massive holes in their city budgets. They begged their legislators to get it fixed. Their legislators took their case to then-Governor Jerry Brown. He told them on more than one occasion that the state was facing a "wall of debt" and just could not spare any more funds. Some of the cities began to talk about folding up and reverting to unincorporated status again.

Then, in 2017, the Governor wanted to raise the gas tax. He needed every vote he could get for that. The bill increased the gas tax by 12¢ and raised vehicle registration fees. It passed with the minimum votes necessary in each house of the Legislature.  Soon after, the Inland Empire legislators were finally able to get VLF-related revenues for their four cities using the "triple flip".  Now, our coalition has absolutely no evidence whatsoever of a quid pro quo. So we're not going to try to make that link. Nope, not at all. Still, we find it really, really curious that the barriers to the four cities getting VLF-related revenues came down right after the gas tax increase was approved.

Proposed new cities, though, have never felt The VLF Love. They have no guarantee of county VLF money ever being spent in their communities. They were left out of the "triple flip". They were not included in the post-gas-tax fix for the newest cities. Were they to incorporate, they would not have access to a VLF  revenue stream that each of California's 482 cities enjoys. Our coalition has promoted legislation to enable proposed new cities to also derive revenues based on motor vehicle property taxation. Our bills were overwhelmingly approved by the Assembly Local Government Committee and then denied on two occasions without debate by the Assembly Appropriations Committee (AB 2491 in 2018 and AB 818 in 2020). Covid-19 put things on hold for a while. Once California started to emerge from the pandemic, our coalition was advised to not pursue legislation involving money. We are willing to wait, but not forever. We want fairness from the state; we want parity with existing cities.

We continue to believe that every existing city in California obtains, and benefits from revenues associated with VLFs. We think it is unfair and unreasonable that new cities cannot access the VLF-related revenue stream the way all 482 existing cities can. Legislation is needed to give new cities equity with previously incorporated cities for this revenue stream. Further, we are of the opinion that, since incorporation transfers road maintenance responsibility from the county to the new city, it is appropriate to shift VLF revenues derived from the new city's area away from the county and to the new city. That is a matter that can be negotiated between the county and the new city; it does not bear on the state's budget (the Assembly Appropriations Committee claimed on two different occasions - without evidence, public input, or committee discussion - that providing more than 482 cities with VLF revenues would break the back of the state budget).

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