The Connecticut Automotive Retailers Association isn’t happy with Gov. Dannel P. Malloy’s proposal to lift the sales tax exemption on trade-ins and implement a 3 percent luxury tax on cars over $50,000. They say both these measures will hurt an already wounded industry.
“I’m concerned about the underground economy,” Romana Primus of Whaling City Motors told Malloy at a breakfast meeting Thursday.
Eliminating the sales tax exemptions for trade-ins will force car owners to sell their vehicles on their own at a discounted price, she said. Then when it comes time to fill out the sales papers they could reduce the sale price even lower so when the buyer goes to the Department of Motor Vehicles, they’re paying sales tax on a much lower price.
“The state will get tax on $5,000 instead of $14,000,” Primus told Malloy. “The differences are that big.” If that in fact turns out to be the case the proposal won’t bring in the $40 million Malloy expects to see from the elimination of the exemption.
“What the state may gain for some of the sales, it’s going to more than lose for some of the sales that did not occur because people did not trade in their vehicles,” Primus said.
“I’m not sure that there’s an empirical data that supports your position,” Malloy told Primus. “I also know for instance that trade takes place currently.” He said dealers have other tools at their disposal to convince customers to trade their vehicles in through the dealership.
Malloy refused to pander to the crowd of about 40 dealers.
“I’m not saying that we have it right. I’m just saying you have to understand the gravity of the situation,” Malloy told Primus. “And you do because you’re survivors.”
But Primus said after Malloy left that it’s also about jobs. She said she just hired five new employees to recondition and wash trade-ins, but isn’t sure if she will have to lay them off if the trade-in business slows down because this proposal passes.
Richard Koppelman, of Miller Motorcars in Greenwich, told Malloy more than half of his business is used vehicles and most are high-end vehicles. He said he’s lived through the elimination of the sales tax exemption before and it forced him to lay off one third of his employees.
He said his customers will not pay the 9.25 percent sales tax on the trade-in value of their vehicle. He said when a vehicle is traded-in at a dealership the dealership is obligated to inspect that car and guarantee it, something a private seller is incapable of doing.
When those cars are resold by the dealership is when they should be taxed, Primus said. And at that point the dealership has put some work into the vehicle so the sale price will likely be higher and the state will be able to collect more taxes on it. She said instituting a tax on the trade-in will also make it harder for people to buy vehicles since it will undoubtedly increase the amount of money they will need to borrow to make the purchase in an already tight credit market.
Art Schaller Jr. said the industry is most concerned with the loss of the trade-in credit and is afraid their customers will go to Massachusetts, New York and Rhode Island—the three surrounding states that have trade-in exemptions.
But Malloy, who has consistently said he will benchmark his tax increases against surrounding states, believes Connecticut will maintain its edge.
“We will have a lower sales tax than the states we most directly compete with,” Malloy told the dealers. “I admit to you we may not have it perfectly, but at least you know now what I’m trying to do.”
“I have people in the legislature—for those of you that sell high end cars—that want to see a much higher income tax rate,” Malloy said. “That might not have as big a short term consequence, but in the long term I think it helps capital and wealth to flee the state.”
As he’s been doing since he released his budget Feb. 16, Malloy tried to explain to the dealers just how big the budget problem is, and the principles on which he based his budget proposal.
“What I’m trying to do is balance taxes people take into consideration when making decisions on where to live. People take into consideration where to live on how much the income tax is,“ Malloy said. “We have to maintain a substantial advantage over New Jersey, New York, Massachusetts and Rhode Island on the income tax side if we’re to be competitive because we are a higher cost place to begin with.”