The Hidden Tax in That DMV Tax Cut

They’ve done it again. State government has found a way to make what should be a simple and welcome tax cut costly, complicated and devious.

California law imposes an annual vehicle license fee of 2% of the value of vehicles licensed in the state. The “fee” is really a property tax in disguise, because it is levied in lieu of a tax on vehicles as personal property. The revenue is distributed to cities and counties, the principal beneficiaries of property taxes.

Legislation in 1998 provided a permanent reduction, or “offset,” of 25% of the fee. To silence the howls of cities and counties, the legislation also required the state to make up the revenue loss to local governments from the state general fund. It allowed greater reductions in the future, depending on growth of the state’s general fund revenue.

In 1999, legislation increased the reduction to 35% for 2000. In 2000, legislation extended the 35% amount into 2001 and 2002, but added one that would bring the total to 67.5%. In 2003, the 67.5% reduction will become permanent.

So far, so good. Now here’s the devious part. The best way to administer the additional reduction (the difference between 35% and 67.5%) this year and next would be simply to reduce the license fee bill for every original car registration or annual registration renewal. Instead, drivers are being forced to pay the full amount, then receive rebate checks for the difference. According to newspaper reports, Gov. Gray Davis insists on sending the rebate checks because people don’t appreciate the fact that they’re getting a rebate unless they see it in their hands.

The Orange County Taxpayers Assn. (OCTax) disagrees with the governor. We would appreciate the tax cut even more if it were administered by a straightforward reduction in the license fee bill. We dislike the rebate scheme because it picks taxpayers’ pockets twice.

First, the Department of Motor Vehicles estimates that the cost to administer and mail the rebate checks is $22.5 million per year. Orange County taxpayers’ share of that burden is about $2.25 million, money that we pay for a public-relations gimmick designed solely to ensure that we appreciate the tax cut.

The second larceny is that the state keeps the “float.” Float is the interest earned on taxpayers’ license fee payments during the time required to process, mail and cash the rebate checks.

Thanks for the tax cut. Now let’s make it better. SB 22 would do so. If it becomes law, after July 1 taxpayers would receive license fee bills that are offset by the full 67.5%, without having to wait for rebate checks. SB 22 would save California taxpayers $45 million (plus float) over the next two years; Orange County taxpayers will save more than $4.5 million.

We taxpayers win precious few victories. It’s hard to imagine that any legislator would vote against a bill that makes such good sense.