Starting March 1, Georgians will have some changes when they purchase or lease new and used cars. Courtesy of the recent "tax reform," the sales tax on automobiles and ad valorem taxes paid on the owner's birthday will go away for those buying cars on or after that date. But this is Georgia, so the system isn't exactly that simple.
The sales tax paid is now replaced with a title "fee." (I hope you're used to referring to any device that raises revenue as a fee by now. Legislators really don't like it when these new ones are called "taxes.")
The one-time fee will start at 6.5% for all new and used cars purchased on or after March 1. This includes all vehicles bought and sold between private individuals, which previously did not pay sales tax on these casual sale transactions. Next year it will rise to 6.75% and in 2015 will be set at 7%. The legislation allows for the fee to possibly increase as high as 9%.
Those who purchased a car after January 1 of 2012 can apply to transfer to the new system after March 1 to avoid paying future ad valorem taxes on their cars. They will have to pay the difference between their sales tax paid and the title fee. Those with cars purchased before 2012 or those that don't wish to pay the title fee will continue to pay ad valorem taxes annually.
For the first three years, the fee will roughly replace sales tax for those in Georgia counties with a sales tax rate of 6 or 7%. However, unlike sales taxes, all revenues will go to the state instead of being divided between state sales taxes and local option taxes. The state promises that counties will not lose revenue under this system. And yet, the state has millions that remain each year that get spent in its general fund that were earmarked for local governments through similar fees. Time will tell if counties will be able to hold the state to its promise on this one.
The winners in this scenario are people who purchase cars at dealerships and hold them for a reasonable length of time. They will pay little or more up front, but will only pay license plate tag renewal fees each year instead of the added hefty ad valorem tax on the cars. When trading cars at a dealership, the state will allow a credit for the trade in value in calculating the new title fee, similar to how sales taxes are treated now.
Those who may pay more under this system are those who purchase used cars from individuals. While these private transactions are currently not subject to sales taxes, they will be subject to the title fee when they register their automobiles. They too, however, will not pay ad valorem taxes, so whether or not they pay more depends on how long they hold their automobile.
The definite losers under this program are those who lease cars. Under the current system, those who lease pay a monthly "use tax" which is calculated like sales tax on top of their monthly lease payment. This use tax is not going away, but the title fee will be a new tax added to the transaction, payable up front.
Because lease terms have a limited term of contract, the title fee must be amortized within the time the driver keeps the vehicle. To demonstrate what kind of effect this will have, we'll look at one of the lease specials that was heavily advertised in the Atlanta area during December. A local Infiniti dealer advertised a G37 sedan for a "sign and drive" lease payment of only $288. With 6% sales tax, the total payment would be about $306 per month.
Assuming this offer was still available in March, the purchaser would have to pay the title fee up front. Given this car's $40,000 MSRP, the fee would equate to an extra $2,600 out of pocket. If rolled into the lease payment, it would raise the payment to about $415 per month, roughly increasing the cost of leasing this car by one third.
The interesting thing about this basket of tax packages is that they were specifically designed to promote businesses and competitiveness. The big winner was large manufacturers who received a break from the sales tax they pay on energy. But it is Georgia's smallest businesses and the self-employed who tend to lease cars. They are the ones who come out unambiguously worse under this proposal. It's another example of how the party of business is actually the party of big business. Small businesses that don't have lobbyists are often an afterthought.
New car dealers who pushed heavily for the law are likely to be back this session asking for a fix to the lease issue. Unlike the small businesses and the self-employed, the Dealers' Association is a powerful and effective lobby, and its members depend on sales by lease. This unpleasantness will likely be addressed some time during this session.
Charlie Harper, author and editor of the Peach Pundit blog, writes on Georgia politics and government; www.peachpundit.com.