General Motors has been in the news this week, declaring bankruptcy just a few weeks after Chrysler took the same step in an effort to restructure the company and find a way to become profitable again. The recession of the past 18 months has hit US automakers hard, and car sales have slipped dramatically in recent months. One of the victims outside of the auto industry being hardest hit by slumping car sales are U.S. state budgets.

States with sales taxes depend on auto sales for a significant portion of their annual tax revenues. New Jersey, for example, claims that they lose $10 million in revenue for every 1% drop in auto sales. Auto sales are down by about 33% for the first three months of 2009, and dealerships are closing left and right due to the downsizing of Chrysler and GM. Indiana reported that auto sales taxes fell by 23% in this past quarter compared to a year ago, and since these taxes are the third largest source of tax revenue in the state, they are seeing a budget gap of more than $1 billion.

This is another example of the recession trickling through the economy, as declining car sales are now forcing state and local government bodies to cut spending in areas such as education, healthcare, and other important areas in order to close massive budget gaps.

California is the hardest hit state, as auto sales taxes are the single largest source of state sales tax revenues. Chrysler is planning to close 32 dealerships in the state, while GM is likely to shut down more than 100. This is on top of the 186 car dealerships that have already closed in the past 18 months. The state is facing a budget deficit of over $21 billion and is in serious financial distress. Many local communities have been forced to lay off police officers and emergency personnel to bring their budgets closer to what tax revenues can support.

The sickness in the US auto industry is well publicized, but the sickness is quickly spreading to other vital areas. The cure will be a more confident consumer who feels comfortable spending money again. Unfortunately we could still be several months from consumers feeling comfortable again.

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Tags: automakers, deficit, GM, state budgets

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