Car Leasing Trend Draining City Treasuries
California cities have had their own love affair with the automobile, infatuated with the millions of dollars in taxes from new car sales that help pay for local expenses such as police and fire departments, street repairs and trash pickup.
But a changing car marketplace, in which consumers increasingly lease cars instead of buying them, is souring this once-lucrative relationship.
Cities, which collect 1% of a new car’s sales price, are seeing revenues drop because they earn next to nothing from lease transactions. As a result, experts say, cities throughout the state are having to shift their budget priorities to make do with less.
Cerritos, well known for its sprawling auto mall, estimates that it is losing $1 million a year in potential revenues from the change, and expects that amount to soar.
“It impacts every city in California,” said Cerritos City Manager Arthur Gallucci, who leases a Lexus. “If you have an auto agency, you are losing. That’s the bottom line. If you have 24 like we do, you are losing a lot.”
Once a tiny portion of the auto trade, lease deals now account for one-third of new car transactions, with a far higher proportion among luxury car dealers. Although some taxes are paid on those deals, the much smaller revenue amounts first go to county governments before being distributed to cities.
“Those cities that are heavy into car dealerships, they are losing considerable amounts of money: $100,000, $200,000 and in some cases far more per year,” said Bob Posf, a principal with Hinderliter, deLlamas and Associates, a Diamond Bar sales tax consulting firm that has analyzed the impact of the trend statewide. “That kind of money to small cities is significant. It could be a fireman, a policeman, a librarian lost or any number of other positions. These cities feel very strongly about this.”
State tax officials do not know exactly how much revenue is being lost, but tales of woe flow from El Monte to Concord.
El Monte, like Cerritos home to a huge auto mall, estimates that it is losing $450,000 a year, money that city officials say they need to hire additional police officers and firefighters, and to upgrade police and fire stations.
The municipal problem is expected to balloon, much like the new car prices that triggered the car leasing trend, city officials say.
Last year, roughly 27% of all consumer car purchases--an estimated 4 million vehicles--were leased nationwide. This year the percentage is far higher. It is expected to reach 60% or higher in the next five years as cars become even more expensive.
“This leasing has really got us worried,” said Palmdale Finance Director Bill Ramsey. “We’re here in a dogfight trying to survive.”
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To help compensate for the trend, more than 70 California cities have hired a lobbyist and are supporting a state senator’s bill that would divert a greater share of lease taxes to cities that have the car dealerships.
“For many small cities, car dealerships are all they’ve got,” said Sen. Cathie Wright (R-Simi Valley), who introduced the legislation in February.
If the law is not changed, cities relying on such revenues could suffer, and find that the costs of having a huge car dealership or an auto mall will outstrip the benefits, experts said.
“Something needs to be done,” said Palmdale city redevelopment executive Danny Roberts, who chairs the group spearheading the reform effort, Cities for Restoring Direct Allocation of Motor Vehicle Lease Tax Revenue. “We can’t wait until . . . everyone starts scrambling and going crazy.”
The State Board of Equalization said in a recent analysis that Wright’s bill would dramatically help cities recover some of their lost revenues, but would hurt those cities without dealerships. Cities without dealerships now get a share of the lease tax revenues in proportion to the sales tax revenue they contribute to the total state sales tax revenue.
So far, there is little opposition to the bill, which passed the Senate Revenue and Taxation Committee this month and is set to go before the Appropriations Committee on Monday, according to Wright.
One opponent of the bill, Mike Thompson (D-Santa Rosa), said it places too much emphasis on where cars are leased. Such revenues, he said, should be spread evenly among cities statewide.
“These big regional (auto) malls were set up and some local jurisdictions were big gainers because people came from other cities to use auto malls and the sales tax went to these centers,” said Thompson.
He said the decades-old effort by cities to create areas favorable for car dealerships threatened many of his constituents in the agricultural Napa and Sonoma valleys.
“We’ve created a situation in which local governments’ dependency on sales tax generators has increased . . . and that’s the No. 1 concern in terms of land use planning,” said Thompson. “At what point do we start replacing the grapevines with sales tax generators?”
Even if passed, Wright’s bill would offer only partial compensation to cities, such as Lancaster, that invested heavily in attracting car dealerships.
Lancaster, a sprawling community 60 miles north of Los Angeles, and its neighboring city of Palmdale argue that under current law the trend toward leasing threatens to cost them millions of dollars in revenues from the auto malls.
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Lancaster has hired the lobbying firm of Kenneth Emanuels and Associates to support Wright’s bill, and has collected $1,000 contributions from many other cities supporting the bill.
Like many of those cities, Lancaster used redevelopment funds in the late 1980s to build an auto mall, luring car dealers from aging lots in urban areas. The city offered financial incentives, as did Palmdale, which was promoting its new auto mall.
Lancaster’s redevelopment agency sold land to new car dealers for about $250,000 an acre, but deferred loan payments for seven years. In addition, during the grace period, the sales tax revenues earned by local dealers were credited to their loan.
Eager to lure car dealerships, many cities have offered similar financial incentives. They are now worried that they will have difficulty recouping their investments, said Peter Welch, director of Government and Legal Affairs for the California Motor Car Dealers Assn.
The car dealers association represents 1,500 car and truck dealers statewide, accounting for $22.4 billion in retail sales last year, 13% of all retail sales in the state.
Welch said the association supports Wright’s bill because cities that have car dealers ought to benefit most from the transactions, whether sales or leases.
“The dealers that do business in their city are very fond of their cities, buying baseball outfits for Little Leagues and active in the Chamber of Commerce,” Welch said. “They would like to see the sales taxes revenues go to the city they do business in.”
Consultants Hinderliter, deLlamas and Associates have done revenue-loss analysis for dozens of clients throughout the state, but Posf said the figures are proprietary and would not release them. But, he said, the changing market--and the proposed legislation--affects every city in the state.
Thousand Oaks lost out on $750,000 in revenues last year, Wright said. It is among a long list of municipalities that support Wright’s bill.
In Ventura County, cities such as Simi Valley have complained of losing out on $600,000 or more a year in potential revenues, said Palmdale redevelopment executive Roberts, head of the coalition to change the law.
And in Orange County, experts estimate that as many as half the new car transactions there are financed through leasing arrangements.
Huntington Beach, with its row of car dealerships along Beach Boulevard, may be losing $500,000 to $1 million a year in tax revenue, studies show.
Smaller cities throughout Northern and Central California also are throwing their support behind Wright’s proposal, sending letters to lawmakers.
Concord says it is losing out on $100,000 a year. “It is not only significant because of the $100,000 but because we feel that the leasing is on an upward trend, and after a few years it will start adding up to really big money,” said Peter Dragovich, Concord’s senior administrative analyst, who said the city had to lay off 20 employees last month. “We’re old-fashioned enough here so that $100,000 still means a lot to us.”
Times staff writers Isaac Guzman and Phil Sneiderman and special correspondent Maki Becker contributed to this story.
