Image: Clunkers
Carlos Osorio  /  AP
Cash for Clunkers held some promise — customers bought nearly 700,000 new vehicles during late July and August, taking advantage of rebates of up to $4,500 on new cars in return for trading in their older vehicles.
updated 10/11/2009 1:32:12 PM ET 2009-10-11T17:32:12

Struggling states and towns got a dose of badly needed money this summer from a Cash for Clunkers program that poured hundreds of millions of dollars of tax revenue into their budgets.

Now, like the auto industry, recession-ravaged governments are seeing revenue fall off as car buyers take a breather from the frenzied sales of July and August. That means less money for schools, roads, public safety and other projects that get much of their funding from sales tax collections.

And while officials welcomed the shot in the arm, the extra clunkers money won't come close to filling the gaping holes in their budgets or do much to solve the worst revenue downturn in decades.

"It is chump change," said David Zin, an economist with the Michigan state senate's fiscal agency.

State and city officials say their budget problems are too severe for one government program to fix.

"Fifty-thousand is not to be sneezed at," Dean Rich, finance director of O'Fallon, Ill., said of the city's expected tax gain from its 16 car dealerships. But it's not enough to prevent a job freeze and cuts to capital projects for the town of 29,000 people.

"It's not the windfall that is going to fix the $1 million shortage we have this year," he said.

Like most governments, O'Fallon suffered during the recession as people facing job losses, reduced pay, lost homes and general unease over the economy snapped their wallets shut. That means big drops in sales tax, which makes up around half of many state budgets. Sales of cars and trucks, big-ticket items with high price tags, are a big component of sales tax collections.

Cash for Clunkers held some promise — customers bought nearly 700,000 new vehicles during late July and August, taking advantage of rebates of up to $4,500 on new cars in return for trading in their older vehicles. The program ended up tripling the size of its original $1 billion price tag due to its broad popularity. For government budget offices, that represented some rare good news.

The auto forecaster Edmunds.com estimated that the average clunker sales price was $26,321, meaning roughly $18 billion worth of new vehicles were sold under the program. Multiplied by the average combined state and local sales tax of 7.5 percent, the total tax bill amounts to a loose estimate of $1.36 billion.

But here's some perspective — the budget shortfall of Michigan alone, the symbolic heartland of the U.S. auto industry, amounts to $2.8 billion. And it pales in comparison to the $240 billion that states collected in total general sales taxes in 2008.

"That's more than a drop in the bucket ... but not much more for state budgets," said Robert Ward, director of fiscal studies for the Rockefeller Institute of Government in New York.

The taxes brought in by clunkers offered a summer shot of adrenaline for most states. The funds — often earmarked for school aid, highway repairs and law enforcement — came at a time when they were struggling with big shortfalls.

Kentucky reported that clunkers' taxes propped up its Road Fund, which supports the state's network of roadways. Motor vehicle usage taxes grew 11.4 percent to $36 million in August, helping keep the fund flat for the month. The state estimates it can now afford to see receipts fall more than 4 percent for the rest of fiscal year and still meet its budget forecasts.

Legislative estimates in Michigan show the state may have taken in $39 million from Cash for Clunkers. About a third of that money is devoted to education.

Massachusetts reported that motor vehicle sales tax revenue rose nearly 36 percent in August from a year earlier, higher than the state's monthly target. That gain, combined with a rise in the overall sales tax that month, pushed vehicle tax collections above the monthly goal.

The extra money may be a help, but state budget officials say it's minor compared with their huge problems.

Kentucky officials have warned that until unemployment improves — about 11 percent of state residents are now jobless — tax revenues will remain in the doldrums.

In Michigan, where the state sales tax is the major source of aid for schools, lawmakers proposed cutting $218 per pupil from the aid the state government gives to local school districts. That's despite the clunkers money and extra vehicle sales tax revenue from laid-off auto workers who got vouchers for new cars as part of their severance. Sales tax collections are still down 9 percent.

Auto sales nationally fell 41 percent from August to September, a drop caused largely by people who would have normally waited a few months to buy a new vehicle rushing in to take advantage of the federal program's big rebates.

That hangover showed up in Massachusetts' sales tax collections last month, which were 5 percent below forecasts. That worries Robert Bliss, a spokesman for the state revenue department.

"Has the pool been drained as a result of this program for the next couple of months? That is the question," he said.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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