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Santa Ana city officials, fearing a downturn in local commerce amid a recent voter-approved 1.5 percent sales tax increase, are trying to encourage residents to shop locally, and they’re helping car dealerships first, through a $1.7 million subsidy.

The 10 Santa Ana car dealerships receiving a split share of the subsidy, approved unanimously by the City Council on March 19, will, by participating in a program, give residents a $500 rebate with the purchase of either a new or used car, which residents can either elect to have deducted from their car payments or receive a check from the city.

A spokesperson for the City Manager’s office said in an email that although the city recognizes the rebate program as a subsidy, Santa Ana residents are the ones who will ultimately benefit from the program and none of the ten dealerships participating in the program will receive over $100,000.

But the subsidy will only benefit Santa Ana residents if they decide to buy a car. Any resident who shops in the city will feel the effects of the sales tax increase starting in April.

“If a resident spends $1,000 at the mall for clothing, they bear the full burden of the tax,” said Michael Manville, a UCLA professor who specializes in local public finance, in a phone interview. “The city seems to be concerned about the sale of automobiles as opposed to other sales and is taking steps to selectively exempt or cushion those sales from whatever it imagines the impact of the sales tax increase will be.”

Manville also questioned what kinds of factors “get you protected from the tax increase?”

Some of the ten car dealerships have been years-long donors to City Council members.

An independent expenditure committee supporting Mayor Miguel Pulido — who’s been a vocal supporter of the program — received at least $2,500 from Don Crevier, the founder of Crevier BMW on Auto Mall Dr, in October last year, according to campaign finance records.

Crevier also contributed $2,000 to Councilman Jose Solorio between December 2014 and October 2016, according to campaign finance records.

Other dealerships putting money down on past city council elections include Guaranty Chevrolet, Tom’s Trucks Center, and Freeway Honda.

Car sales also generate some of the highest sales taxes in the city, which officials say could drive people to other cities where there might be smaller sales tax percentages.

Santa Ana voters in November approved a 1.5 percent sales tax increase from 7.75 percent to 9.25 percent, which takes effect in April.

The sales tax, which was titled the “Santa Ana Neighborhood Safety, Homeless Prevention and Essential City Services Enhancement Measure,” is estimated to bring an additional $63 million extra to the city each year.

The measure came before Santa Ana voters in the midst of a fiscal crisis, as the city’s labor and employee pensions costs have been skyrocketing. Most of the pension cost increase is for current and former police employees.

In 2017, the average price of a new car in Santa Ana was $37,557, according to city staff. Under the calculation of the current 7.75 percent sales tax, customers in Santa Ana would pay an additional $2,910 for their vehicle.

But when the sales tax increases to 9.25 percent in April, the additional sales tax cost of a new car under that calculation would rise to an additional $3,474.

“Cities in California are very dependent on sales tax revenue, and automobile dealerships generate a lot of sales tax per sale, so if you were raising your sales tax you would naturally worry,” said Manville.

“There’s a general pattern where the local governments compete with each other a lot around sales taxes,” Manville added. “This is an example of that. You don’t want that rate increase to drive your car buyer across your border.”

The City of Westminster adopted a similar $500 rebate program for residents buying cars locally in May 2017. This was after voters approved a sales tax increase the year before in an attempt to save the cash-strapped city from potential bankruptcy.

At a City Council meeting in May that year, former Westminster council candidate Mark Lawrence criticized the program, calling it a “special carve-out” for auto dealerships to counter the sales tax increase, and accused council members of being swayed by their campaign contributions from car dealerships.

By incentivizing Santa Ana residents to buy cars from local dealerships with Santa Ana’s own rebate program, city staff estimates a sale of 2,025 new cars and 824 used cars from the ten participating dealerships during the first year of the program.

The program would run for two years, with two possible one-year extensions, according to a city staff report.

The first two years of the program, from April 1, 2019, to March 31, 2021, are a test run. If the Council decides to keep extending the program after 2021, the $1.7 annual cost to the city would eventually total $8.6 million by the 2024 fiscal year.

Under the agreement, the city will also devote $25,000 to the marketing and administration of the program.

Acting City Manager Steven Mendoza, during an earlier Jan. 15 meeting, said that when accounting for the sales tax increase, “the actual cost of the program to the city is just $175,000 a year.”

There have been some concerns by council members that some non-residents could find loopholes in the program and dealerships’ verification processes to obtain the rebates.

“It’s an expensive program. I want good verification not just on the front end, but some accounting on the back end,” said Solorio during the March 19 City Council meeting. “We’re talking about over $8 million over a few years. That’s a substantial amount of money.”

Solorio, along with other council members backed by the city police union, recently supported and argued for $25 million in police raises over the next two and a half years.

In response to Solorio’s concerns, city staff added a last-minute provision to the agreement requiring residents to provide additional documents like utility bills at dealerships to prove their residency and qualify for the rebate.

But Al Parajeckas of Penske Automotive Group, which represents some of the ten car dealerships, still questioned that logic, arguing before the dais that residents “aren’t gonna bring their utility bills.”

“Could you lose sales if you ask (potential customers) too many questions?” Pulido asked.

“They’re just gonna leave” Parajeckas replied.

“They’re just gonna leave,” Pulido repeated. “If somebody can’t prove residency, they’re not gonna get the rebate from the get-go.”

“But let’s not turn the sale away,” Pulido added. “Let’s try to bring the customer in and get them to sign on the bottom line and have them drive out in a new car.”

Brandon Pho is a Voice of OC intern. Contact him at bpho@voiceofoc.orgor on Twitter @photherecord.