The Case Against Special Rental Car Excise Taxes

April 18, 2006

This morning’s USA Today explores the rapid growth in taxes and fees imposed on the rental cars in recent years, often in an attempt to fund municipal projects that have no clear relationship to the rental car industry. We’re cited toward the end of the piece:

Increasingly, governments are viewing taxes and fees on its cars as a primary option for local civic projects that the rental industry says should be funded locally: sports stadiums, art centers and convention centers.

“It’s taken on a wave of popularity,” says Richard Broome, a vice president at Hertz. “It’s politically expedient to tax out-of-towners because the presumption is that they don’t vote.”…

Enterprise estimates about 80 special car rental taxes — not including airport fees — have been imposed across the USA, and at least 44 proposals are pending. Some examples:

• To pay for a performing arts center and expand a culinary institute, Clark County, which includes Las Vegas, approved legislation last year to charge car renters 2% of the base price.

• In Dallas, renters pay a 5% charge to help pay for the American Airlines Center, home of the NBA’s Dallas Mavericks.

• In Arkansas, a part of the 10% rental car tax goes toward teachers’ salaries.

• In Wisconsin and several municipalities, the rental car tax is a key funding source for public transportation projects. “It’s like taxing Pepsi to build a Coke manufacturing plant,” Broome says….

The industry has plenty of support from business travelers such as Richard Hadden, a Jacksonville-based author and professional speaker who rents frequently in Florida. “The excessive amounts being charged in some localities are wrong,” he says…

Rental car taxes unfairly single out one industry for a special tax, says Andrew Chamberlain of the Tax Foundation… “And it’s not for the benefit of that industry.”

The industry has complained about it repeatedly in the past. But competitiveness and the lack of a trade group that lobbies have undermined past lobbying attempts, Chamberlain says. (Full story here.)

From an economist’s perspective, these special excise taxes on the rental car industry are hard to defend. Most of them fail to satisfy basic, widely-agreed-upon principles of sound public finance.

For one, they’re highly non-neutral. A basic goal of any tax system is to raise appropriate revenue for programs while doing the least harm to the economy. But these taxes seem designed to do the opposite. By singling out one industry for special taxation, these levies actually maximize the economic distortion of the tax system. A much more sound approach is to rely on broadly-based and low-rate taxes which raise large amounts of revenue but do less harm to the underlying economic activity.

Second, special rental car excise taxes don’t closely link taxes paid with government services provided. This is a violation of what economists call the “benefit principle.” For example, a special tax on gasoline to fund roads provided directly to drivers who use gas makes sense. But a special rental car tax used to supplement teacher’s salaries, build sports stadiums, or fund other general government services bears no relationship to the industry being taxed. That’s just poorly designed tax policy. General government services that benefit all residents should be funded through broadly-based levies, not high-rate excises on politically unpopular industries.

As we’ve noted before, there’s a perception among lawmakers that rental car excise taxes are “good” taxes because they fall on tourists from other cities and states. While this is often not the case—more than half of rental car customer are local, not visiting tourists—it’s a belief held by many lawmakers. As Tom Ambrosino, mayor of Revere, Mass. is quoted in the story, “We try to shift the (tax) burden away from our citizens as much as we can.”

But this predatory approach to tax policy is impossible to defend from the perspective of sound public finance. The primary goal of tax policy is to raise revenue for programs demanded by citizens. To make intelligent choices about the costs and benefits of those programs, citizens must understand their full costs. How is this possible when the benefits of programs accrue to residents, while the tax burden supporting the programs is “exported” to taxpayers in other areas?

As a result, many of the current and proposed rental car excise taxes are a vivid illustration of the old slogan “taxation without representation.” And in a democratic system, that’s just poor public policy.


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