By Kent Gray

Triplicate staff writer

Crescent City City Finance Director Carol Leuthold said that any cut in car registration taxes in California must be compensated by the state or local communities will be in financial crisis.

andquot;It is the third biggest source of funding we have,andquot; Leuthold said yesterday. andquot;If they take it away from us, we're going to be in a world of hurt.andquot;

A campaign promise of Governor-elect Arnold Schwarzenegger was that he would repeal a recent tripling of the fee on the first day he takes office next month.

The increase, triggered on June 20 by Gray Davis administration officials to help ease a $38.2 billion budget deficit, raised the tax to the level it was before lawmakers and former Gov. Pete Wilson approved a series of cuts that slashed motorists' bills by two-thirds.

The fee, formally known as the vehicle license fee or VLF, has been around since 1936 and generates about $6 billion a year for local governments when fully levied.

Leuthold said VLF is a local tax and she does not know how Schwarzenegger plans to fulfill his promise.

andquot;I'm sure he wants to lower it, and I'm sure he means to keep his promise, but he may find he is not able to do so,andquot; said Leuthold.

A Schwarzenegger spokeswoman in Los Angeles County said yesterday her office has no information about how the governor-elect will implement his VLF relief promise other than what he has said publicly or has been addressed on his Web page. She did say more information should be available by early next week.

In Crescent City, the VLF is the third largest revenue source for the city, behind sales taxes and the motel bed tax, Leuthold said. In Del Norte County, Christie Babich said VLF makes up approximately 20 percent to 25 percent of the county's general purpose funds.

andquot;It's pretty significant for our general-purpose revenue,andquot; Babich said. andquot;Last year, it was equivalent to $2.05 million for us.andquot;

On Thursday, Floyd Shimomura, chief counsel for the state Department of Finance, said he didn't see how Schwarzenegger could keep his pledge. andquot;The short answer is he can't do it on his own,andquot; Shimomura said.

Rolling back the increase would cost local governments about $4.2 billion a year and would mean cuts in police, firefighting and other services, city and county leaders say.

Wilson's law never actually cut the tax rate, which is still 2 percent of a vehicle's value. Instead, the state essentially agreed to pay two-thirds of the car tax by subsidizing local governments to make up for the lost revenue.

To cut motorists' tax bills when he takes office next month, Schwarzenegger will either have to persuade lawmakers to cut the tax rate or pare other programs to generate enough money to resume the local government subsidies, Shimomura said.

Senate leader John Burton said on Wednesday that legislators won't be able to subsidize cuts in the VLF because the state doesn't have the money.

Any move by Schwarzenegger to cut the tax bills without resuming the state subsidies may lead to lawsuits by the League of California Cities and the California State Association of Counties, Burton said.

One alternative would be to return the collection of the tax to local communities and take California out of the equation, but it would be expensive.

andquot;I suppose there's a way to do it, but it would be more expensive and cost a lot more in administration,andquot; Leuthold said. andquot;It's not their money in the first place. They just collect it for us.andquot;

The state is still facing a projected deficit of about $8 billion next year, even without having to pay the subsidies.

Associated Press Writer Steve Lawrence contributed to this report.