Car chargeLawmakers balk at abolishing tax on auto leases 04/16/2001 By Terry Box / The Dallas Morning News Walt Capps grimaces when he gets the annual tax bill on his leased car – even after 20 years of them.
And his irritation is particularly acute these days. Two years ago, Texas voters approved a constitutional amendment that abolished the tax, but it is still being levied on leased vehicles – and adding about $50 a month to most lease payments – because the Legislature has not yet rescinded the tax.
"I think it's unfair," said Mr. Capps, 67, a Richardson real estate agent who uses his 1997 Buick LeSabre in his job. "If I had bought the car rather than leased it, I wouldn't be paying the tax."
Called a "business personal property tax," the levy was enacted decades ago when automobile leases were used primarily by businesses.
But about 20 years ago, leasing started to become an attractive financing alternative for consumers, and private individuals now hold about 63 percent of the new-vehicle leases in Texas.
Nevertheless, they are subject to the business tax, which averages about $570 a year and is determined by the value of a vehicle.
The tax is collected as part of the monthly lease payment or as an annual bill.
In November 1999, a solid 57 percent majority of voters approved the constitutional amendment, which was supposed to rescind the tax on personal leased vehicles.
David Blassingame, chairman of the Texas chapter of the National Vehicle Leasing Association, said he is "cautiously optimistic" that the Legislature will approve "implementing legislation" this session to revoke the tax.
Without it, the tax cannot be abolished – despite the vote two years ago.
"I'm a little surprised and a little disappointed that since the people voted on it two years ago, we're having this much trouble getting it through the Legislature," Mr. Blassingame said.
Attractive option
Leasing is attractive to some consumers because it often allows them to buy a more expensive vehicle than they might otherwise be able to afford.
For others who regularly use their vehicles in their business, leasing offers tax advantages.
In figuring lease payments, a vehicle's residual value – the amount it is estimated to be worth at the end of the lease – is subtracted from its selling price, and the customer pays the difference over the life of the lease.
If a $30,000 vehicle will be worth $18,000 at the end of a three-year lease, for example, the customer pays the $12,000 difference plus interest over the three-year lease.
The customer's lease payment would be about $380 a month – except in Texas, where it would jump to about $430 a month with the tax.
Mostly because of the tax, leasing may be even less popular in Texas than some estimate.
"We think leasing nationally accounts for 32 to 33 percent of sales," said Mr. Blassingame, who also is a senior vice president at Autoflex in Richardson, which specializes in vehicle leases.
"In Texas, it's about half that," he said. "It's not as much an option here [for consumers] as it is in other states."
The issue for the Legislature is revenue.
The annual tax on leased vehicles generates more than $36 million in revenue statewide that is used by school districts, county governments and other public entities.
In the four-county Dallas-Fort Worth area – which accounts for nearly 44 percent of all new-vehicle leases in Texas – the tax provides governments with nearly $19 million in revenue annually.
Until the Legislature can find a way to replace that revenue, it is probably not going to approve a law abolishing the tax, said Drew Campbell, president of the New Car Dealers Association of Metropolitan Dallas.
"Everybody who was involved in this knew from the outset that ... [state lawmakers] were going to have a problem with it," said Mr. Campbell, who spends every legislative session in Austin representing the interests of Dallas-area dealers.
"There's a $30 million price tag on this, and the Legislature does not want to spend $30 million on it," he said.
"Honestly, I don't think there's anything deceptive going on here. There's just 30 million reasons why it can't get anywhere."
Compromise proposal
State Sen. John Carona, a Republican from Dallas who supported the constitutional amendment and is a sponsor of enabling legislation that would end the tax, has proposed a compromise bill that would kill the tax for two years.
At the end of the two-year period, the Legislature would have to extend the ban or the tax would be reinstated.
While not exactly what voters had intended, the compromise may be tax opponents' best hope for this session, said John Krueger, an aide to Mr. Carona.
The loss of tax revenue "is a legitimate concern for the Legislature in these tighter fiscal times," Mr. Krueger said.
"Sen. Carona had hoped that the strong message from voters in 1999 would convince the Legislature that this is what voters want," he said. "We just want to get a bill passed."
Market share
Even if the tax on leases is ultimately abolished, though, some in the industry doubt that they will gain much market share in Texas.
Balloon-type payments, which offer many of the same benefits as a lease, often at a lower overall cost, have filled leasing's void in Texas, dealers say.
The balloons are not subject to the lease tax but are figured the same way as a lease – with the buyer paying the difference between a vehicle's retail price and its residual value at the end of a three- or four-year period.
The final payment in a balloon is the vehicle's entire residual value.
Consumers can opt to pay the residual – either with cash or another loan – or they can trade the vehicle on a new one.
In addition, many balloons require smaller down payments than leases.
And unlike leases, balloon-payment buyers hold a copy of the title and are viewed as owners rather than leasors of a vehicle.
Ford's balloon financing, called the Red Carpet Option, was developed specifically for the Texas market because the of the lease tax, said Jerry Reynolds, managing partner of Prestige Ford in Garland.
"Red Carpet Option accounts for about 60 percent of our sales," Mr. Reynolds said. "I wouldn't do any more leases if the law were changed."
General Motors' dealers in the Dallas area also have come to rely heavily on balloon financing, which GM calls Smart Buy.
At Frank Parra Autoplex in Irving, for instance, about half of the GM new-vehicle purchases over $35,000 are made through Smart Buy, said Ken Thompson, head of the Thompson Group at Parra, a special sales division.
"Anyone who gets a new vehicle every three or four years, it's a more economical way of buying," Mr. Thompson said.
Still, there is a role for leases in Texas – even with the tax, dealers say.
"Only about 5 percent of our sales are on leases," said Barry Pryor, president and general manager of Sewell Lexus in Dallas. "But for some business people, they are a good option."
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