New law would make car leases less attractive

Georgians who lease a car on or after March 1 will find themselves paying more in taxes than if they buy the vehicle outright, a change that has angered some motorists and one lawmakers are working to address.

In lawmakers’ haste to push through last year’s bill that would phase out the so-called “birthday tax” on cars, they failed to account for the nuances of car leases, which account for 34 percent of new car transactions in Georgia.

When a car is leased, the initial sales tax is rolled into the monthly payments. On a straight purchase, the consumer pays the initial sales tax and an annual property tax on his or her birthday.

The massive tax bill signed into law in 2012 eliminates both the initial sales tax and the birthday tax for car buyers and replaces them with a single title tax when the vehicle is purchased. That tax will be 6.5 percent as of March 1, and it could go as high as 9 percent if the state revenue falls short.

Under the new law, however, those who lease cars will pay the same 6.5 percent title tax when the deal is signed and will continue to pay the monthly sales tax based on their local jurisdiction’s rate. While the leasing company actually pays the title tax, that expense is typically passed on to the consumer.

While most Georgia counties have a sales tax rate higher than the 6.5 percent, a few, such as Cobb and Cherokee, assess 6 percent on purchases. People who lease cars in those counties will then pay a higher tax rate under the new law.

Even in counties with a higher sales tax rate, the overall effect would be to make leases more of a tax burden than outright buying a car and less attractive to consumers like Eric Hankinson of Roswell.

Hankinson has leased nine vehicles in the past and does his homework to determine if a lease or purchase makes the most financial sense. If the law takes effect without changes, Hankinson said it’s doubtful he’d sign lease number 10.

“It would be very discouraging for me,” Hankinson said.

John Turner of DeKalb County has much the same mindset. Under a typical lease, Turner knows he pays sales tax for the period of the lease.

“I don’t mind paying sales tax on that,” he said. “The double tax is really bad.”

Rep. Tom Rice, R-Norcross, has filed legislation to try to address the problem. House Bill 80 would lower the initial title tax on leases to 4 percent, but would not address the monthly sales tax. Negotiations are continuing among lawmakers, car dealers and companies that typically finance leases, meaning that rate could change.

Rice said the Legislature has a difficult challenge in replacing the revenue counties and cities lose from eliminating the birthday tax.

“We need to ensure there’s enough revenue on these vehicles to make up for the lost (birthday tax),” Rice said. “That’s why there’s any title fee on leased vehicles at all.”

The 2012 tax bill, House Bill 386, which also eliminates sales tax on energy used in manufacturing, grants credits for certain agricultural products, increases the state income tax exemption for married couples and collects sales taxes on Internet sales, passed the House less than two days after it was introduced. It passed the Senate two days later.

Rep. Mickey Channell, R-Greensboro, the chairman of the tax-writing Ways and Means Committee, said the size of last year’s tax bill almost guaranteed the need for tweaks this year.

“Almost every time, there will be one or two or three things that will wind up with unintended consequences, and things not turn out the way we had intended to at the time,” Channell said. “The car title thing is certainly one of them.”

Danielle Fagre, senior vice president of the American Financial Services Association, whose members include lease financing firms, said the new Georgia law would be unprecedented.

“We don’t know any other state that treats leases negatively compared to purchases from a tax perspective,” Fagre said.

Georgia, she said, has a higher rate of leases than most states. Data from Experian Automotive show 33.8 percent of new car transactions in Georgia are leases, compared to a national average of about 17 percent.

“The fact that leasing is so much higher in Georgia than the national average makes this an even more important issue,” Fagre said. “This is truly one of the issues that dealers, the financial service industry and consumers should all be on the same page.”

Several Atlanta-area dealers contacted last week referred questions on the tax changes to the Georgia Automobile Dealers Association. William Morie, president of the dealers group, refused to comment.

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