Sales Tax, License Fee Increases Could Decelerate Auto Sales
California’s plans to dig itself out of its budget mess could put an ugly dent in auto sales if proposals to boost sales taxes and triple the vehicle license fee are adopted.
Those measures, along with a hike in registration fees, would add $621, or 2.4%, to the average $26,124 sales price of a new vehicle in California. And that has auto dealers fearing that the higher costs will slow the record pace of sales achieved the last three years.
Indeed, so many Californians have bought new cars of late that the average age of a vehicle on California’s highways may be the lowest it has ever been. That, in turn, means that there are now fewer drivers under pressure to replace their old wrecks.
“There is a high percentage of people out there who have the discretion not to buy,” noted David Conant, president of Conant Auto Retail Group, which owns Norm Reeves Honda in Cerritos and seven other dealerships.
Given that, he added, “they might decide to wait in anticipation that some of these new taxes will come off once the economy gets better and the state has more money.”
In a recent survey, nearly 10% of potential new-auto buyers said the one-two punch of a sales tax hike and sharply higher license and registration fees would steer them to the used-car lot or to postpone the purchase of a new car or truck.
That potentially means 240,000 lost sales, said Art Spinella, president of CNW Marketing/Research of Bandon, Ore., which conducted the survey of nearly 500 Californians who said they were considering a new-car purchase in the next six months.
“I did not think it would be as severe, but California always seems to throw us a curve,” he said.
Spinella cautioned that what people say in surveys can differ from what they end up doing. But generally, he said, every $1,000 increase in the out-the-door price of a new car or truck trims sales by 2%.
That didn’t faze Gus Prada Lim, who was scoping out an olive-green Honda Element sport utility vehicle at Norm Reeves Honda in Cerritos this week. He said he doubted that an increase in tax and license fees would affect his purchase.
“When I buy a car, I go for the looks and performance,” said the Long Beach resident. “I don’t think about the taxes.”
But Vanessa Beltran of Lakewood, who also was shopping for Hondas, said new taxes could factor into her decision.
“Any amount of money added to the price of a car is going to change your choice,” she said.
At a Toyota dealership nearby, John Ross of La Habra said he would try to beat politicians to the punch and buy before any new taxes are enacted.
Analysts believe that other buyers will emulate Ross’ plan, creating a sales boomlet right before any increases would take effect. But this surge probably would be followed by a dip in sales.
Fritz Hitchcock, whose Hitchcock Automotive Resources in the City of Industry owns dealerships that generate $600 million in annual revenue in California, believes that car lots would take as much as a 7% hit in sales if the taxes go through.
With the state facing a budget shortfall of more than $26 billion over the next 17 months, Gov. Gray Davis has proposed boosting sales taxes by 1 percentage point to raise $4.5 billion annually. Of that amount, as much as $800 million would come from car sales alone.
On top of that, over the objections of Davis, both houses of the state Legislature have voted to raise $3.8 billion by tripling vehicle license fees.
Almost $900 million of that would come from license fees on new autos, according to data from the Department of Motor Vehicles. (A smaller portion would come from licensing cars owned by people moving to California, but the DMV was unable to provide a breakdown.)
Sales of used cars would produce an additional $250 million in license renewal fees.
“The industry is an easy target,” dealer Conant said, “because California is an automobile society.”
A small lobbying effort is underway to block the increases, but industry insiders are not optimistic. Dealers say privately that they don’t want to be seen as a hurdle to solving the state budget crisis. And they believe they have little leverage.
“We are a small constituency, and there is no way we can stop this snowball from coming down the hill,” said Jay Gorman, executive vice president of the California Motor Car Dealers Assn.
Republicans in the state Legislature are vowing to fight the proposed increase in vehicle license fees, but dealers are more concerned about the increase in sales tax that would add 1% to the purchase price of cars and other taxable consumer goods, according to people familiar with their lobbying efforts.
The reasoning is that people can easily tote up how much an extra 1% adds to a vehicle’s purchase price, whereas the typical buyer tends not to consider license fees until presented with the sales bill -- after the emotional attachment to the car or truck has been made.
The proposed increase in the license fee, however, is actually more -- 1.35% of the sales price. And because it is recurring, it could easily amount to thousands of dollars in higher fees over the life of the car.
Motorists now pay two-thirds of 1% of a vehicle’s purchase price in license fees. Statehouse Democrats want to raise that to 2%. That’s what car buyers paid before 1998 -- when the state, flush with money from the economic boom, gradually lowered the rate to its present level.
Brad Williams, senior economist in the nonpartisan Legislative Analyst’s Office, thinks the heavy reliance on auto sales for such a significant portion of new tax revenue will spark a debate on broader policy issues.
“People are going to ask if it would make more sense to broaden the base to tax previously exempt goods and services to spread the pain all around,” Williams said. “California has a high sales tax rate compared to other states,” he added, but the base of goods and services taxed is “among the narrowest.”
