The specter of paying more for your car tags may not be high on the public radar yet but state legislators and county officials are well aware of the situation.

The increase is a direct result of the decline in new car sales, according to the state tax commission and numerous local government officials.

With car sales at their lowest in years the Mississippi State Tax Commission has decided to decrease the percentage of tax reimbursement, which keeps the price of car tags lower for county residents, said Kathy Waterbury, spokesperson for the Mississippi State Tax Commission.

Waterbury said each time a new car is sold a percentage of tax on that sale is sent to the Tax Commission who in turn sends that money to each county.

Pearl River County Tax Collector Gary Beech laid out the problem facing local governments when the reduction in the state car tag discount goes into effect July 1, 2009.

Using 2009 figures from Pearl River County’s legislative tag credit settlements, Beech showed the funding decline for Pearl River County.

In January tag settlements were at 88.59 percent, a shortage of $39,191.41 in tag receipts. By February settlement amounts received had dropped to 57.29 percent, a $144,200.10 shortage. March continued to drop with a 24.54 percent figure, or a $286,222.62 shortfall in monies the county has not seen in rebates.

Based on this trend in rebate settlements, Beech is not sure if there will be any tag settlement coming in April. He questioned if the legislature would have enough time to resolve the problem to allow the tax commission to refigure the rebates coming back to the county.

He said in a stable business cycle there is a normal stream of new cars sold each month and the next tax year the cycle starts again. Now, with the slump in car sales, older cars are depreciating and less money is being collected because fewer new cars are being sold. This keeps county tax income from staying steady or rising.

“… every car in the county is getting older and the new ones (being sold) really aren’t enough for the fall in assessed value,” Beech said.

To illustrate the change caused by the different tax rates, Beech used a car with an assessed valuation in 2008 of $3,348.

Under the previous rate of 5.5 percent the vehicle had a discount credit of $184.14. With the new discount rate of 3 percent the credit would be only $100.44, a difference of $83.70.

That difference increases the cost the owner of the car pays for their car tag, Beech said, placing the new tag cost at $475.59 instead of $391.89 at the old 5.5 percent rate.

The total amount owners pay for their tags varies from county to county because of the model of the vehicle, its age, the taxing district of the resident owning the vehicle and other variations, he said.

He said most people are only vaguely aware of the issue and probably will not be aware of any changes until they get tag renewal notices, beginning in July.

Beech said taxpayers had to wait until they received that tag renewal notice before paying for the tag. His office receives the white tag renewal cards from the state and then mails them to the taxpayer.

The new Legislative Tag Credit rate of 3 percent was adopted at the regular meeting of the State Tax Commission on April 14, according to a copy of a tax commission letter received by Beech’s office. That letter said the commission by law has to set the amount of the tag credit on or before May 1 each year.

The credit formula was set up by state law in 1994 as the Motor Vehicle Ad Valorem Reduction Fund increased the sales tax on new and used vehicles to 5 percent, Beech said. A large portion of that tax goes into the reduction fund each year and is rebated back to the counties to make up for the loss in local sales tax on car sales.

These funds make up part of the budgets of counties, cities and schools.

Waterbury described the change in the reimbursement as something like a coupon. She said the change would reflect a coupon that once gave a customer a 50 cent discount on an item that is worth a dollar, but now is only worth a 25 cent discount for the same item.

Waterbury said if car sales did increase a change in the percentage rate would still be a year away because of when the Tax Commission decides what the discount rate will be.

This new discount rate of three percent will be the lowest since its inception, she said.

Beech said the problem in reduced funding started with the extreme drop in new car sales caused by the slump in the economy. This was exacerbated locally because there was a jump in sales tax collections following hurricane Katrina. He said after Katrina Pearl River County was recording over $1 million a month in vehicle sales. That now $200000 to $300,000 less a month, now.

“It proceeded to fall off just as sharply as it increased and then with the current economy … new car sales have just plummeted; there is no sales tax to put in the (reduction) fund.”

Based on these projections, the county budget could be $750,000 short in funding at the end of the budget year in September, Beech said.

If nothing is done about the shortfall, consumers will make up the difference in higher tag fees, or the shortfall will be made up from other revenue sources, Beech said. His opinion is that the solution should not be tied to the cigarette tax or other tax but should be settled with “whatever money is available.”

He says the amount needed to replenish the tag reduction fund is approximately $30 million, a figure supported by six of the area’s legislators, Representatives Herb Frierson, Mark Formby and Dirk Dedeaux and Senators Ezell Lee, Sid Albritton and Billy Hudson.

Frierson said the reduction formula is a tax swap and not a tax break.

“It’s revenue neutral to the taxpayer. You pay more on the front end but you save money on your car tag over the life of the vehicle. All but $15 of a car tag goes to local government. It’s not a state revenue stream, it’s a local government revenue stream with a $15 charge to the state on it for road and bridge privilege.”

The flaw in that system, Frierson said, is that a continuation of car sales is needed to replenish the tax reduction fund. Now car sales “have fallen off table.” Frierson says the $30 million to replenish the pool will maintain it at the level needed.

“I’m for doing that,” he said. “And I’m for doing that by whatever funds are available to the state to do it with. … even if it causes problems elsewhere in the budget … even if that means voting not to adjourn.”

He said the current reduction in the pool will correct itself as the economy recovers.

State economists are telling the legislature that the bottom of the recession will come in the fall, “hopefully,” Frierson said. Those projections are based on a comparison of this recession to the one that happened in 1979 and ended in the mid 1980s. If the recession is longer, the state will have to find the money somewhere in the general fund, Frierson said.

Formby agreed.

Since new car sales are down, the formula is not putting any money into tax reduction fund, therefore money used to reduce tag cost “is going away,” he said.

People want to know why their car tags are going up, Formby said.

“It’s not that we’re raising the price (of the tags) — the price is the same — but the offset money has vanished.”

“Nobody is actually going up on anything. We’ve been subsidizing it by half and the money we’ve been using to subsidize it is now gone away, … but nobody’s doubling the price of the car tags … .”

Formby said there were two options available: Allow the new 3 percent rate to stand so the consumer pays more for car tags so counties continue to get the tag rebates money, or find that $30 million shortfall “somewhere,” put it into the tag fund, and hopefully not have to do it again next year.

Formby said locating $30 million before July 1 before the 3 percent deduction takes effect is the option being explored now by both houses of the legislature, both political parties, and the governor’s office.

“I, like everyone else in the legislature and the governor’s office, am trying to find a source for the $30 million dollars, remembering that if we take $30 million dollars and put it into the car tag fund” that money has to come from another part of the budget that will have to be replaced or reduce another area of government funding, or $5 million from six places.

Dedeaux is in favor of finding a source of funding to ease the hit on taxpayers but the question is what is the best way.

Dedeaux supports a significant increase in tobacco tax to create a stream of revenue for the state, although he understands the danger in adding more taxes now because of weak economy.

He pointed to Mississippi’s tax on tobacco as the second lowest in nation at 18 cents and said the time had come to bring that up to the national standard.

As the state doesn’t have tobacco industry to be hurt by tax, “That’s the most obvious place to get revenue in my mind at this point,” Dedeaux said.

Hudson believes the legislature will reach a compromise and thinks the funding will come from some agreement on the tobacco tax.

He did say that if the tobacco tax ended up not being viable, another way would be to use money from the “Rainy Day” fund, although that was not an attractive option and could be open to a veto from Gov. Haley Barbour.

“I’ll vote for it (the tobacco tax) if its 64 cents or if its 75 or if its anywhere between.”

“Nobody up there, nobody, Democrat or Republican, liberal or conservative, I don’t think there’s a person in either house that wants to raise car tags. Car tags are too high, we all know that, and it would be a very bad thing to do it.”

Albritton agrees that something needs to be done but said the issue should have been addressed sooner. He said Lt. Gov. Phil Bryant kept saying the tag issue was looming but the legislature was slow in picking up on the warnings.

Albritton puts a cigarette tax increase at the top of the solutions offered but would accept using some portion of general fund monies as an alternative. He did say there appears to be little opposition to use of the cigarette tax, just in getting agreement on how much to raise it.

Lee was more blunt about the matter.

“We have got to do something about these car tags and they are sitting up there today, I can assure you, and they’re arguing over 5 cents on a pack of cigarettes, … but it’s all about politics and they’re wasting people’s money and time,” he said.

“But I can assure you when we go back at the first part of May to complete our appropriation process something has got to be done, or the people are going to revolt.”

Lee said he plans to support finding $30 million dollars to keep tags from rising or whatever is necessary, such as by raising the tax on cigarettes.

Waterbury said if the legislature decides to approve the increase in cigarette tax then that could stave off the increase in rates motorists would pay. Waterbury would not know any more about the cigarette tax until the sometime after the legislature reconvenes on May 4.