Did car tax drive deficit?

Feb. 1, 2010


As negotiations get under way on the California State Budget – especially its $20 billion deficit – numerous remedies are being advanced, including tax increases. One old idea is to bring the car tax, also called the vehicle license fee, back to 2 percent of the vehicle’s value, where it stood when Gov. Schwarzenegger took office in 2003 and immediately cut the tax back to its previous level of 0.65 percent.

Just a year ago, in February 2009, the governor reversed himself, signing into law a bill passed by the Legislature that almost doubled the car tax rate, from 0.65 percent of value to 1.15 percent of value. The tax increase lasts until June 30, 2011. But some have called for it to go even higher – back to the 2% of value of 2003. Dan Walters, dean of California state journalists, has brought this up many times since 2003. Most recently, he wrote:

How does one reconcile, for example, [Arnold Schwarzenegger’s] very first act as governor, reducing taxes on automobiles by billions of dollars, with his plea to voters, soon afterward, to borrow $15 billion to rescue the state from imminent insolvency – while simultaneously touting a supposed spending limit that, as everyone in the Capitol knew, was worthless?

And a 2008 editorial in the Los Angeles Times argued:

California’s leaders took a wrong turn in 1999 when they slashed the vehicle license fee, or car tax [to 0.65 percent]. The move frittered away a rare revenue surplus that should have been used instead to fix the state’s structural deficit.

In light of those arguments, it’s worth remembering that outrage over Gov. Gray Davis’ tripling of the car tax in 2003, to the level of 2% of value, was a major factor in his recall. Lawsuits were being prepared to challenge tax’s legality, on the grounds that Davis, by himself, didn’t have the authority to unilaterally raise the tax, without a vote of the Legislature or the voters. And then-State Sen. Tom McClintock, R-Thousand Oaks, filed two petitions for ballot measures to overturn the car tax, one of which likely would have succeeded.

Tax rates and tax revenues

“A higher car tax makes purchases of cars more expensive,” Esmail Adibi explained; he’s director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University. “It discourages buying new cars, especially expensive ones. So the state doesn’t collect as much sales tax.” He said people either buy cheaper cars, thus paying lower sales tax, or postpone buying a new car entirely, thus paying no sales tax – or car tax – at all.

It’s worth noting that there’s a difference between tax rates and tax revenues. Tax rates are the percentages of income, sales, or something else that the government tries to get from taxpayers. Tax revenues are the amounts it actually gets. Raising rates doesn’t necessarily translate into increasing revenues.

Moreover, buying a car means paying not just the car tax, but the underlying sales tax, which currently runs as high as 10.75 percent, the highest in the nation.

Dynamic impact

Tom McClintock, now a U.S. congressman, told me that raising the car tax at first hurt the state budget. He pointed to budget figures (Schedule 6, Appendix Page 13 of this .pdf) showing that, from fiscal 2001-02, general fund revenues rose more than $8 billion, to $80.6 billion. By contrast, the next year, fiscal 2003-04, which included the car-tax increase, general fund revenues dropped almost $4 billion, to $76.8 billion.

Then, cutting the car tax back in 2003 actually was “a big economic stimulus for California, particularly in car buying.” When the car tax fell off in 2004-05, revenues rose again, more than $5 billion, to $82.2 billion.

Much of these changes involved not just the particular tax increase or tax cut, but the whole tax climate – whether the statewide trend was for higher or lower tax burdens. McClintock called it the “dynamic impact” of taxes.

The impact of the car tax was noted in a study study by the Power Information Network, an affiliate of J.D. Power and Associates, the market researching firm. An Oct. 23, 2003 summary of the study noted:

Since California’s higher vehicle registration fees went into effect on Oct. 1, new light-vehicle retail sales in California have dropped significantly, with the luxury vehicle market taking a substantial hit….

Luxury vehicle retail sales in California declined 40 percent from September to October this year [2003], compared to a decline of only 19 percent over the same period in 2002. Furthermore, total industry retail sales in California declined 35 percent from September to October of this year compared to a decline of 18% in 2002.

Lost sales

Put another way, the gap between the two numbers for auto industry retail sales — $35 percent compared to 18 percent — was 17 percentage points. That’s how much would have been lost in sales for the whole year, had the tax continued.

At the time, the Contra-Costa Time reported on Oct. 24, 2003 that:

the decline in car sales will also affect the state’s sales tax take. Last year, sales at car dealers accounted for 19.5 percent of the state’s total retail sales, or $98 billion, according to the California Motor Car Dealers Association.

So, let’s combine the numbers: the $98 billion in sales times the 17 percentage-point decline in sales equals a sales tax cut of $16.7 billion. Now, the state sales tax rate then averaged approximately 8 percent. So, 8 percent of $16.7 billion is $1.336 billion in lost sales tax revenue.

Add to that lost income taxes and other taxes paid by auto industry workers fired, and even more can be added to reduction in revenue.

The current situation

The same thing has happened the past year. The Sacramento Bee reported:

Statewide new car sales figures for 2009 are in, and the numbers are the worst since the dawn of disco.

The Sacramento-based California New Car Dealers Association said Thursday that registrations of new cars and light trucks in California declined 28.3 percent last year compared with 2008 – steeper than a 21.2 percent decline in the U.S. market.

CNCDA’s figures – compiled by Malvern, Pa.-based Auto Outlook Inc. and one of several key reports of annual car sales statewide – showed 1,038,271 registrations last year, compared with 1,447,460 in 2008. The totals include fleet sales.

“New car dealers in both Northern and Southern California experienced massive decreases …” said CNCDA Chairman Tom Hoffman, operator of Puente Hills Chevrolet in Los Angeles County. “New vehicle sales in 2009 were less than half the sales just four years ago and represent the lowest sales volume in California since 1975.”

As to the budget, McClintock said the 2009 Schwarzenegger overall tax increases were supposed to bring in $13 billion in more revenues. “Instead, it decreased – dramatically. Revenues dropped $10 billion for the April-December 2009 period, compared to the April-December 2008 period.”

He said the only part of the tax revenue equation that rose was the corporate tax, which went up $2.4 billion — and that was the one major tax whose rate was not increased.

John Seiler, an editorial writer for 19 years at The Orange County Register, currently is a reporter and analyst for Calwatchdog.com. His email: [email protected].

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