State agrees to work with San Mateo County to return millions in vehicle license fees

State officials have agreed to find a way to return millions of dollars in vehicle license fees to San Mateo County weeks after county leaders claimed the loss of revenue would lead to public service cuts.

The state legislature has approved language in its budget trailer bill – legislation used to change state laws so that the annual state budget can operate – allowing officials to negotiate a new vehicle license fee (VLF) reimbursement formula for San Mateo, Alpine and Mono counties.

VLF is an annual property tax charged by the state for owning and registering a vehicle. Under a 2004 agreement, counties and cities agreed to receive a reduce share of the fees in exchange for annual payments from the state as compensation. The payments are calculated based on a complex formula that takes into account school district property taxes.

But San Mateo leaders say that formula is outdated and shortchanges the county. All three counties are currently facing a budget shortfall because they did not receive their full VLF revenue from the state. They warn other California counties and cities could find themselves in a similar shortfall situation.

Once the new formula is decided, it will take effect fiscal year 2027-28, and apply statewide to any county or city.

San Mateo County says the state owes them $226 million in replacement funds for the 2025-26 fiscal year. The county is due for $134 million while the 20 cities and towns need a combined total of $91.6 million.

The Board of Supervisors called the lack of action “theft by the state.”

“We feel very strongly that this is a theft by the state,” said Supervisor Jackie Speier. “They know it’s a theft. and I’ve been disturbed by their willingness to shine us on. We’re not going to allow that to happen.”

In June, Newsom approved the state budget, which allocates $80 million in a one-time license fee backfill for the counties that were left out, including $77 million for San Mateo County. But the $77 million only covers two-thirds of what they are owed, according to the county.

The Finance Department did not respond to comments about the county’s funding concerns.

Local mayors from Redwood City and Daly City said they would be forced to cut back city services without the revenue from the vehicle license fees, potentially leading to longer response times for emergency responders and resources for recreational programs, among other services. The county warned the lack of funds could cost 1,000 county and cities jobs.

Now that the state promised to find a solution, the county recently announced it has added revisions to its fiscal year 2026-27 budget that includes the full VLF amount. The revisions will be presented to the board during their Sept. 29, when supervisors will consider adopting the budget.

When California counties agreed to the 2004 deal, it permanently lowered the VLF share. The state decided to replace the losses by redirecting local property taxes revenue from state-supported school districts to cities and counties. The state would then use money from its General Fund to backfill the districts’ loss of revenue, a transaction referred to as “in-lieu VLF fees.”

All but two school districts in San Mateo County are unable to receive the full backfill amounts because they are basic-aid districts, which means they have sufficient funding from property taxes and cannot share their funds with the county, according to Justin Mates assistant county executive.

“We simply don’t have enough revenue from non-basic aid school districts to pay what is owned,” he said.