Shortfall in Car Tax to Hit Home

Gov. Arnold Schwarzenegger’s promise to protect local governments from losing money as a result of the reduction of the state’s car tax is set to fail its first test Wednesday.

Administration officials have notified cities and counties that the state will be $254 million short on the December car-tax payment to local governments, which originally was scheduled to be $381 million and is due midweek.

Moreover, local officials learned Monday that the pain will get worse next month, when payments to the locals go from a third of what they expected to nothing at all. From January through March, state officials plan to divert all remaining car-tax money away from local governments to pay $600 million in refunds owed to drivers who paid the higher car tax this fall.

As a consequence, local governments across the state likely will have to begin cutting programs ranging from fire coverage to libraries, government officials say. Some local governments and the California League of Cities are threatening to sue the state for the money. Other cities already have concluded that they are unlikely to get paid and are considering tax increases.

The state collects vehicle license fees, then ordinarily turns the money over to city and county governments, which rely on the money for services such as police and fire protection, libraries and parks. On average, local governments use three-fifths to three-fourths of the money for public safety, officials say.

When Schwarzenegger ordered the car tax rolled back by $4 billion, he promised to ensure that local governments would not lose any money. But the administration has not proposed any plan to make up those funds. With the state facing a $14-billion deficit, making the payments to local governments requires either cutting something else in the budget or raising taxes.

The state’s bid to keep the cash for its own purposes sparked angry words from local government officials.

“Not to be bold, but it sounds illegal to me,” said David Janssen, the top administrator for Los Angeles County. “The [state] Constitution clearly says that vehicle license fees belong to local government.” If the state persists in withholding the money, he said, the county would consider suing.

For many local governments, the revenue loss could strangle cash flow, leading to abrupt service cuts as city councils and boards of supervisors scramble to realign their budgets.

“I think we will see cutbacks right away,” said Chris McKenzie, executive director of the League of California Cities. “There are no simple choices left anymore when you lose that much of your budget. Reductions of that magnitude could cause complete elimination of programs, complete closure of libraries and parks.”

The League also is considering filing suit, McKenzie said, adding that the group is “examining our litigation options on a whole host of matters relating to the vehicle license fee.”

How dependent local governments are on the car-tax money varies widely. For the largest cities, such as Los Angeles, the car tax is only about 7% of overall revenue. But the League of Cities said that more than 50 California cities, many in the Central Valley, rely on the car tax for more than a third of their total budgets.

Counties also rely more heavily on the car-tax money. For Los Angeles County, for example, the car tax is about one-third of county revenue.

Some suggest that Schwarzenegger’s move was merely a tactic designed to pressure the Legislature to find the money to keep cities and counties whole.

“The DMV told [local governments] that the reason they’re doing this is to get cities and counties to lobby the Legislature,” said John Redmond, Los Angeles County’s lead analyst for the state budget. “They basically told them they have a month to put the heat on.”

But Robert Waste, a professor of public policy at Cal State Sacramento, said that as lawmakers struggle to close the deficit, it is very possible that local governments will not see any of the lost car-tax money for a year or more.

“It feels like things are creeping in that direction,” Waste said. “It might be one of as many as a dozen previously unthinkables we are going to see over the next month as everybody puts together the hard numbers just to get through the year.”

In Northern California, some local governments are planning for the worst by asking voters to make up some of the difference with new taxes.

In Oakland, voters will be asked to approve a measure that will increase property taxes to pay for public safety and library programs. Santa Cruz will ask voters for a quarter-cent sales-tax hike to keep the state from having to make more cuts, and Berkeley has put a new parcel tax on the ballot to avoid laying off police officers and firefighters.

“There is a very real danger of significant layoffs of public safety personnel,” said Rick TerBorch, president of the California Police Chiefs Assn. “Good public policy has been thrown out the window for personal political gain.”

In Sacramento, the Schwarzenegger administration and legislative leaders are blaming each other for the cash crunch that local governments face. With all the possible solutions being politically unpleasant, each says the other side should move first in proposing a way out.

A group of 21 Senate Democrats on Friday sent the governor a letter saying they could not support appropriating money to local governments without seeing a plan from the governor on what should be cut -- or what taxes should be raised -- in its place.

Administration spokesman Vince Sollitto said that is not the governor’s problem. “The governor has indicated the Legislature caused this problem with mispriorities, and he urges them to correct it,” Sollitto said.

Finding a way to keep that money flowing to cities and counties was supposed to be part of a budget deal that the governor had planned to work out with the Legislature last week. Yet that deal, which would have involved asking voters to authorize borrowing $15 billion to help pay for the car-tax cut and some of the deficit, as well as a constitutional spending cap, fell apart in the Legislature late Friday night.

That has left the administration in a jam to provide $600 million in refunds to 3.3 million drivers who paid the higher car tax after Oct. 1. Schwarzenegger’s order rolling the tax back from 2% to 0.65% was retroactive to that date.

“State law requires that refunds must be paid before any remaining car-tax funds are transferred to cities and counties,” said Bill Branch, a spokesman for the Department of Motor Vehicles. “We have no choice under the law but to proceed that way.”

City and county officials from around the state are planning a public relations assault in Sacramento on Wednesday. Meanwhile, city councils and other government bodies are passing resolutions aimed at drawing attention to what they characterize as a fiscal crisis triggered by inaction in Sacramento.

In Los Angeles, which stands to lose $13 million a month, the City Council adopted such a measure Friday.

“Nobody is paying attention to the impact on local governments,” Councilman Eric Garcetti said. “Each one of these state leaders ... it is time for them to stand by our firefighters. It is time for them to stand by our police officers.”

Other local governments are lining up behind a proposal, dubbed the Local Taxpayers and Public Safety Protection Act, that would require the state to get voter approval before it takes tax dollars away from local government. Supporters are aiming to place the measure on the November 2004 ballot.

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Times staff writer Jessica Garrison in Los Angeles contributed to this report.