Car Leasing Trend Takes Financial Toll on Cities : Government: Sales-tax revenues slide for areas with dealerships. Wright bill addresses problem but draws fire.
But a changing marketplace is souring the once-lucrative relationship.
With consumers increasingly leasing cars instead of buying them, cities that collect 1% of a new car’s sales price are now seeing those revenues drop because they earn next to nothing from lease transactions.
Once a tiny portion of the auto trade, leasing now accounts for one-third of new car transactions, and the proportion among luxury car dealers is far higher. While some taxes are paid on those deals, the much smaller revenue streams go first 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 & 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.”
Posf said 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 it is losing $1 million a year in potential revenues from the change and expects that amount to soar in the future.
“It impacts every city in California,” said Cerritos City Manager Arthur Gallucci, who himself 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.”
El Monte, also home to a large auto mall, estimates it is losing $450,000 a year, money city officials say they need to hire additional police officers and firefighters and to upgrade police and fire stations.
Even worse, the municipal problem is expected to balloon, much like the new car prices that triggered the leasing trend, say city officials.
Last year, roughly 27% of nationwide consumer car purchases--an estimated 4 million vehicles--were leased. This year it is a far higher percentage. And the proportion is expected to climb to at least 60% over 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.”
To help compensate for the trend, more than 70 California cities are supporting a state senator’s bill that would divert lease taxes to cities where car dealerships are located. The cities have hired a lobbyist to push the bill.
“For many small cities, car dealerships are all they’ve got,” said state Sen. Cathie Wright (R-Simi Valley), who introduced the legislation this year.
If the law is not changed, cities relying on dealership revenues would suffer, finding for the first time that the costs of having a car dealership or an auto mall in town might outstrip the benefits, experts said.
“Something needs to be done,” said city of Palmdale redevelopment executive Danny Roberts, who also 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 help cities recover a significant portion of the lost revenues but hurt cities that lack dealerships. Burbank, for example, estimates that it would lose as much as $137,000 a year if the allocation formula is changed.
So far, there is little in the way of substantive opposition to the bill, which passed the Senate Revenue and Taxation Committee this month and will be heard by the Appropriations Committee on Monday, Wright said.
One opponent of the bill, Sen. Mike Thompson (D-St. Helena), 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 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,” Thompson said.
The drive 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?”
The bill is especially important to cities such as Lancaster that invested heavily in attracting car dealerships.
Officials in the Antelope Valley cities of Lancaster and Palmdale estimate that they stand to lose millions of dollars in revenues from local auto malls in the coming years.
Lancaster has hired the lobbying firm Kenneth Emanuels & Associates to support Wright’s bill and has collected $1,000 contributions each from other cities supporting the legislation.
Like many other cities, Lancaster in the late ‘80s used redevelopment funds to build an auto mall, luring car dealers from aging lots in more urban areas of Los Angeles County. The city offered financial incentives, as did Palmdale, which was promoting its own auto mall.
Lancaster’s Redevelopment Agency sold land to new-car dealers at a discount and deferred loan payments for seven years. In addition, during the grace period, sales-tax revenues earned by local dealers are credited to their loan.
Eager to lure car dealerships, many other cities have offered similar financial incentives. They are now worried they will have difficulty recouping their investments, said Peter Welch, director of government and legal affairs for the California Motor Car Dealers Assn.
The group represents 1,500 car and truck dealers around the state, 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-tax revenues go to the city they do business in.”
Neither the association nor the state Board of Equalization knows exactly how much revenue is being lost as customers increasingly choose to lease rather than buy new cars.
Consultants Hinderliter, deLlamas & Associates have done analyses 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.
Wright said, for example, Thousand Oaks lost out on $750,000 in revenues last year. The Ventura County city is among a long list of municipalities that support her bill, including Concord, Poway, El Cajon, Loma Linda, San Bernardino, Carson, Santa Maria, Petaluma, Bellflower, Newport Beach, Chula Vista, Stockton, Oxnard, Norco, Escalon, Gilroy, Escondido and West Covina.
Officials from some of these cities were so strongly behind changing the law, they sent representatives to Sacramento to testify on behalf of the bill during hearings last month.
In Ventura County, cities such as Simi Valley have complained of losing $600,000 or more annually in potential revenues, said 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.
And smaller cities throughout Northern and Central California also are throwing their support behind Wright’s proposal, sending letters to lawmakers.
Concord, for instance, says it is missing out on $100,000 a year and expects the problem to worsen.
“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.
He said the city had to lay off 20 employees last month as a result. “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 correspondent Maki Becker contributed to this story.
