Kentucky Offers New Tax Breaks to New Car Buyers

In Kentucky, a new state tax break aimed at boosting new car sales has, so far, had less impact than expected and will likely cost the state far less than expected in reduced sales tax revenue.

Although new car and truck dealers are appreciative of the effort, may say that the state needs to do a better job of informing consumers about the program. Thoroughbred Chevrolet’s director of operations Mel Lehrner says, "It’s a great program. I don’t think it’s really been promoted. I don’t know that the public really knows about it.”

The year-long program, which launched on August 31, allows new car buyers to pay sales tax only on the difference between the price of their new vehicle purchase and the value of their trade-in. The tax structure has been applied to used car and truck purchases for years and was expanded to include new vehicle purchases as part of an omnibus incentive program by a special session of the state legislature this past summer.

According to the Kentucky Department of Revenue, only $1.5 million of the appropriated tax credit was used through October 13. The agency had originally expected that amount to average $2.5 per month over the life of the program. Based on the initial figures, budget officials now estimate the program could cost the state about $16 million instead of the $25 million they had originally anticipated.

Despite the apparent lack of awareness, most new car dealers have reported that the program has helped them seal some deals even if it hasn’t increased foot traffic in their showrooms.

Finance manager Eric Smith with Glenn Auto Group of central Kentucky says, "We had a buyer recently where we were trying to get them to a certain payment." The tax credit allowed the dealer to structure his payments to meet his budget. Smith says, "Every little bit helps our customers."

President of the Kentucky Automobile Dealers Association, Ronald Johnson, says that used car buyers have long been aware of the sales tax savings available when trading in a used vehicle for another of greater value but says they need to be educated about the new program that offers the same tax benefits to new car buyers.

Johnson also speculates that the program may be hampered by the current lack of availability of some new car models. He says, "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."

He also speculates that the current state-run incentive program, which can save new car buyers hundreds of dollars, may not have the appeal of the recent federal Cash for Clunkers program, which offered thousands of dollars of savings. Smith also points out that the federal Cash for Clunkers program was well publicized compared to the current state sponsored incentive program.

State Rep. Bob Damron (D-Nicholasville) suggests that Kentucky might need to consider making the program a permanent part of the state’s tax code and points to neighboring states, including Ohio, that allow new car buyers to pay tax on only the price difference between their trade-ins and new vehicle purchases. Ronald Johnson agrees and says, "People see this as a dealer issue but it’s the consumer who pays that tax."

Rep. Damron, who owns a number of new car dealerships, expects the program to generate more sales as public awareness increases. He says, "As time goes on, I think it really is going to move some cars. I think people are still really cautious right now about spending.”

As for making the current program a permanent part of the state’s tax code, Damron says, “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."

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