Legislative Analyst's Office

Analysis of the 2002-03 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 $4.4 billion, of which almost $700 million is appropriated in the budget bill.

The largest program contained in the tax relief budget item 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. Since 1998, the Legislature has reduced the VLF by 67.5 percent. 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 continuously appropriated and, therefore, does not appear in the budget bill. The budget proposes expenditures of nearly $3.8 billion for the VLF backfill in 2002-03.

The largest 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 $410 million on this program in 2002-03. This is an increase of $6 million, or 1.5 percent, which reflects the expected growth in the number of homeowners claiming the exemption.

No Information on Manufacturing Property Tax Rebate

The manufacturing property tax rebate program is due to sunset at the end of 2002. No information is currently available on the use of this program. If the Legislature chooses to extend the program, we recommend that local governments report their data to another state agency, such as the Board of Equalization.

Tax Rebate Sunset Extended. Chapter 868, Statutes of 1993 (AB 1823, Alpert), created a manufacturing property tax rebate program. The program allows cities, counties, and special districts to provide businesses a rebate of some or all property taxes paid on "economic revitalization manufacturing property." Local governments can rebate taxes for up to five years for property which helps create at least ten new manufacturing jobs. Chapter 943, Statutes of 1999 (SB 943, Dunn), extended the program through calendar year 2002. As required by Chapter 943, those local governments electing to use the property tax rebate program beginning in 2000 are required to submit an annual report to the Legislative Analyst's Office (LAO). In turn, the LAO is required to prepare a report evaluating the effectiveness of the program.

No Reports Received. To date, our office has not received any reports from local governments using this program. We also have not been able to identify any local governments that have opted to use the program since the extension of its sunset. While it is possible that no local government continues to use the program, it is also possible that some local governments have used the program but failed to file a report.

Recommend Changing Reporting Requirement. Without any information on the extent to which the tax rebate program is used, we are unable to evaluate its merits or provide a recommendation on extending its sunset. If the Legislature chooses to extend the property tax rebate program again this year, we would recommend changing the reporting mechanism. We would suggest requiring any local government using the program to provide the required data to an agency which it has regular contact on property tax issues, such as the State Board of Equalization. This agency could then compile the submitted reports and provide the information to the LAO for analysis.

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