Md. thwarts bids to save on car costs State shoud change unfair tax system that overchanges customers on leased autos

March 08, 1998|By Christopher Pummer

If you've ever leased a vehicle in Maryland, no matter how great a deal you think you got, you got taken for a ride.

Don't go running back to the dealership. It wasn't the dealer in this case who fleeced you.

The culprit is the state of Maryland, which hits unwary consumers who opt to lease with a tax premium of up to $1,000 or more for making that choice.

Auto leasing is already complicated enough, which makes it ripe for exploitation by unscrupulous dealers. Momma might not have raised any dummies, but she also didn't have to contend with such terms as capitalized cost reduction, residual values and money factors before she drove a new Chevy Impala off the lot back in the good ole days.

Recognizing the need to better protect consumers, the Federal Reserve Board this year enacted "truth in leasing" laws requiring dealers to provide a cursory explanation of certain lease contract terms.

The Fed's reach, however, does not extend to state tax policies. If it did, that agency might well mandate "truth in taxing" laws to force several states, including Maryland, to disclose how they tax auto leases more heavily than they do new car purchases.

Leases account for more than 30 percent of the state's new car sales, according to the Maryland New Car and Truck Dealer's Association. An estimated 100,000 residents every year are thus being subjected to a discriminatory tax policy.

How did the tax system come to be? In large part, because of a predilection for taxing the wealthy once prevalent in the state's Democrat-controlled General Assembly.

Before 1990, the only parties who generally entered into auto leases were businesses and wealthy individuals, in many instances to take advantage of federal tax benefits. To raise revenue for the state Transportation Trust Fund, Maryland levied its own tax on lease contracts and monthly lease payments.

The problem is that state officials failed to foresee how wildly popular leasing would become.

The majority of leaseholders in Maryland today are middle-income residents, for whom a car payment is often the second-largest household expense after their mortgage or rent. People with $25,000 in annual household income can qualify for leases on economy cars and trucks touted in dealer ads for as little as $99 a month.

The state, in short, is no longer just soaking the rich, it's soaking everybody who leases.

So just how does the state rear-end leaseholders? Take as an example the average-priced car sold in Maryland, which has reached a staggering $20,000.

The state Department of Transportation collects a 5 percent titling tax on both lease contracts and new car purchases, so leaseholders pay the same $1,000 tax on that vehicle as new car buyers. In actuality, they pay that tax on behalf of the bank or lease financing company that holds title as the registered owner.

The wrinkle is that, unlike new car buyers, leaseholders are only "buying" a percentage of the vehicle -- essentially the value lost during a two- or three-year lease period. After two years, that $20,000 vehicle might be worth $16,000, so an equitable tax would be 5 percent of the $4,000 difference, or $200. Since it's not, the state realizes an $800 windfall.

To make matters worse, people who elect to purchase their vehicle when their lease expires face a rude awakening. The state again imposes the 5 percent titling tax at that time, with no credit given for the tax already paid. The secondary tax on the 2-year-old vehicle now worth $16,000 amounts to another $800, top of the $1,000 paid two years prior.

A bill introduced this year in the General Assembly provides a partial remedy to the problem by abolishing the tax on leaseholders who exercise their buyout option.

"We owe it to Marylanders to eliminate unfair taxes whenever we can," said Del. Robert L. Frank, a Baltimore County Democrat and the bill's co-sponsor. "This is the quintessential unnecessary tax."

The measure faces a singular, but formidable opponent in the Maryland Department of Transportation (MDOT), which stands to lose a projected $3 million to $5 million in annual revenue if it is adopted.

MDOT representatives were the only parties to testify against the bill at a House Ways and Means subcommittee hearing last month. They conceded that the tax structure is not fair, but the department is counting on lawmakers to overlook that fact and choose instead not to bite the agency that feeds them.

"It's double taxation, but it's also a cash cow for the Department of Transportation," said Del. Thomas E. Dewberry, a Baltimore County Democrat and the bill's other co-sponsor. "Legislators very much treasure transportation money for when constituents come asking for road improvements, bridges, repairs or sound barriers. They don't want to be at odds with the department, on one hand asking for money for their district."

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