CAR-TAX STRUGGLE HAS LONG HISTORY DAVIS' BUDGET MAY COST CITIES A PORTION.

Byline: Mike Sprague Staff Writer

Up until 1935, it was an annual ritual in California.

Each year before that Depression year, someone from the local county tax assessor's office would trudge over to your home, check out your car's value, then send you a tax bill in the mail.

In 1935, however, the state stepped in. California officials took over the collection of property taxes on vehicles that year. Instead of being administered by 58 counties, the car tax became the charge of the state, which would send out bills, collect the money and then distribute it back to counties and cities.

Officials called the new state tax the vehicle license fee.

Once just a small percentage of counties' and cities' annual tax revenues, the VLF today has evolved into a main source of revenue, generating nearly $4 billion in 1998.

The fee is one of the top three funding sources for cities, said Jean Korinke, legislative representative for the League of California Cities.

The other two top sources are property taxes and sales taxes.

The same is true for counties, said Pat Leary, legislative representative for the California State Association of Counties.

In 1998, the Legislature cut the VLF by two-thirds. Elected officials opted to make up the difference to cities by dipping into the state's General Fund. As if using dirt from one hole to fill another, politicos dubbed the money shift a ``backfill.''

This year, facing a potential state budget revenue shortfall of some $34.6 billion - according to Gov. Gray Davis' estimate - the governor has proposed lopping $3.8 billion off that deficit by eliminating the backfill.

The reaction by city and county officials has been loud and critical.

Most of all, say those who represent the interests of local governments, county and city officials feel betrayed.

``The Legislature had choices,'' Leary said. ``It could have cut sales tax or income tax, but it instead cut local government revenue, because it was the trendy thing to do. The Legislature said, 'Trust us. We'll backfill the amount.'''

California was not the first state to meddle with the VLF. The first to reform the fee was Virginia in 1987, after Jim Gilmore, then a candidate for governor, campaigned on the promise of eliminating the car tax. Gilmore won the election.

From there, the VLF became a national issue, eventually playing a role in California's political scene.

In 1998, flush with large surpluses of cash, the California Legislature approved a bill cutting the VLF by two-thirds, using state money to backfill cities and counties.

Even before then, however, during the 1980s, the state had begun to meddle in the distribution of the VLF.

Facing low revenues during the recession of the 1980s, 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.

To prohibit any more take-aways, voters in 1986 approved Proposition 47, which constitutionally guaranteed VLF revenue to cities and counties.

The state then began taking away other traditional city revenues, such as the cigarette tax.

In fiscal 1992-93, the state shifted local property taxes from cities and counties to schools. Since then, the amount has grown from $1 billion to $5 billion.

It was out of a desire to make the car tax more uniform and easier to assess that the state in 1935 replaced it with the VLF.

``(Before 1935), you had rates all over the map because cars were taxed as personal property,'' Leary said. ``The biggest problem was that when the assessor came out to do the assessment, the car wasn't always there. Funny thing about those wheels - they always managed to be taken away at tax time.''

Initially, the state's new VLF rate was set at 1.75 percent of the value of the car. In 1948, lawmakers increased it to 2 percent, where it remains today.

The tax always decreases as the car ages. For example, a car purchased for $30,000 will cost $600 to register in the first year. But by its fifth year, the fee decreases to $360. By year 10, it's down to $120.