FRANKFORT — A state tax break designed to spur more new-car sales for the ailing auto industry has had a slow first month and probably will not cost the state as much as expected in lost sales tax revenue.
Car dealers aren't complaining, but they say more needs to be done to alert potential buyers about the one-year program that gives buyers a tax break when they trade in used cars for new ones.
"I don't know that the public really knows about it," said Mel Lehrner, operations director of Thoroughbred Chevrolet in Lexington. "It's a great program. I don't think it's really been promoted."
Under the program, which began Sept. 1 and ends Aug. 31, buyers pay sales tax only on the difference between the value of their trade-ins and the price of their new vehicles. Used-car buyers have had the same benefit for years. The provision was tacked on to an omnibus incentive program passed during the special legislative session this summer.
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According to the state Department of Revenue, $1.5 million of the tax credit had been used as of Tuesday; expectations were $2.5 million a month. Now, state budget officials think the credits will cost $16 million by the time the program expires instead of the expected $25 million.
Car dealers said this week that although the sales tax break doesn't bring people into the showrooms, it has helped them sell new vehicles.
"We had a buyer recently where we were trying to get them to a certain payment," said Eric Smith, a finance manager with Glenn Auto Group, which has four locations and six car lines in Central Kentucky. The savings that the tax credit generated made it possible for the buyer to get the car he wanted, he said.
"Every little bit helps our customers," Smith said.
Ronald Johnson, president of the Kentucky Automobile Dealers Association in Frankfort, said Kentucky buyers have long known they will save on sales tax if they trade in a used car for another used car that is worth more. Buyers have to be educated that the same savings are available now on a new car.
"I think the other thing that you have to remember is that a lot of dealers' new-car inventory was depleted after the Cash for Clunkers program," Johnson said.
The federal program that gave buyers an incentive to trade in high-mileage older cars for more fuel-efficient cars was well-publicized. It also came with savings in the thousands of dollars. The state program saves buyers hundreds of dollars, Smith said.
Johnson and Rep. Bob Damron, D-Nicholasville, said the state might need to look at making the tax program permanent. Surrounding states such as Ohio have long allowed those who trade in old cars for new ones to pay tax only on the price difference.
"People see this as a dealer issue," Johnson said. "But it's the consumer who pays that tax."
Damron, who has many car dealerships in his district, said earlier this week he expects more people will take advantage of the sales tax credit as they become aware of it.
"As time goes on, I think it really is going to move some cars," he said. "I think people are still really cautious right now about spending. I also think that it's a fairness issue. If you get the tax credit on a used car, you should get the tax credit on a new car."