Perspective on the Vehicle License Fee

  1. Summary
  2. Introduction
  3. What Is the Vehicle License Fee?
    1. Calculating the Fee
    2. Vehicles Subject to the Fee
    3. Historical Evolution of the VLF
  4. Where Do the Fees Go?
    1. Realignment Portion
    2. Base VLF Portion
    3. Additional Revenues
  5. Some Key Considerations
    1. What Do Other States Do?
    2. The VLF as a Cost of Vehicle Ownership
    3. A Local Revenue Source
  6. Considering Changes to the VLF
    1. Altering the Depreciation Schedule
    2. Changing the Tax Rate
    3. Exemptions
  7. Conclusion

What Is the Vehicle License Fee and How Are its Revenues Used? What Factors Should the Legislature Consider Regarding Any Potential Changes to the Fee?



The vehicle license fee (VLF) is one of the state's major revenue sources, with collections expected to near $4 billion in 1998-99. Vehicle owners pay the fee on an annual basis, in lieu of paying property taxes on vehicle ownership.

This piece provides background information on the fee, including:

  • How the fee is calculated.
  • Changes to the fee since its inception in 1935.
  • To which governments and for what purposes the fees are distributed.
  • How other states tax vehicles.

A number of mechanisms to change the VLF have been proposed--such as implementing an exemption or changing the depreciation schedule or tax rate. We describe these various mechanisms, as well as some key considerations for the Legislature to take into account prior to making any such change. For instance, the VLF is one of local governments' primary sources of discretionary revenue.


The motor vehicle license fee (VLF) is a fee on the ownership of a registered vehicle in California, in place of taxing vehicles as personal property. The VLF is paid in addition to other fees, such as the vehicle registration fee, air quality fees, and commercial vehicle weight fees.

Recently, the fees and taxes that residents pay to register and own their vehicles have received increasing attention across the country. This piece provides a perspective on the VLF: its history, distribution of revenues, and the issues involved with potentially changing its rate or distribution.

What Is the Vehicle License Fee?

The VLF is administered by the Department of Motor Vehicles (DMV). A vehicle owner pays the VLF on an annual basis, in lieu of paying property taxes on the ownership of the vehicle and based on the vehicle's sale price. For those vehicles brought into California from out of state, the fee is based on the vehicle's value at the time of its initial registration in California. The owner pays a two percent fee, based on the vehicle's current estimated value. The fee is deductible for federal tax purposes for those vehicle owners who itemize their tax returns.

Calculating the Fee

The vehicle's current value is estimated by a statutory depreciation schedule. For each year the vehicle is owned, the VLF is assessed at a lower percentage of the vehicle's original value. When a vehicle is resold, the calculation of the fee begins again at year 1 of the schedule using the new sale price as its base. Figure 1 shows the current depreciation schedules for both vehicles and trailer coaches.

Figure 2 (see page 152) shows how the VLF for a vehicle is determined for a sample automobile. The vehicle's sale price is first rounded to the nearest odd hundred dollar. The rounded purchase price is multiplied by the depreciation factor, based on its year of ownership. This estimated current value is then multiplied by two percent to determine the fee owed. The final fee is also rounded to the nearest dollar.

Vehicles Subject to the Fee

Generally, any vehicle (cars, trucks, and motorcycles) required to be registered is also required to pay the VLF. Various classifications of specialized vehicles are exempt from the VLF and instead subject to the property tax. These classifications include farm trailers, firefighting vehicles, and forklifts. Other vehicles, while required to be registered, are exempt from both the VLF and property taxes. This group includes government vehicles, privately owned school busses, and vehicles owned by disabled veterans.

Figure 1
Vehicle License Fee

Depreciation Schedules

Year of Registration Vehicles a Trailer Coaches a
1 100% 85%
2 90 70
3 80 55
4 70 45
5 60 40
6 50 35
7 40 30
8 30 25
9 25 24
10 20 23
11 15 22
12 15 21
13 15 20
14 15 19
15 15 18
16 15 17
17 15 16
18 and subsequent years 15 15
aPercentages are applied to purchase price.

Trailer Coaches. Trailer coaches, also known as mobile homes and manufactured homes, are generally treated as homes subject to the property tax. However, prior to 1980 these mobile homes were considered vehicles and subject to the VLF. As a result, those trailer coaches that have been owned and have maintained their registration since 1980 or earlier can still choose to pay the VLF. Due to the longer expected life span of mobilehomes and their higher values as compared to automobiles, mobilehomes have a different statutory depreciation schedule than other vehicles (see Figure 1).

Figure 2
Example of How the Vehicle License Fee is Calculated
Step Sample Calculation
1. Purchase price $22,050
2. Round value to nearest odd hundred dollar 22,100
3. Multiply rounded value by depreciation percentage:  
  • Year 1:
100% 22,100
  • Year 2:
90% 19,890
  • Year 3:
80% 17,680
4. Multiply by 2 percent rate:  
  • Year 1
  • Year 2
  • Year 3

Historical Evolution of the VLF

The VLF has undergone a number of important changes since its creation. These changes are summarized in Figure 3. Originally, motor vehicles were subject to the property tax, which is administered by local governments. However, in 1935 vehicles became subject to a state-imposed VLF and were exempted from property taxes. It was felt that a state-imposed system would be simpler to administer, given the variation of assessment practices across counties and the relative ease of avoiding vehicle property taxation. In general, these fee revenues were returned to local governments as a replacement for the revenues they would have received if vehicles were on their property tax rolls.

In the early 1980s, low state revenues and the complicated post-Proposition 13 landscape caused the state to change many of its fiscal relationships with local governments. As part of the state's budget actions from 1981 to 1983, the state retained a total of over $700 million in VLF revenues that otherwise would have been sent to local governments. Subsequently, Proposition 47 was passed by the voters in 1986, which ensured VLF revenues would be designated for local governments. However, the state retains authority over both the amount of revenues that are collected and the method of their distribution. Moreover, Proposition 47 did not apply to trailer coach license fee revenues.

Figure 3
Vehicle License Fee--Historical Milestones
Year Event
1935 Vehicles became subject to a 1.75 percent license fee, in lieu of local property taxes. Revenues generally distributed to local governments.
1948 License fee raised to 2 percent.
1981-1983 Facing low revenues, the state reduced VLF payments to local governments by $700 million over three years, about one-third of the fee's revenues over that time.
1986 Proposition 47 passed, constitutionally guaranteeing VLF revenues to local governments.
1991 As part of the realignment of state and local health and social services programs, a portion of VLF revenues is designated for the funding of realignment programs. The depreciation schedule is changed in order to increase revenues.

In 1991, as part of the major realignment of state and local health and social services programs and funding, the VLF depreciation schedule was amended to its current form. The change slowed the rate of depreciation for vehicles and therefore increased revenues. The new revenues were dedicated to the funding of local governments' realignment programs.

Where Do the Fees Go?

The 1998-99 Governor's Budget projects total VLF revenues that approach $4 billion. Figure 4 (see next page) shows for 1996-97 through 1998-99 how these revenues are distributed. About three-fourths of the total revenues are distributed through what we refer to as "base VLF," with the realignment VLF accounting for most of the remainder.

Figure 4
Distribution of Vehicle License Fee Revenues
(In Millions)
Estimated 1997-98 Proposed
Base VLF:      
Administrative $177.1 $208.0 $229.2
Cities 1,022.1 1,061.2 1,110.0
Counties 1,481.8 1,538.5 1,609.3
Subtotals ($2,681.0) ($2,807.7) ($2,948.5)
Realignment VLF 864.6 908.2 953.1
Trailer Coach VLF 35.8 35.9 36.3
Totals $3,581.4 $3,751.8 $3,937.9

The distribution of VLF funds is a complicated process that has evolved from a number of budget agreements and other legislative actions. Figure 5 provides an overview of the allocation process, using actual 1996-97 data. The distribution of funding is discussed in greater detail below.

Realignment Portion

Of the total VLF revenues collected by the Department of Motor Vehicles, 24.33 percent of the funds are designated for realignment funding. The monies are deposited in the Local Revenue Fund and then allocated to two accounts:

Base VLF Portion

The remaining VLF revenues--75.67 percent--are the base VLF funds. First, revenues are used to cover two specific expenses:

The remaining revenues are split into two portions--81.25 percent and 18.75 percent shares of the funds.

81.25 Percent Share. This portion of the VLF revenues is split into two equal amounts for cities and counties. Then the funds are distributed to each jurisdiction on a population basis. For cities that have incorporated since 1987, the jurisdictions' population is determined by taking the larger of its estimated current population or three times the number of registered voters at the time of incorporation.

18.75 Percent Share. Of the 18.75 percent share, there are three special payments made to local governments:

Any remaining funds, over $400 million in 1996-97, are distributed to counties in the same manner as their 81.25 percent share (on a population basis).

Additional Revenues

Delinquent Collections. In 1993, the authority to collect delinquent VLF revenues was transferred from the DMV to the Franchise Tax Board. The FTB holds greater administrative authority to collect these delinquent fees, using actions such as issuing bank and wage levies. The first $14 million collected by the FTB in new delinquent fees is deposited into the Vehicle License Collection Account of the Local Revenue Fund. This money is then distributed to counties for mental health programs, as part of realignment. The distribution schedule is developed by the State Department of Mental Health, in consultation with the California Mental Health Directors Association. Any funds over the $14 million are added to the 81.25 percent share of the base VLF distribution.

Trailer Coach Fees. Since the 1992-93 budget agreement, revenues collected from trailer coach VLFs have been deposited into the state's General Fund. The estimated total of trailer coach fees in 1998-99 is $36 million. Only coaches that initially registered in 1980 or earlier are eligible to pay the VLF instead of property taxes. Previously, these fees were distributed to cities, counties, and school districts based on the geographic location of the registrations.

Some Key Considerations

What Do Other States Do?

The taxation of vehicles is not uniform across the United States. In fact, each state has a unique system of taxing vehicles and imposing various fees. Figure 6 (see next page) compares the taxation systems (based on vehicle values) of the 20 western and major industrial states of the country. Each of these states also has additional mechanisms to tax driving--such as registration fees, drivers' license charges, and sales taxes on vehicle purchases.

California is among seven of these states that have a vehicle tax system in lieu of a property tax. These taxes are based on an estimate of the vehicle's value and are collected on an annual basis. Ten states exempt vehicles from the property tax, with no comparable replacement tax. Three states subject vehicles to local property taxes.

The VLF as a Cost of Vehicle Ownership

The VLF is only one of many costs of owning and maintaining a vehicle. Among the other major costs are vehicle insurance (required by California law), gasoline, maintenance, and any car loan payments. Figure 7 shows these estimated costs for an average-priced new vehicle in a driver's first year of ownership. The VLF represents only about 6 percent of this sample owner's costs. While the VLF is a relatively minor portion of a vehicle's annual costs, it is one of the costs of driving that the Legislature can most readily change. The VLF is also a particularly visible cost of vehicle ownership, since it must be paid in a single payment at the time of annual vehicle registration.

A Local Revenue Source

While the VLF's revenues and distribution are controlled by the Legislature, the ultimate recipients of the fees are cities and counties. Therefore, any change to the VLF would substantially affect the revenues of these local governments. This is because the base VLF represents about 10 percent of cities' tax revenues and about 25 percent of counties' tax revenues. Along with the property tax and their portion of the sales tax, the VLF represents one of the major general purpose revenue sources for local governments.

Figure 7
Sample First Year Costs For a New $22,000 Vehicle
Item Estimated Costs Percent of Total
VLF $440 6%
Gas/oil 1,080 14
Maintenance 520 7
Insurance 1,110 14
Car payment 4,800 60
Total $7,950 100%
Source: Runzheimer International and LAO calculations. Assumes 15,000 miles traveled.
Percentages may not add due to rounding.


Consequently, if the Legislature were to consider a reduction in VLF revenues, it would have to take into account its impact on local government finances. Basically, the Legislature would be faced with whether or not to "backfill" the lost local government revenues. If the Legislature did not backfill the loss, it is doubtful that most local governments would be able to replace the lost VLF revenues. Property tax rates are already capped at the Proposition 13 limit of one percent. Furthermore, Proposition 218, passed in 1996, has made it more difficult for local governments to raise other revenues to finance government efforts.

Considering Changes to the VLF

As interest in the VLF has grown in recent months, a number of mechanisms have been suggested to alter the fees paid by Californians. If the Legislature wished to consider making changes to the VLF, two factors should be taken into account.

Below, we describe three mechanisms for changing the VLF.

Altering the Depreciation Schedule

In order to raise or lower VLF revenues, the Legislature can alter the rate at which vehicles' values are depreciated. The Legislature took this approach in 1991 when it implemented the current depreciation schedule. The new schedule was put in place to increase VLF revenues to help pay for the realignment of various health and social services programs. By slowing the rate that vehicles' values are depreciated, the new schedule maintains a greater base of vehicle values each year upon which to assess the two percent fee, thereby increasing VLF revenues.

The schedule has served as a convenient mechanism for avoiding assessing each vehicle on an annual basis. Each vehicle under the statutory depreciation schedule depreciates at the same rate. However, in reality vehicles depreciate individually based on their make and model, miles driven, and condition. For vehicles that actually depreciate in value faster than the schedule, owners overpay VLF (relative to an "ideal" system). Conversely, for vehicles that depreciate slower than the schedule, owners underpay.

Our brief review of the current depreciation schedule indicates that it is a reasonable approximation of vehicle depreciation. While no schedule will depreciate each vehicle in the state perfectly, the current schedule appears to generally mirror the pattern of vehicle values. At the same time, if the Legislature chose to alter the depreciation schedule in order to change VLF revenues, it could consider an in-depth effort to ensure that any new schedule is based on real vehicle depreciation.

Changing the Tax Rate

Vehicles were originally taxed as a form of personal property, subject to the property tax. However, vehicles have been exempt from this form of taxation since the 1935 creation of the VLF. In 1935, the VLF tax rate was set at 1.75 percent, which approximated the average property tax rate at the time. In 1948, the Legislature raised the VLF tax rate to two percent--reflecting the gradual increase in property tax rates. The VLF rate has not been changed since 1948, and the relative connection to the property tax rate has not been maintained.

Vehicles are not subject to the one percent rate cap imposed by the passage of Proposition 13 in 1978. Consequently, while homes are currently subject to a one percent property tax rate, vehicles are subject to a two percent fee.

Although the VLF rate has not been changed in 50 years, the rate can be lowered or raised by the Legislature. Changing the VLF rate for all vehicles would result in the same percentage change for each vehicle owner's fee. If the Legislature wished to raise or lower the VLF rate, revenues would change by about $200 million for each one-tenth of 1 percent change in the rate.


A final mechanism for changing the amount of VLF revenues would be to create an exemption for a certain level of a vehicle's value. For instance, Virginia recently enacted such an exemption for its taxation of vehicles.

With an exemption, a vehicle owner does not pay a fee on all of the vehicle's value. For example, with a $5,000 exemption, the first $5,000 of a vehicle's value would not be subject to a fee. Consequently, the owner of a $22,000 car would pay fees only on $17,000 of its value. In California, a $5,000 exemption would lower revenues by about $1.2 billion in 1998-99. At this exemption level, about one-third of all vehicles would pay no VLF.


The VLF is one of the state's major revenue sources, with collections expected to near $4 billion in 1998-99. Its collection procedure makes the fee quite visible, as it is due annually in a lump sum payment.

The Legislature could consider changes to the VLF either as a way of altering the cost of driving or as a means of providing general tax relief to Californians. A number of mechanisms--such as creating an exemption or changing the depreciation schedule or tax rate--exist to provide such a change.

The Legislature, however, should consider the implications for local governments of any VLF reductions. Most of the fees are sent to cities and counties as discretionary revenue. With many of their other revenue-raising mechanisms limited by law, VLF revenues are an important source of general purpose funds for local governments.

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