A judge heard arguments Tuesday afternoon in a lawsuit filed by the California Department of Finance and the chancellor of the state’s community colleges against Orange County in a dispute over tax revenue.

Orange County Superior Court Judge Robert J. Moss has 90 days to rule on the legality of a decision made by Orange County Board of Supervisors last year to withhold $73 million in property taxes from the state.

The lawsuit stems from a conflict that arose in 2011 after the state announced it planned to change distribution of vehicle license fees, which cost Orange County $48 million.

County officials voted to divert $73 million in local property taxes away from schools to cover the shortfall.

County officials expected the state would be forced to backfill the school’s money under Proposition 98, an equalization law that requires the state to make up for property tax shortfalls in school districts.

That’s what happened for K-12 districts, but the law doesn’t apply to the community colleges, which are named, along with the state’s Department of Finance, as plaintiffs in the lawsuit.

California officials took the county’s vehicle license fees in June 2011, saying it was the only municipality still receiving money from that source following a funding shift in 2003.

That year, the state traded sales tax and vehicle-license fee revenues going to counties and cities for property taxes to repay $15 billion of bonds issued to pay down the 2003 deficit.

The shift meant that property taxes flowed to counties through a vehicle license-fee adjustment account. Orange County, however, had pledged its VLF revenues to pay its bondholders as part of the recovery plan stemming from its 1994 bankruptcy, so the state passed legislation allowing the county to keep its fee.

When the county refunded its bankruptcy-related debt for savings, it eliminated its legislative guarantee of VLF funding.

The state capitalized on that during June’s 2011 budget process.

County leaders contend they have been able to keep a smaller amount of property tax than the state’s other counties in order to receive the VLF since the funding shift in 2003, but state officials argue they just cut off a loophole the county used to receive extra money.

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