Spokane’s Jaremko Nissan.
OLYMPIA, April 2.—Gov. Jay Inslee has a deal for you: Trade in a late-model car and you can do your part for education – by paying sales tax twice.
A favorite target in the war on loopholes, Washington state’s trade-in tax exemption is back in the crosshairs again. It made Inslee’s list last week as he outlined a plan to whack tax exemptions and continue temporary taxes into perpetuity – thus raising $1.2 billion in new tax revenue during the next budget cycle. So once more, car dealers find themselves in the position of having to explain how their business really works — and why a tricky point in Washington tax law really isn’t a loophole, but rather one of the foundation-stones of their business.
There’s something a little different about this one. The trade-in tax credit is an exemption, all right, but it doesn’t fit the loophole template — it was not a tax incentive granted by the Legislature in order to stimulate an industry sometime in the dim past, and then forgotten, as the usual complaint goes. This one was approved by the state’s voters, by a whopping 69-31 margin, through a 1984 initiative, with the idea that it prevented double-payment of sales taxes. And unlike most of the proposals Inslee dusted off last week, this one is sort of a retread. Last time around, the Legislature considered and quickly rejected a proposal to ditch the entire exemption. This time Inslee would cap it at $10,000 – something Inslee says would protect the little guy. But those in the car biz say it really doesn’t make a difference. Choke off sales at the high end of the market and it has a ripple effect all the way down the chain, from loaded late-model low-mileage creampuffs to beat-up high-milers.
Vicki Giles Fabre of the Washington State Auto Dealers Association says Inslee’s proposal could choke off a recovery in the car business at a time when sales might be called lukewarm. “A lot of dealerships just made it through and are starting to get back on their feet again,” she says. Far from the whack at the well-to-do the governor described last week, she says Inslee’s proposal would drive costs up for everyone who buys a car at a dealership.
Pay Taxes Twice?
New car sales manager Mark Jaremko.
Car dealers are doing a little better these days – sales are up since the worst of the recession. Last year 230,000 cars were sold in Washington, up from 170,000 in 2011. But it’s still 15 percent below sales in the peak year of 2007. And because the churn in the car business has slowed, there aren’t as many used cars in the pipeline. Over in Spokane, Mark Jaremko, new car sales manager at Jaremko Nissan, marvels at the prices even high-mile Japanese cars are fetching these days. Take away the tax credit on high-value trades and he says it becomes all the harder to convince a customer to take the leap.
“It’s something that helps tip people into doing a trade with their car right now, rather than waiting and trying to sell the car on their own,” he says.
The exemption basically means that when you trade in a car at a dealership, you don’t pay sales tax on the entire transaction. You just pay it on the difference between the value of the new car and the one that is being traded in. The idea is that you paid sales tax once already on that first car, and so you shouldn’t have to pay the same tax twice.
The break applies not just to cars but to recreational vehicles, boats, farm machinery and anything else you can trade in at a dealer. And depending on the value of the trade-in, it can mean big money. Since the top sales tax rate in the state is 9.5 percent, if you trade in a car worth $10,000, that means a credit of up to $950. It’s double when the vehicle is worth $20,000 — and so on. All told the Department of Revenue estimates the exemption will be worth $291 million over the next two years.
Which explains why the anti-loophole crowd has been eyeing it hungrily for years, despite that public vote. Liberal think tanks and activist groups call it a worthy target; environmental groups complain the tax break encourages people to buy gas-guzzling SUVs and pickup trucks. It was targeted for termination by the Senate Democrats in 2010. But the idea died quickly — there’s plenty of sympathy for a business that is one of the biggest engines of the state economy. State Rep. Cary Condotta, R-East Wenatchee, whose post-session day job is in marketing at Wenatchee’s Town Auto Group, says the trade-in tax exemption has strong support. “Right now the car business is the one shining example in the economy, and it seems like the exact wrong thing to do.”
Hint of Class Warfare
Inslee launches his war on loopholes last week.
Under Inslee’s proposal, customers with low-value cars would still get the full credit. The average trade-in is worth $7,500, so Inslee’s budget office figures most customers would still get the break.
According to the Office of Financial Management, the plan would affect 85,000 transactions and would generate about $100 million in new taxes over two years.
Inslee paints it in terms of rich-versus-poor. With a nod to the Cleveland High School students who stood with him at his news conference last week, Inslee said, “You don’t pay for the education of these children when you trade in a car, as opposed to just putting down cash on the barrelhead. There is no difference between those transactions, whether a taxpayer pays it with a trade-in or cash. It is no difference in the economics, one iota. We are taking a look at this and we’re suggesting that people who have the wherewithal to trade in a $15,000 or $20,000 car – and that’s not me, I’ve never traded in a $10,000 car – have a chance to help in the education of these students.”
Misunderstands Car Business
Salesman John Peluso.
By making that argument Inslee shows a lack of understanding about the car business, say those on the front lines. It really doesn’t matter what the average trade-in value is — the biz depends on customers at all tiers to trade in their cars. A $20,000 trade isn’t a rich man’s car – that’s a three-year-old Toyota. And when its owner finds he or she has to pay an additional $95o in taxes — that might be cause to ask for a card, go home and think about it. A deadly thing in the car game. As fewer late-model low-mileage used cars are traded, there are fewer available at the next tier below. As availability goes down, prices go up, so on and so forth, all the way to the bottom of the chain.
General Manager David Biggs.
The tax credit is perhaps more important at the higher end of the market. At the upper levels there might be a difference of a few thousand dollars between the wholesale value the dealer offers and the “private party” value customers think they might get at the curb, if they wait long enough. The tax credit allows the dealer to show more for the trade. It usually provides enough money to make up most of the difference — perhaps 75 or 80 percent — and thus provides a winning sales argument. If you can only save a few hundred bucks by selling a car yourself, is it really worth the fuss? The car biz depends on those customers at the top of the chain to trade their late-model cars for new ones, explains Jaremko general manager David Biggs. “These are the people whose frequency [of trading] would be destroyed, which I think kills the new-car business,” he says. “It is also going to kill the used-car business with the market for late-model trades. You’re not going to have anything on the lot worth more than $10,000.”
Really, Olympia has it backwards, says salesman John Peluso of the same dealership. If lawmakers want to stick it to somebody, they ought to go after the less-wealthy people in the $10,000-and-under market. That’s because they don’t have options. “People who trade in those cars are desperate to trade in a car. The car has a bad tranny, the majority of them are older — sometimes there is something rotten in Denmark. But if I’m trading in a $17,000 or $18,000 car, I might say, hey, the heck with you – I will just drive my car for another year. The car drives just fine.”
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