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Legislature cuts taxes on new cars.

Legislature Cuts Taxes On New Cars

New car dealers and new car buyers won a major tax break in the opening flurry at the state legislature, one they say they desperately needed.

Used cars dealers and used car buyers were the big losers, and they are not happy.

Senator Clarence Bell of Parkin told me he got a letter the other day from a used car dealer that began this way: "You senile old ####."

All of the car tax activity was lost in the attention given to a half-cent sales tax increase.

I am referring not only to application of a sales tax on used cars, which ought to encourage some folks in a cash-poor state to go ahead and buy a new car.

I also am referring to an accompanying tax reduction on most new car sales.

What we had was a premeditated double-whammy that shifts the tax burden from buyers of new cars to buyers of used cars. It is a classic example of regressive taxation, meaning taxation that takes a larger chunk out of low-income people than high-income people.

In Arkansas, regressive taxation is a way of life. Legislators say the people want it that way. People like the sales tax because everybody pays it, and they don't want to see any of those bleeding hearts shed crocodile tears about how poor people get mistreated on the sales tax. That's what legislators say, anyway.

If Dennis Jungmeyer is to be believed, this was not an unneeded tax break for new car dealers.

He is the executive director of the Arkansas Automobile Dealers Association, and he says that 85 percent of the state's new car dealers are currently operating in the red. Anything to encourage people to buy new cars will help, he says.

The state's usury law and smart buyers' growing habit of buying late-model used cars to avoid the sales tax has put many a new car dealer out of business, or near there, he said.

This is the tax break: Beginning May 1, the sales tax on all automobile transactions, for either a new or a used car, will be calculated on the difference between the trade-in allowance and the sale price of the new car.

For instance:

* Today, if you traded in your 1988 Olds for a 1991 Olds, you would pay the state 4 percent of the total sale price of the 1991 Olds. Let's say the price was $23,000. The tax would be $920.

* As of May 1, if you trade in your 1988 Olds for a 1991 Olds, and if the dealer gives you $9,000 for your trade-in and sells you the 1991 Olds for $23,000, you will pay the state 4.5 percent of the difference - $14,000. The tax would be $630, a 32 percent reduction.

That's nice reduction, something of an incentive to buy a new car. But it becomes even more of an incentive when you consider that as of May 1, you would have to pay a sales tax, anyway, if you bought a late-model used Olds.

Thirty-nine states tax the trade difference on new and used cars, and there was no good or justifiable reason for Arkansas to be any different, Jungmeyer said.

A chancery judge already had ruled that Arkansas was unconstitutionally applying the use tax to used cars bought out of state while not applying the sales tax to used cars bought in the state. Rather than give up the use tax, the logical solution was to apply the sales tax to in-state sales.

The regressive nature of the tax will be offset somewhat by a $2,000 floor. Cars priced at less than $2,000 will not be subject to the sales tax.

Jungmeyer said new car dealers advocated the new system not to work a hardship on poor buyers of old clunkers, but to level the playing field between new cars and late-model used cars.

Not too long ago, he said, a new car dealer with a few used cars on the outside lot would sell four new vehicles for every used vehicle sold. Now, the ratio is one-to-one, he said.

He said that buyers concerned about the instant depreciation of new vehicles and the cash outlay required for the sales tax have become aware of the impressive array of late-model used cars available, those with 15,000 miles or less that had been part of a rental car pool or an executive fleet.

With reduced new car sales and a credit squeeze in Arkansas, dealers are hurting, he said. Relief from the usury law, just denied by the voters in November, is not likely in this century, Jungmeyer said.

The least the state could do was make its taxing system uniform and put it in line with other states, he said.

Maybe so. And if the people want regressive taxation, so be it. But I can't help but think that people are not yet clear on what is about to hit them, and I am inclined to agree with predictions that voter backlash could rival that of 1979 when Gov. Bill Clinton and the legislature raised car tag fees.

Consider this: If you sell your used car yourself, thinking you can get more for it than the dealer would allow on trade, and use the cash for a down payment on a new car, you would pay the sales tax on the full sale price. If you traded the car directly, you would save on the sales tax.

There is one another element: The sales tax on used cars would apply to casual sales as well, meaning nondealer transactions between individuals. Parties to such a sale would have to attend to the tax matter.

The state Revenue Division will be required to come up with a system for regulating those sales. An official state-issued bill of sale may be required. Relying on the book value of used cars, regardless of the sale negotiations, is one option.

Whatever the format, the honor system will be an integral part of any regulation and taxation of casual vehicle sales.
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Author:Brummett, John
Publication:Arkansas Business
Date:Feb 4, 1991
Words:1019
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