When Alan Gamblin started selling cars, he said, it was hard to persuade someone to trade in an old ride for a new one.
That was before state voters imposed a tax break on the value of traded-in property. Buyers of a new car, boat, motor home or other property who trade in the old model to knock off part of the price tag don’t have to pay sales tax on the difference.
The Enumclaw car dealer is alarmed that Senate leaders have proposed repealing the tax exemption. They call it a loophole. He sees it as a way to avoid double taxation.
“I’m old enough to know. I started selling cars in the mid-’70s, and it was just awful,” Gamblin said. “People just couldn’t understand.”
The state missed out on $315 million in tax revenue in 2008 and 2009 because of the policy, a lot of money to legislators looking for ways to fix a $2.8 billion shortfall. Senate budget writers proposed getting rid of the trade-in break Tuesday to save $92 million next year, one of the largest of 26 tax exemptions they targeted.
“The vast majority of people have no knowledge that they’re even being given this incentive,” said Sen. Rodney Tom, a Medina Democrat and vice chairman of the Senate Ways and Means Committee. “If people can afford a car, they can afford a car.”
Senate Democrats’ tax package also includes a boost of three-tenths of a cent in the sales tax. If both proposals become law, a car buyer who trades in a used car worth $10,000 – roughly the average trade-in, the Washington State Auto Dealers Association says – would pay nearly an extra $1,000.
Paying off a loan over five years would become about $200 more expensive, the association says.
Unlike many targeted exemptions, which have accrued over the years as interest groups persuaded legislators to give them a break, voters approved the trade-in exemption.
Tom noted voters have passed plenty of initiatives since that 1984 vote, some calling for increased spending on public schools. Democrats say they’re calling for higher taxes to protect spending on schools, college grants, health care, and other state services.
Not only auto sales would be affected. Farmers would pay more when trading in machinery, one reason Sen. Mark Schoesler, R-Richland, called the Senate budget “a declaration of war on agriculture.”
Lawmakers should be encouraging spending to stimulate the economy, critics said.
“It’s a great tool to get people to purchase large items,” Holli Johnson, legislative liaison for the nonprofit Washington State Grange said.
There are pros and cons to repealing the tax, said Marilyn Watkins, policy director for the Economic Opportunity Institute, a think tank that has argued for eliminating tax exemptions. It avoids regressive taxation, she said, since it skews toward affecting larger purchases.
“Most of the low- to moderate-income people that I know don’t go to the brand-new car lot and trade in their older car,” Watkins said. “They often buy a used car to begin with – I suppose it’s off of Craigslist now – and you can get a better deal by selling your car yourself.”
Jordan Schrader: 360-786-1826