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10 years later, lasting effects of car tax clash

On June 20, 2003 California's embattled governor approved a tripling of the vehicle license fee. The political and policy ramifications still reverberate today.

If anyone learned something from 2003's epic clash over raising the fee Californians are charged to register a car, it's Gray Davis.

"Once you give something back to people," Davis told me in a 2006 radio interview, "you can never ask them to return it. You gave it to them, it's theirs, leave it alone."

It's a political lesson preached inside and outside the halls of state government, on this tenth anniversary of the triple whammy heard 'round the state: the June 20, 2003 action by the embattled Davis to reinstate the full vehicle license fee (VLF) -- a 300 percent boost that, in retrospect, may be what sealed his fate in the historic recall election just 110 days later.

"It poured gasoline onto the recall movement," remembers Rob Stutzman, a GOP strategist who a few weeks after the action became a senior adviser to the man who gained the most from the controversial fee hike, Arnold Schwarzenegger.

It was Schwarzenegger, aided by talk radio hosts and ultimately even the mainstream press, that turned the vehicle license fee into the 'car tax,' a pejorative that Democrats say even now misleads the public about the annual assessment's true value.

"This money never came to Sacramento," says state Sen. Mark Leno, D-San Francisco, a fierce critic through the years of the VLF cut. "It stayed with cities and counties to pay for fire and police protection, to keep libraries and parks open and streets swept clean."

The VLF was created in 1935 as a substitute for a property tax on automobiles. In 1948, then Gov. Earl Warren helped set the fee at two percent of the value of the vehicle; the VLF remained at that level for fifty years.

"I would challenge anyone to argue that that two percent vehicle license fee impeded the growth of California in the second half of the 20th century," says Leno.

In 1998, the state's rising revenues under the dot-com boom led then Gov. Pete Wilson and legislators to ratify a plan to reduce the VLF, a plan carried out by Davis once he took office in 1999.

But because VLF revenues were local funds, the cut (ultimately down to .65 percent of a vehicle's value) would have sharply hit local services. And so the 1998 statute said the state would replace, or 'backfill', those dollars.

Even in good years, that wasn't such an easy task.

"Wilson signed the law, but I had to find room in the budget to pay for it," said Davis in our 2006 interview.

By 2003, with a sluggish California's economy and a huge $35 billion projected budget deficit, the governor and his fellow Democrats decided the state could no longer cover what was an almost $4 billion a year.

But how to do it? An actual legislative vote, or an administrative trigger, which looked to be in the language of the 1998 law?

"He came to Democrats and said, 'Do not put that bill on my desk,'" remembers Leno, then a member of the Assembly.

On June 20, Davis' finance director, Steve Peace, announced the VLF would go back up. Immediately, GOP legislators vowed to overturn the action. They also are the ones responsible for coining it the 'car tax,' borrowing the phrase -- and the attack plan -- from Virginia's 1997 governor's race.

While others began the fight, no one lampooned the VLF more than candidate Schwarzenegger.

"I will immediately destroy the car tax!" he bellowed at a fall 2003 recall campaign rally, just before giving the sign for a wrecking ball to smash into a wrecked car.

"We'd do anything to try to capture the visualization of what was happening to Californians," says former Schwarzenegger strategist Stutzman.

(An amusing anecdote: the wrecking ball wasn't their first choice. "We had actually contemplated blowing it up," says Stuzman,"but decided that ultimately may be in bad taste. I think there had been car bombings in the Middle East at that time.")

The final blow, though, was the timing. The new and tripled vehicle license fee bills arrived in mailboxes just days before the October 7 election. Davis was recalled, only the second sitting governor in U.S. history to be ousted.

Political observers on both sides believe the 'car tax' fight deserved part of the credit.

Schwarzenegger immediately rescinded the fee increase upon taking the oath of office on November 17, 2003. In the years since, the VLF has consistently remained below the 1948-1998 level -- slightly raised for three years as part of the controversial 2009 state budget deal negotiated by Schwarzenegger.

In all of that time, the state has continued to subsidize local government services.

"Collectively, over a 10 year period, it has cost out general fund about $50 billion," says Leno, chair of the Senate's budget committee.

Taxing vehicles remains a toxic proposal in California politics. In 2010, voters resoundingly rejected Proposition 21, an $18 annual fee earmarked for state parks.

The VLF, given the relatively predictable year to year value of automobiles, is one of the more reliable taxes. But selling a tax's stability isn't easy.

"The result of that [2003] revolt is that no one wants to go out and probably do taxes they should be done," says GOP strategist Stutzman, "which is to make them flatter, and broader."

Democrat Leno places the blame squarely on Schwarzenegger's broad shoulders.

"He destroyed a revenue source that had served this great state extraordinarily well," says Leno.

And the man who saw the 'car tax' fight doom his political career, even in the immediate aftermath, realized he had no idea what that DMV bill would feel like when it arrived in the mailfor millions of Californians.

"I'm thinking," said Davis in 2006 of that fateful day, "'They'll understand if I take it back for one year.' Well, they don't understand."

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