Press Release

"Auto Purchases and Local Sales Taxes: The Sky Isn’t Falling But it is Close"

A week ago the New York Times reported that an analysis of new vehicle sales showed that Californians disproportionately tapped into the equity of their homes when making new automobile purchases.  While 11.8% of autos in 2007 were financed in the rest of the country by purchasers tapping into the equity of their homes, during the same time 29.8% of new vehicle sales in California were bought by making a trip to the home equity ATM.  With home values falling and credit lines drying up, that is a data point that demands watchdogs sit up, pay notice, and think about what it means for the fiscal health of several San Diego municipalities.  Finance directors throughout the County should be shouting loudly at city managers and council members that there is a significant danger that the diminished ability of consumers to take on $20,000 to $30,000 in debt for a new auto will negatively impact new vehicle sales and, in turn, reduce the sales taxes that are generated from such purchases.

No city in San Diego County is at more risk because of the slowing sales of new vehicles than National City.  According to the Cities Annual Report from the California State Controller, for the fiscal year ending June 30, 2006, 48% of National City’s general fund revenue came from sales tax.  Nearly half of this (44%) came from the sale of motor vehicles and motor vehicle parts.  In contrast, the City of San Diego has a much more diversified tax base, with only 20% of its general fund revenues coming from sales tax.  Thought of in another manner, whereas the City of San Diego had per capita sales tax collections of $124, National City collected $215.  Even accounting for the sales tax increase that National City levied in 2006 (which does not apply to automobiles), the data indicates that National City finances are particularly vulnerable to a downturn in the ability of San Diegans to purchase durable goods like automobiles.

While National City is in a league of its own, other cities are also at substantial risk.  Escondido derived 38.4% of its FY 2006 general fund revenues from sales taxes and vehicle and vehicle parts accounted for 34% of all taxable retail sales.  Poway, with the concentration of auto dealerships along Poway Road saw 28% of its taxable retail sales (which make up 34% of its general fund) come from auto related transactions.  Prolonged and sustained downturns in the auto market will have significant impacts on these communities as well as La Mesa, El Cajon and, to a somewhat lesser extent, Carlsbad.

On top of the credit crunch, consumer confidence is particularly negative.  Alan Gin of the University of San Diego reports that consumer confidence in San Diego has declined 12 straight months.  Moreover, since the start of 2008, the pace of decline has accelerated.  This is similar to national measures that show Americans, suffering under price spikes in food and energy, are growingly particularly pessimistic about future economic conditions.  While the near-necessity of automobile ownership in Southern California and normal wear-and-tear will create a baseline demand for new vehicle purchases, it is unlikely that sales in San Diego will show signs of any significant turnaround over the next 12 months.

In such an environment it is critical that municipalities throughout the region retrench and avoid making the kind of long-term commitments that could come back to seriously bite them if the downturn in real estate values and durable good sales remains pronounced and prolonged.  Number one of the list of “thou shalt not do in a time of uncertainty” for city managers and finance directors is signing multi-year employee contracts with back-end raises.  While inflation is hurting everyone, there is simply too much uncertainty as to when real estate values and consumer confidence will rebound to lock into place agreements that will require robust revenue growth if budgets are to remain balanced.  The second deadly financial sin would be taking on new debt.  Not only is short term revenue growth problematic, the municipal bond market is extremely unsettled.  Several municipalities have been burned by auction price bonds and debt service payments far in excess of what was originally forecast. 

Eventually real estate values in San Diego will recover.  With values having retreated to 2003 levels, there are still thousands of San Diegans that have seen the value of their home rise significantly above what they paid.  However, at least in the short term, the ability of San Diegans to tap into the home equity ATM is problematic and city budget makers should take head and trim their sails.  Anything else would be irresponsible and would fly in the face of the realities of the economic slowdown.

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