Cash from Clunkers

In 2009 the federal Car Allowance Rebate System (CARS), better known as “Cash for Clunkers,” provided cash rebates of up to $4500 to owners of qualifying cars and trucks who traded them in on energy-efficient new vehicles. This year Democrats in the state senate want Washington taxpayers to return the favor by paying sales tax on the value of vehicle trade-ins. Call it “Cash from Clunkers.”

During the current 60-day legislative session, the legislature is scrambling to fill a $2.8 billion hole in the state budget. The shortfall is the result of two factors: too much spending and lower-than-expected revenues due to the recession. While some of the deficit will be reduced by budget cuts, the senate wants to partially close the gap with a series of new taxes and by removing a tax exemption that has been in place for a generation.

With a combined state-and-local sales tax rate of just under 10 percent, the sales tax on a new vehicle in King County is staggering: close to 2 grand on a $20,000 car. There’s some relief if you have a trade-in however, as you only pay sales tax on the difference between the price of the new vehicle and the value allowed by the dealer on your old car or truck. Using the same $20,000 new vehicle and a trade-in valued at $10,000, you would be responsible for sales tax on $10,000, or just under $1000 in most of King County. That makes sense. Sales tax was paid on the trade-in when it was new, so it shouldn’t be subject to further tax when it is traded in. Besides, the state is already in line for the sales tax due when the dealer (or another car retailer) resells the trade-in.

In 1984 Washington voters outlawed sales tax on trade-ins. Perhaps the state senate thinks we have forgotten. Or perhaps they are out of ideas for how to increase revenue streams. Apparently the rest of the items in the various legislative tax packages won’t raise enough money to pay for programs they cannot bring themselves to cut. These include taxing bottled water, candy, and gum; adding a dollar to the cigarette tax; hiking the general sales tax rate by .3 percent; and upping the tax on hazardous substances. So the senate is proposing that consumers pay state sales tax on the value of their trade-ins. If their proposal becomes law, who wants to bet that local governments won’t follow suit?

By any measure 2009 was a rough year for new-car dealers (remember the GM bankruptcy?) despite the temporary stimulus provided by the Cash for Clunkers program. While the automobile industry is beginning to recover, the last thing it needs is for the state government to make it more expensive for consumers to buy new vehicles. And a tax on trade-ins won’t just hamstring car dealers. It would also apply to boats and planes, whose dealers are struggling to stay in business. Consumers, who are already stretching their budgets to pay for health care, tuition, food, housing, and present taxes, will also be hurt. I don’t buy the argument that anyone with enough money to purchase a new car, boat, or plane won’t feel the pain of the additional sales tax on a trade-in.

I don’t know whether the senate’s idea of taxing trade-ins will become law. But just proposing it shows me that Democrats in the senate are out of touch with real-world economic decisions faced by their constituents. This fall we should send more lawmakers to Olympia who know how to say no to increased spending.