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Car dealers fear state tax increases will put the brake on sales

The levies, part of a package aimed at closing a $42-billion projected state budget deficit, will add almost $400 to the price of the average new car.

February 21, 2009|Ken Bensinger

California's auto dealers are worried that the state's new budget will put an even bigger dent in already miserable sales.

Increases in the sales tax and vehicle license fees were key components of the measure signed by Gov. Arnold Schwarzenegger on Friday. Both raise the cost of buying a car.

Almost no consumer goods have a higher sticker price than autos, and the new levies -- part of a package aimed at closing a nearly $42-billion projected state budget deficit -- would add almost $400 to the price of the average new car. Broken down, that's about $260 from the 1% sales tax hike, plus $130 from the 77% increase in the vehicle license fee.

Although much of the increased cost will be mitigated by a new federal tax break on vehicle sales taxes, dealers fret that the increased out-of-pocket expenditure could be enough to drive away even more customers. That, in turn, could imperil dealerships and consequently, the tax revenue they provide to municipalities that depend on them.

"At a time when car sales are reeling, it's a difficult thing to swallow," said Peter Welch, president of the California New Car Dealers Assn. His group, which represents 1,200 new-car dealers, opposed the sales tax increase. "We're really concerned about what this will do to dealers."

Last year, new-car sales in California fell 23%, a considerably larger drop than in the nation as a whole, where sales of cars and light trucks declined 18%. At the same time, with General Motors Corp., Ford Motor Co., Chrysler and even Toyota Motor Corp. in terrible financial shape, dealers are getting squeezed from their manufacturers to offer incentives that increase sales volume, but cut profits even further.

That has led to huge numbers of failures, with 137 new-car dealers going out of business last year and 22 more so far in 2009, Welch said. The effect of those closures on local tax collection can be huge, with some municipalities depending on car sales for as much as a third of their revenue.

"Whatever happens to us affects the local economy," said Alex Tissot, general manager of Colonial Honda in Glendale. He said his sales fell nearly 40% in January, and the dealership lost $120,000.

The California Assembly Budget Committee expects the new sales tax, which also drew resistance from retailers, to bring in $5.8 billion in additional revenue, plus $1.7 billion from the new licensing fee.

But with car sales representing the single largest source of sales taxes in the state -- about 15% of all sales taxes come from the transportation sector -- dealers say the increase could drive away enough customers to actually hurt tax collection.

"Suppose you raise taxes by a penny per dollar, but sales go down 20%. How much money are you really bringing in?" said Bill Dohring, lobbyist for the Independent Automobile Dealers Assn. of California, which represents used-car dealers.

Dealers already are turning away customers because they don't qualify for car loans, and even a $100 or $200 increase in the sale price could push more customers out of deals, Dohring said.

But others disagree.

"Is somebody going to defer a $26,000 purchase because of a $400 marginal change?" said Jean Ross, executive director of the California Budget Project. "Not likely."

Moreover, the $787-billion federal stimulus package signed into law earlier this week included a provision that allows most taxpayers to deduct state sales taxes and licensing fees on new cars purchased between Feb. 17 and Dec. 31. Depending on a taxpayer's income, that could reduce the overall cost of the taxes and fees by more than a third.

Still, said Lenny Goldberg, executive director of the California Tax Reform Assn., "there's no question that the auto industry is taking a big hit with this."

Some car salesmen, being, well, salesmen, see a silver lining of opportunity in the tax hike. Since the new sales tax doesn't take effect until April 1 and the license fee May 19, some plan a marketing push to get consumers on their lots while the taxes are still low.

Dealers in Orange County, for example, are considering an advertising campaign pointing out that buying a car now will give consumers the full federal deduction without having to pay the higher state fees.

"There's certainly a window of opportunity to get people into cars now," said John Sackrison, executive director of the Orange County Automobile Dealers Assn.

The idea would be to encourage a bump in auto sales in March, before the new taxes go into effect. He and others believe that after April 1 the new levies could lead to a significant decline in sales.

Car dealers said they played a role in keeping lawmakers from raising the sales tax even higher as the state budget was being debated.

But the dealers were less successful in their support of a proposed 12-cent-per-gallon increase in the gasoline tax, which was eliminated from the budget package. They said the tax hike would get Californians to buy more fuel-efficient cars.

Other proposals that dealers hoped would stimulate sales did not pass, including a program under which the government would offer cash incentives for people to dump their old cars.

They were able to fend off an attempt to broaden the sales tax to include vehicle repairs.

Although most dealers seem to oppose the new taxes, some contend that the state had little choice.

"More sales tax is a necessary evil right now," said Salem Arnaout, owner of Simi Valley Chrysler Jeep Dodge. "If people have to pay taxes in order to keep the state working, so be it."


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