Report 2005-125.1 Summary - September 2005

Vehicle License Fee Adjustment: The Department of Motor Vehicles Effectively Captured the Information Needed to Calculate the Adjustment


Our review of the Department of Motor Vehicles' (DMV) capture of information needed by the State to calculate the fiscal year 2005-06 vehicle license fee adjustment found that:


The Department of Motor Vehicles (DMV) assesses, bills, and collects vehicle license fees from vehicle owners. For many years state law set the vehicle license fee rate at 2 percent of the market value of a vehicle. However, the Legislature amended statutes to require a reduction in the vehicle license fees that vehicle owners paid from 1999 through 2004. For example, from July 1, 2001, through December 31, 2004, state law required a 67.5 percent reduction to the 2 percent rate, meaning that vehicle owners in the State paid vehicle license fees at the rate of 0.65 percent of their vehicles' market value.

Because state law requires the State Controller's Office (controller's office) to allocate money collected from vehicle license fees to cities and counties, the reduction in vehicle license fees paid would have resulted in significant revenue losses for local governments. However, state law in effect during the period required the State to offset, or make up for, the reduction in the vehicle license fees by making transfers from the General Fund. Legislation enacted in 2004 eliminated the General Fund offset to the vehicle license fee rate effective January 1, 2005, and concurrently reduced the rate to 0.65 percent of the market value of a vehicle. In addition, the legislation altered the funding source for compensating local governments for the loss of vehicle license fee revenues, switching from the General Fund to local property taxes. The legislation also required the controller's office to calculate and report by October 15, 2005, the vehicle license fee adjustment for fiscal year 2005-06. As used in state law, the term vehicle license fee adjustment is the compensation local cities and counties receive from local property taxes. We will issue in October 2005 our report on the calculation of the vehicle license fee adjustment the controller's office is required to make.

The DMV captured sufficient information to compute that it would have collected $6.5 billion in vehicle license fees had the 2 percent rate remained in effect during fiscal year 2004-05. This calculation consisted of $4.4 billion in vehicle license fee reductions and $2.1 billion in vehicle license fees the DMV actually collected during the fiscal year. We use the term vehicle license fee reduction to refer to the difference between the fees the DMV would have collected from vehicle owners if they had paid vehicle license fees at a rate of 2 percent and the fees it actually collected in fiscal year 2004-05.

We found that the DMV made changes to its information systems to effectively bill and account for the correct vehicle license fee rate and the vehicle license fee offset. In addition, our review of 39 transactions for vehicle license fee collections and offsets revealed that the changes the DMV made to its information systems worked as intended. We also determined through our review of the transactions and significant adjustments to the vehicle license fees and offsets that the DMV appropriately accounted for the collections and offsets during fiscal year 2004-05. Finally, the DMV recorded the vehicle license fee information in sufficient detail to determine the dates on which it collected the fees and the years for which it assessed them.


Both the DMV and the Business, Transportation and Housing Agency were pleased with the results of our review.