The cost of buying a car or watercraft in Michigan is expected to be gradually reduced under legislation reducing the sales tax on new vehicle and boat purchases. (Charles V. Tines / The Detroit News.)
Lansing— The cost of buying a car or watercraft in Michigan is expected to be gradually reduced since Gov. Rick Snyder has changed positions and is promising to sign legislation reducing the sales tax on new vehicle and boat purchases.
The “tax on the difference” proposal — overwhelmingly approved by the House and Senate — is touted as a way to spur business by allowing the value of trade-ins to be deducted before dealers calculate and collect the 6-percent state sales tax. Buyers currently pay sales tax on the full purchase price.
“Money saved by Michiganders will make getting a new car more affordable for many people, including those who need a vehicle of their own to get or keep a job,” Snyder said in a statement.
The legislation was held up for months as its backers negotiated a deal to ease the Republican governor’s worries about the estimated annual loss of $220 million in revenue for the state budget when it is fully implemented.
Snyder spokeswoman Sara Wurfel said the key to the governor’s change of heart was lawmakers’ willingness to lengthen the number of years when the switch will be eased in.
Under bills that sailed through the House and Senate this week, the policy change will take effect over 24 years starting in December. Earlier versions of the proposals called for a five-year or 10-year break-in period.
Rep. Andrea LaFontaine, R-Columbus Township and chief sponsor of one of the two bills, hailed its passage as a step toward tax justice for consumers. LaFontaine argued Michigan vehicle and watercraft buyers “have been unfairly double-taxed when trading in to buy a new or used vehicle.”
“Michigan’s policy of charging the full sales tax on purchases involving a trade-in just takes more money out of the budgets of families,” she added.
At LaFontaine Cadillac Buick GMC in Highland, General Manager Robert Milner predicted the sales tax reduction will add an incentive for prospective buyers to drive away in new cars or trucks. The dealership has 1,200 new cars and more than 225 used vehicles for sale.
The average vehicle on the road is 11.4 years old, according to Southfield-based market research firm Polk.
“Those are people who own those cars — they’re not leasing,” Milner said. “That means there’s a lot of equity out there on the roads that’s not going to get taxed now.”
Michigan is one of six states that taxes the full price paid for a new vehicle or boat. Border states and the Canadian province of Ontario tax vehicle sales on the difference between the new-vehicle price and the value of a trade-in, LaFontaine said.
Here’s how the new law will work when Snyder signs it:
■In the first year, the deduction allowed for trade-ins will be limited to a maximum of $2,000. A trade-in worth that maximum would result in sales tax that will be $120 lower than if it were calculated according to current law.
■In each subsequent year, the maximum allowable trade-in value will be increased by $500 (or $30 per year in additional savings). When fully implemented, the change-over will allow trade-in value as high as $14,000 to be exempted from the sales tax.
As part of the deal, lawmakers added a provision saying the trade-in allowance increases will end if Michigan’s Medicaid expansion law is repealed, said Ari Adler, spokesman for Republican House Speaker Jase Bolger of Marshall.
The expansion law, set to take effect in the second quarter of 2014, makes more than 400,000 additional Michiganians eligible for public-funded health care coverage. It can be repealed, however, if the federal government doesn’t approve the state’s unique version of the expansion or if the long-term state costs for it exceed expected early-year savings.
The Snyder administration projects savings of $200 million annually from the expansion — similar to the amount of revenue lost when the vehicle tax-on-the difference law is fully effective. The savings will be realized because the federal government will take over Medicaid mental health care benefits now funded by the state.
The tax-on-the difference bills are expected to reach Snyder’s desk by the end of the month, their sponsors say.