Jim Gilmore’s Car Tax Repeal Plan, 18 Years Later

July 30, 2015

“No Car Tax.” As political slogans go, Virginia Governor Jim Gilmore’s 1997 cri de coeur was admirably clear. No vague, aspirational statements about renewing, reclaiming, or reviving anything; just: the car tax must go.

Gilmore’s anti-car tax campaign was a political masterstroke, and in his first year in office, he secured passage of legislation phasing out the widely despised tax over five years. But eighteen years later, with Gilmore the latest Republican to throw his hat into the presidential ring, Virginians are still paying the car tax. What happened?

Virginia’s car tax—a personal property tax imposed on vehicle ownership—has long been highly unpopular. Complaints about the assessments are an annual tradition in the Commonwealth, up there with maple festivals and shad planking. If ever a tax was ripe for repeal, it was the car tax. And initially, it looked like it was going to happen.

In a 1998 special session, the Virginia General Assembly adopted legislation phasing out the car tax on personal vehicles (on the first $20,000 in vehicle value) over five years. For the first year, the state would actually mail taxpayers a reimbursement worth 12.5 percent of their car tax liability. By the second year, the reimbursement amount would appear as a deduction on car owners’ tangible personal property tax bills, and the amount of the deduction would be transferred from the state to the locality to make them whole. The initial phase-out schedule adopted in SB 4005 was as follows:

Tax Year

Scheduled Phaseout

1998

12.5%

1999

27.5%

2000

47.5%

2001

70.0%

2002 onward

100%

In 2002, however, lawmakers froze the relief rate at 70 percent due to rising costs to the General Fund. Even then, the cost of the refunds continued to rise, so in 2004 the legislature again amended the Personal Property Tax Relief Act by setting the reimbursement amount at $950 million in perpetuity beginning in the 2006 tax year, and providing the reimbursement in the form of targeted aid to localities based on prorated shares of actual payments in 2005, based on effective local tax rates in effect on August 1, 1997.

Fiscal Year

Actual Phaseout

Expenditures

1999

12.5%

$181.3 million

2000

27.5%

$322.1 million

2001

47.5%

$604.1 million

2002

70.0%

$826.2 million

2003

70.0%

$856.7 million

2004

70.0%

$881.1 million

2005

70.0%

$890.1 million

2006-present

Capped

$950.0 million

This approach necessarily means that as populations shift, taxpayers’ shares vary. The relief rate is lower in localities that have experienced an above-average rate of growth in registered vehicles than it is in those with a low or nonexistent growth rate, since they are still receiving reimbursements based on 2005 figures.

So while the state picks up about 62 percent of the bill statewide, relief varies greatly across localities. For instance, car tax relief is currently at a mere 29 percent in Arlington, a Virginia suburb of Washington, D.C.

Back in 1997, Gilmore’s campaign estimated that fully refunding the car tax would cost $620 million per year. The actual cost rose to about twice that, due at least in part to a surge in purchases of expensive cars during the economic boom of the late 1990s. That same economic growth fueled a 43 percent increase in the state budget during Gilmore’s four-year term. By the final year of his term, with the national economy in recession, these expenditure levels were difficult to maintain, and the Virginia General Assembly failed to adopt a second-year budget for the first time in state history.

(Note that since Virginia operates on a biennial budget, failure to adopt a revised budget in the second year does not precipitate a government shutdown. Gilmore was, however, obligated to cut spending to close the budget shortfall.)

From a public policy perspective, it is difficult to justify singling out one good—cars—for an annual tax. That it is an ad valorem tax is even more difficult to justify, as the value of one’s vehicle has little connection to the degree to which the owner uses roads or related government services. Gas taxes and tolls are far superior in this regard.

Virginia’s car tax is also one of the rare examples of tangible personal property taxes still being applied to household goods. Although many states have abolished personal property taxes altogether, some continue to impose them on business personal property, which leads to tax pyramiding. Nearly all states, however, exempt household goods, with the exception of a few states (like Virginia) which continue to impose them on big-ticket items like cars.

Gilmore’s pledge to repeal the car tax was clearly good politics. It also had the potential to be good policy. What resulted was effectively a tax shift, with local governments being held harmless and the state picking up the slack. This is arguably preferable to the alternative, as the general taxes on which the state relies for general fund revenues are less arbitrary than the car tax. Nevertheless, such transfers can easily create perverse incentives or lead to non-neutral treatment of localities, and in this case, the high price tag ultimately led the program to stall out.

Years later, the car tax remains highly unpopular, but it would be difficult to muster the political will to tackle the issue. Local taxes can be notoriously hard to reform because any offsetting measures, whether in the form of authorization to levy alternative taxes or, as in this case, aid from state government, will tend to have an unequal effect across the state. Ultimately, the cost of fully offsetting the car tax, and the disparate effects across Virginia, proved the plan’s undoing.

What lessons can we draw nearly two decades later? Perhaps first and foremost that tax policy at the local level matters a great deal, in no small part due to how difficult it is to affect reform. Virginia is a perfect case in point. Other than the car tax, the most controversial taxes in Virginia are likely the BPOL (a gross receipts tax), the machinery and tools tax (a business personal property tax), and the merchants’ capital tax (an inventory tax). All of these constitute poor tax policy—a fact widely acknowledged. But because they’re all locally assessed, and the revenue collected under this tax mix varies so widely across localities, finding alternatives which do not substantially disadvantage certain parts of the state is a remarkably difficult undertaking. And, if the solution involves state transfers, an incredibly costly imposition on the general fund.

Despite the proposal’s popularity, Governor Gilmore’s plan to repeal the car tax was always going to be a heavy lift. That’s why it’s so important to get tax policy right in the first place, and at all levels of government. Once in place, even a tax structure widely acknowledged to be undesirable may prove remarkably difficult to uproot.

More on Virginia’s unique local taxes here. More on personal property taxes here.


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