Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Tax Relief (9100)

The state provides tax relief—both as subventions to local governments and as direct payments to eligible taxpayers—through a number of programs contained within this budget item. The budget proposes total relief of $3.1 billion, of which almost $1.2 billion is appropriated in the budget bill.

The largest ongoing program appropriated in the budget bill is the homeowners' exemption. This provision, which is required by the State Constitution, grants a $7,000 property tax exemption on the assessed value of owner-occupied dwellings, and requires the state to reimburse local governments for the resulting reduction in property tax revenues. The exemption reduces the typical homeowner's taxes by about $75 annually. The Governor's budget proposes an expenditure of $417 million on this program in 2001-02. This is an increase of $8 million, or 2 percent, which reflects the expected growth in the number of homeowners claiming the exemption.

Vehicle License Fee Backfill

The largest program of tax relief pays for the costs of reimbursing local governments for reductions in the vehicle license fee (VLF). The VLF is an annual fee on the ownership of a registered vehicle in California, levied in place of taxing vehicles as personal property. The revenues are distributed to cities and counties. As part of the 1998 budget agreement, the VLF was permanently cut by 25 percent, with the potential of future reductions of up to 67.5 percent (dependent on the growth of General Fund revenues). For all VLF reductions, cities and counties continue to receive the same amount of revenues as under prior law, with the reduced VLF amounts replaced by General Fund spending. This spending, known as the "VLF backfill," is reflected in the tax relief budget item.

The VLF Rebate Begins in 2001. As part of the 2000 budget agreement, vehicle owners will permanently receive the equivalent of a 67.5 percent reduction in the VLF beginning in calendar year 2001. For calendar years 2001 and 2002, vehicle owners will receive this reduction in two parts:

• Offset on Registration Bill. As done with the prior reductions, vehicle owners will receive a credit on their vehicle registration bill for a portion of their VLF owed. In 2001 and 2002, this offset will be equal to 35 percent of the VLF owed.
• Rebate Check. Vehicle owners will also receive from the State Controller in the weeks following their registration payment a rebate check totaling 32.5 percent of their VLF paid.

Beginning in 2003, vehicle owners will receive the full 67.5 percent reduction as an offset on their registration bill.

Only a Portion of Costs Are Contained in the Budget Bill. The amount of General Fund spending necessary to backfill local governments for the registration bill offsets is continuously appropriated. These costs, therefore, do not appear in the budget bill. As shown in Figure 1, we estimate this cost to be $1.9 billion in 2001-02. On the other hand, the amount necessary to pay for the rebated portion of the tax reduction is appropriated in the budget bill. We estimate the rebate will cost $1.7 billion in 2001-02 (with half-year costs in both 2000-01 and 2002-03). Of this amount, however, $1.2 billion was previously appropriated by Chapter 107, Statutes of 2000 (AB 511, Alquist). Therefore, the appropriation in the budget bill totals less than $600 million. The amount of VLF tax relief will total $3.6 billion in 2001-02.

Our estimate of the necessary appropriation for the VLF rebate in the budget year is about $60 million lower than the administration estimate, due to a combination of a lower expected growth rate in VLF revenues and different estimates of the rebates' processing time. Since the rebates have just begun, a better estimate of the necessary appropriation should be available at the time of budget hearings.

Recommend Accelerating Transition to Offsets

We recommend accelerating, by one-calendar year, the beginning of the full 67.5 percent vehicle license fee offset on a vehicle owner's registration bill, resulting in one-time administrative savings of $17 million.

As described above, vehicle owners are scheduled to receive rebate checks in both 2001 and 2002, with the full 67.5 percent offset on a vehicle owner's registration bill scheduled to begin in 2003. We recommend amending state law to accelerate that date forward a full year. Thus, vehicle owners would all receive rebate checks in 2001 and begin receiving the full tax relief offset on their bills in 2002. This would result in administrative savings for both the Department of Motor Vehicles and the State Controller's Office for processing rebate checks totaling an estimated $17 million in one-time savings over the budget year and 2002-03.