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Budget faces sales-tax hit

New cars have been become an unlikely piece of California's looming budget pinch.

The 2008-09 state budget, facing a hit from a softening economy and dwindling revenues, is all but certain to be squeezed from an unexpected sector of the California economy: new car buyers. California car dealers sell about 2 million new cars and light trucks each year, and the sales taxes from those transactions amount to a hefty piece of change.

But lately it's getting dicey.

The state budget depends largely on revenues from taxes–such as income taxes, sales taxes, corporation and insurance taxes, and the like. The income tax
provides the largest single infusion of money–it was $55.2 billion in the current, 2007-08 budget–and the sales tax is the state's No. 2 money producer, roughly half the amount of the income-tax revenue, or about $28.8 billion. The sales taxes come from throughout the economic system, from stores to equipment rentals to homebuilder's supplies to wholesale warehouses, just to name a few.

They are an indication of economic health and activity, and they reflect problems in various areas of the economy. During the first quarter of last year, for example, there was some $128 billion worth of taxable sales.

But new car and light-truck registrations dropped 9.3 percent through the first three quarters of 2007 compared with the year before, a dramatic decline attributed in part to credit tightening, consumer uncertainty and the stresses of an increasing number of consumers facing foreclosures. Indeed, the problems in the sub-prime mortgage market have resulted in homeowners faced with spiraling balloon payments from creatively financed loans. Through the final quarter of the year, the drop in new car registrations is projected at 7.5 percent, an improvement over the third quarter because many consumers buy their cars at the end in the final month of the year.

"I think there is a direct connection between them," said Peter Welch of the California Motor Car Dealers Association, which represents 1,350 new car dealers. "With the average price of a new motor vehicle at around $27,000, it is a major acquisition, and 80 to 85 percent of the transactions are typically financed, out to 72 months.

"What we are starting to see is that is that credit-challenged segment of society who are finding it harder to get a home loan now, also are finding it more difficult to get a car loan," Welch said. "Even if you are not on an adjustable-rate mortgage and in immediate in peril of seeing you're mortgage go up, most people have seen a decline in the value of their homes. As a result, the equity cushion is smaller. Maybe now, it's even gone. People are feeling poor."

Welch also noted that there has been a major shift of new car buyers away from sports utility vehicles to passenger cars. "It's the biggest shift I've ever seen, and I've been doing this 20 years. California passenger vehicles now account for 55.7 percent of the market. That's a huge shift, and I attribute it to gasoline prices." Typically, SUVs cost more than passenger cars, which means the shift to lower-priced and more fuel-efficient vehicles also means a less sales tax.

The new, 2008-09 budget is being put together now by the Department of Finance, based on revenue and economic projections by the department, and the wish lists of the state agencies. Republican Gov. Arnold Schwarzenegger will release the budget in January. Sales-tax collections have been coming in below expectations. Budget writers–and retailers–hope the holiday shopping season will boost revenues.

"Sales and use tax receipts were $375 million below the month's forecast of $2.304 billion," the Finance Department said in its October bulletin. A more complete picture of third-quarter sales activity will be available when final payments for the quarter are received in late October and early November. It appears that a moderating economy is negatively impacting retail sales. Year-to-date, the sales tax cash is $276 million below forecast.

By one estimate, the dropping new-vehicle sales could mean hundreds of millions of dollars less in sales tax revenues, plus a drop in the $26 million in vehicle fees that the state collected last year.

"This is totally a sales tax-related issue," said Lenny Goldberg of the California Tax Reform Association, which seeks to close tax loopholes. "This can't be good news for the state budget.

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