Friday, February 27, 2004

California Driving

Governor Arnold's personal charisma seems to have made folks forget the mess he made of the car tax. Remember? The first thing Arnold did as governor was to cut the automobile Vehicle License Fee, a cut that has generated $824,000 of campaign contribution gratitude from California's car dealers.

Technically, what Arnold did was to block the scheduled ending of a temporary tax cut. The VLF is a kind of wealth tax, one that takes the place of a local property tax on autos. The Department of Motor Vehicles collects it as part of annual auto registration, but the money raised is transferred to local governments -- cities and counties. Since the 1940's the normal VLF rate has been 2% of a car's DMV bluebook value. However, during the state revenue boom in the late 90's, the legislature decided to temporarily lower the VLF, down to 0.65% of DMV bluebook. In order to protect local revenue, the state "backfills" the amount of the cut, paying the difference to the cities and counties. There are about 30 million motor vehicles in California with a total value of $280,000,000,000, so the VLF is big money -- the 2% rate would produce about $5 billion a year for local governments, and the "backfill" costs the state about $3.5 billion annually. (Note that the backfill is categorized as state spending for budget purposes.)

The temporary cut in the VLF was to have expired in 2003 due to the state's current revenue squeeze. However, just after his inauguration, Gov. Humvee ordered that it stay in place -- apparently giving no thought as to how to keep funding the $3.5 billion annual backfill. The cuts in the university and health care budgets were then improvised to cover the local government's need for backfill money to keep paying the cops and firefighters. In retrospect, it reads like a script for Terminator Part V -- the final victory of machines over humans.

On March 2 Californians are to vote on the Gov's $15 billion bailout bond, about $400 in new debt for every person in the state. To pay it off, we'll be hocking a 1/4% slice of the sales tax for the next 20 years or so. Like the Ancien Regime in Bourbon France, or the provincial Mandarins of Late Imperial China, we'll have to assure the moneylenders of our willingness to squeeze, rack and grind down the laboring masses in order to fund the prompt payment of every penny of principal and interest. Interesting, that the shortfall this bond will cover is roughly equal to the total revenue that the state has lost from cutting the VLF.

Here are links to more VLF info from California's legislative analyst:

How VLF works and who bears the burden. 3% of the revenue comes from 25% of the cars -- those bought for under $5,000. 30% of the revenue comes from the 8% of the cars that are valued at more than $25,000. If you want to pay less tax, buy a cheaper car.

How the backfill works. Total backfill costs so far: $15.6 billion. And because VLF is an itemized deduction for federal income tax, for every $100 reduction in VLF Californians will have to pay about $15 more to the IRS. It adds up -- about $2.4 billion lost so far, and counting.

And what's my position on the bailout bond? Under rational government it would be the lesser evil, but under Gov. Charismanegger, who sensed no inconsistency in attacking "reckless spending" while increasing backfill spending by $3,500,000,000.00, success on the bailout bond will just encourage more folly. So... I suppose I'll just hold my nose and vote against it.

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