Tracking the Recession: Car Dealer Closings Will Add to State Budget Woes

Just when many state governments are weeks away from the start of another budget year, a new crisis has emerged that threatens their finances: the closing of nearly 2,000 automobile dealerships.

Coupled with the slowdown in automobile manufacturing and sales, the dealership shutdowns recently announced by General Motors Corp. and Chrysler will have a deep impact on state and local governments already enduring what may be the worst recession since the Great Depression. Consider that a fifth of California’s sales tax revenue is from new and used car sales.

“As these local dealerships close, the impact will be more profound than people realize,” said Sen. Mark Norris, the Republican Senate majority leader in Tennessee. Chrysler is planning to close 14 dealerships in his state.

To improve profits, Chrysler, which has filed for bankruptcy protection, said it will close 789 dealerships throughout the country by June 9. GM has not released the list of 1,200 dealers it plans to shutter. Until now, Michigan and other upper Midwest manufacturing states have borne the brunt of the auto industry tumult, but the demise of the dealerships widens the scope of the problem. It’s expected to put about 100,000 people out of work nationwide.

These additional job losses worsen the predicament of state governments, which already collectively have to cut billion in the budget year that ends June 30 and another billion in FY 2010. Not only do lost jobs siphon precious tax revenue from states, but they increase state spending if the unemployed worker seeks benefits or services.

“The bottom line is: Revenue is going to go down and spending is going to have to go up. It’s a tough scenario for states to deal with,” Scott Pattison, executive director of the National Association of State Budget Officers, said.

Dealers often are keystones of their communities, “with some of the better jobs available,” said Paul Taylor, chief economist of the National Automobile Dealers Association in Virginia. A single dealership employs up to 100 people and averages .5 million a year in state and local taxes, advertising expenditures and charitable contributions. Dealers collect taxes on auto sales, parts and repairs. Their employees pay state income taxes in most states. Car-buyers pay titling fees and in some states, a personal property tax.

New Hampshire lawmakers were first to attempt to help car dealers. The bill, signed May 6 by Gov. John Lynch (D), allows local dealers to continue servicing vehicles even if they no longer sell cars. If a dealer closes, the bill requires the automaker he or she represents to buy back inventory delivered in the last two years, which helps the dealer stay on his feet to re-open as a used car lot or repair shop.

“Whether voluntarily closing or not, these dealerships will find it easier to reduce floor inventory, manage long-term leases, and recover the costs of stocked parts. They will now more easily convert their dealerships to other auto-related businesses, potentially saving many New Hampshire jobs in the process,” said Peter McNamara, head of the New Hampshire Automobile Dealers Association . His state is losing six Chrysler dealerships.

The Obama administration, which has named former University of Maryland dean Ed Montgomery director of recovery for auto communities and workers, announced May 21 that million in stimulus money would be made available to help train auto industry workers to change to energy jobs. Montgomery made the announcement in Ohio, a state hit hard by the auto manufacturing slump.

According to the Alliance for American Manufacturing, the auto industry supports 7.2 million jobs in a wide network of suppliers and service workers, In 19 states, auto supply manufacturers are among the top five industrial employers. Those workers eat in restaurants, buy clothes for their kids and get their teeth cleaned, activities that create other jobs. The ripple effect is more like a wave: U.S. Rep. Tim Ryan , a Democrat from Ohio, said the loss of two shifts at a GM plant in Lordstown since last summer caused the unemployment rate in Trumbull County to double from 7 percent to 14 percent.

In Michigan alone, the loss of 20,000 additional hourly jobs in the automobile sector could cost the state budget million in revenue, the director of the Senate fiscal agency told lawmakers May 15. But Michigan is not alone.

“This jobs crisis goes deeper than auto companies and assembly workers in Detroit,” Leo Gerard, president of the United Steelworkers, said. “Reducing U.S. auto manufacturing drives down overall employment, from the people who make auto catalogs and shipping boxes to workers making glass for windshields, rubber for tires and other materials.”

State Rep. Marlin Schneider, a Democrat from Wisconsin, said the shutdown of a GM sport utility vehicle plant in Janesville would affect everything from paper companies that print brochures to electric companies.

“The demand for electricity is going to go down in that area, which will raise rates on ratepayers,” Schneider said. “Wisconsin is going to get hammered by that (the plant closing) and the closing of these dealerships.” Chrysler is closing 18 dealerships in Wisconsin.

Even the South will not escape the impact from dealership closings and slumping sales. In recent years, the auto industry has thrived in southern states, fueled by foreign carmakers such as Toyota, Nissan, BMW and Honda. Southern states offer tax breaks, low union membership, milder weather and a cost-effective transportation network, especially access to ports, said Sujit CanagaRetna, a senior fiscal analyst in the Council of State Governments’ Southern office.

In February, Tennessee lawmakers authorized selling million in bonds to finance infrastructure the state pledged to lure a Volkswagen plant in Chattanooga and a semiconductor factory in Clarksville. Norris, the Senate majority leader, said as the session is winding down lawmakers have been second guessing their commitment.

“In the same session we approved the bond issue, some members are now questioning whether that’s prudent,” the west Tennessee lawmaker said. “Even more theoretical, they’re asking whether we should focus redevelopment efforts on different technologies such as solar instead of automobiles. I’m not sure if that’s not an overreaction to the cooling off of the automobile industry.”