Car dealers say Malloy’s trade-in tax plan would cost jobs

Connecticut’s automotive retailers are hoping they can convince Gov. Dannel P. Malloy to drop two controversial tax proposals by translating them into a term he has used repeatedly since taking office: jobs.

The retailers contend Malloy’s plans to impose the sales tax on automobile trade-ins, and to charge a luxury tax on vehicles worth more than $50,000, will result in new car dealerships cutting more than 730 sales and repair jobs.

“Trade-ins are such an important part of our business. This would be a huge hit for our industry,” Art Schaller Jr., chairman of the Connecticut Automotive Retailers Association, said.

The association, which includes 245 dealerships – almost all of which sell new cars – was scheduled to outline its concerns to Malloy at a breakfast meeting Thursday in the state armory in Hartford.

“I absolutely believe that if these tax changes are implemented, it is going to cost enough business in our industry that we’re going to have to lay people off” throughout the state, added Schaller, who operates dealerships in Manchester, Middletown and New Britain and whose family has been in the business since 1953.

At issue is the governor’s proposal to impose sales tax on vehicle trade-ins, which currently are not subject to that levy in Connecticut.

Under the existing law, a potential new car customer trading in a used car for $10,000 to a dealer not only can deduct $10,000 from the purchase price, but effectively saves another $600. That represents the amount of sales tax–based on the current 6 percent rate–that otherwise would have to be paid on the new car purchase.

Malloy’s budget also calls for the base sales tax rate to rise to 6.25 percent, increasing the potential savings on that $10,000 trade-in to $625.

Some potential customers may pay the higher tax, the association says, but others will try to negotiate with the dealer to assume some or all of that extra cost, or scrap the intended sale entirely. Under each of the last two scenarios, dealerships lose money.

Those customers who accept the added tax burden and plan to finance their purchase may need to borrow more, and thereby incur higher interest costs, the association says. It estimates that consumers financing a new purchase over five years would pay an extra $1,012.

Schaller said potential deals can fall apart over as little as $50, adding that the surprise some customers might encounter at paying sales tax on a long-exempt area like trade-ins would scuttle plenty of sales.

The Malloy administration estimates ending the exemption on trade-ins would raise $40 million extra next year. Another $1.2 million would be produced by adding a luxury surcharge of 3 percentage points to the sales tax on luxury goods, including vehicles costing more than $50,000.

But the new car dealerships contends that if the $6.6 billion in annual sales they did in 2009 falls between 20 and 25 percent–as commerce did nearly 40 years ago when a trade-in tax was imposed briefly in Maine–dealers’ revenues would fall more than $1.5 billion and state government would lose more than $90 million in annual sales tax receipts.

Similarly, the dealerships earn $1.03 billion annually on parts and vehicle service, but estimate that if 30 percent of its customer base purchases their next vehicle in neighboring states–and take them to out-of-state dealerships for regular service–more than $300 million in earnings would be lost. And that translates into $19.25 million in further lost sales tax revenue for Connecticut.

More importantly, said association president James Fleming, the 245 new car dealers in the group each expects such revenue losses would mean eliminating 2 to 3 jobs on average per dealership. That translates into as many as 735 jobs lost, he said.

But Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said new car dealers likely would pass along the added costs to consumers rather than reduce staff and scale back a “highly lucrative” repair business.

Both association officials and Barnes also agree that the recent recession thinned the ranks of new car dealerships in Connecticut–from about 320 down to 245 according to Fleming–and Barnes said this leaves the survivors poised to make considerable profits as car market recovers.

Leaders of the Democrat-controlled General Assembly have been relatively quiet about the sales tax proposals, or the $1.5 billion in total new taxes Malloy has proposed to help balance the next state budget.

Senate Majority Leader Martin M. Looney, D-New Haven, former co-chairman of the Finance, Revenue and Bonding Committee, said that while many of the governor’s proposals to close sales tax exemptions are unpleasant, he believes most lawmakers understand unusual efforts are necessary to close a projected deficit ranging from $3.2 billion to $3.7 billion for next fiscal year.

“None of them are popular but I think many people recognize that most of them probably are necessary,” he said.

Republican lawmakers uniformly have opposed the Democratic governor’s tax increase proposals though, to date, they haven’t offered any spending cuts as an alternative.

Sen. Andrew Roraback of Goshen, ranking GOP senator on the finance panel, said the administration should get ready for more jobs-based counter-arguments similar to those of the new car dealers.

“I take him at his word when he says ‘Connecticut is open for business and this is all about jobs,'” Roraback said. “The more you tax something, the less you have of it. And I take it that the people being taxed would be more than happy to help the administration gather the requisite information about what stands to be lost.”