Why you might pay more to buy a car in Illinois: a trade-in tax credit cap

Car buyers are on the hook for an estimated $40 million extra in sales taxes thanks to an Illinois law starting next year that will cap trade-in tax credits for most motor vehicles at $10,000.

Currently, car buyers pay sales tax on the difference between the value of a new car and the value of the car they're trading in. But starting Jan. 1, car buyers will receive sales tax credit on only up to $10,000 of the value of their trade-in.

For a trade-in valued at $20,000, for instance, that would mean at least $625 more in sales taxes the new-car buyer must pay the state. The tax is based on the city where the car buyer lives. The least a buyer can pay is 6.25%. Chicago car buyers pay 9.5% in sales taxes, which would add an additional $950 to that $20,000 trade-in.

"This is a huge concern for us," said Pete Sander, president of the Illinois Automobile Dealers Association. "We think it means people are either going to keep their cars longer before trading them in or go through a private sale to avoid this."

Car sales people often offer trade-in pricing above book value in an effort to offset some of the tangential costs of buying a new car. Without having that wiggle room, they fear new-car buyers won't have as much incentive to purchase vehicles as they have in the past.

Private car sales are taxed differently depending on the age and price of the car. Any sale under $15,000 is taxed by the model year of the car, so the newer the car, the higher the tax owed on it ranging between $390 for a 2018 model to $25 for any car made in 2008 or earlier.

The new law applies to traditional passenger vehicles, not large motorized vehicles like buses, farm equipment, RVs or tractor-trailers. Some boat, ATV and motorcycle sales would also be affected by the new law, state officials acknowledged.

The additional revenue generated will go toward the state's $45 billion "Rebuild Illinois" capital improvement plan that Gov. J.B. Pritzker signed into law late last month.

"The Rebuild Illinois plan transforms our state's approach to transportation infrastructure, finally treating our roads, bridges and railways like 21st-century investments and not relics of the past," Pritzker said at the bill signing. "This is more than an infrastructure plan. This is a job creation plan the likes of which our state has never seen."

State Sen. Don DeWitte, a St. Charles Republican, said the cap on the trade-in tax credit had been part of the capital budget negotiations all along.

"It could have been a whole lot worse," he said. "There was some discussion about taking away any credit altogether."

He voted in favor of the capital plan and said he never heard complaints about the trade-in credit change from any of the car dealership owners in St. Charles or elsewhere in his district. DeWitte said interest groups were kept in the loop about all aspects of the budget process during negotiations.

However, dealership lobbying groups say they were caught off-guard by changes to the trade-in provisions.

"This was definitely a last-minute addition," said Dave Sloan, president of the Chicago Auto Trade Association. "It's not only going to hurt the auto business but also the state's tax collections, because when people don't have that credit, they'll no longer go to a dealer."

Illinois Department of Revenue officials said the average trade-in value of all vehicles -- including ones not affected by the change in law -- was $9,398 last year. That means the average trade-in value for vehicles affected by this change was actually less, they said. Proponents of the sales tax credit cap say that means most car buyers won't be negatively affected.

But that is little comfort for dealers who peddle in higher-end vehicles.

Nick Gerling, a sales consultant at the Wickstrom Auto Group in Barrington, said many of his customers have upward of $40,000 worth of trade-in value on their vehicles when they're shopping for a new car.

"I don't know what the average is, but it's absolutely more than $10,000," he said. "If that trade-in credit isn't going to wipe out the sales tax anymore, then that's more money for us to go up against and it's going to be harder for us to make that sale. It's going to be very bad for vehicle sales altogether."

And for those who do buy cars with a lesser trade-in credit value next year, they're also likely to get hit with a higher "doc fee" from dealerships since the state increased the maximum paperwork processing fee to $300 as well, Sloan said. Currently, the maximum fee amount is $179.81, according to the Illinois attorney general's office.