Rental Car Companies: A Tax Magnet?

June 14, 2006

An article yesterday from Smartmoney.com offers what it calls, “10 Things Your Rental Car Company Won’t Tell You.” Not surprisingly, the growing tax burden imposed on rental car companies by state and local governments made number one on the list.

From the article:

1. “We’re a tax magnet.” As with the rest of the travel industry, business is up for car rentals and expected to climb even higher after having remained fairly flat for several years. But customers are already paying more, due to an unprecedented slew of taxes and fees.

However, that extra money doesn’t go to the rental car companies but into city and state coffers, where it’s used to fund municipal projects. For example, in 2005, car rentals in Arlington, Texas, were hit with a 5% tax to help pay for the new Dallas Cowboys stadium. Car rentals get tapped as fundraisers because local politicians won’t feel the repercussions at the voting booth. “They’re taxing people who are flying in from someplace else,” says Hertz spokesperson Richard Broome. “These people can’t and don’t vote locally, so there’s no harm for them.”

But there’s a way for consumers to dodge some of these fees: Pick up your car in town, not at the airport… (Full piece here.)

Of course there’s a better way to avoid these rising rental car taxes than to “dodge” them as the article suggests—encourage state and local lawmakers not to levy unjustified excise taxes on car rentals to begin with.

As we’ve written before, many of the rental car excise taxes that have been imposed around the nation in recent years are impossible to justify on any economic grounds. Most of them suffer serious design flaws, and fail to satisfy basic, widely-agreed-upon principles of sound tax policy.

Probably the most important flaw in most rental car excise taxes is that they don’t closely link taxes paid with government services provided, violating what economists call the “benefit principle” of taxation.

In recent years, special rental car taxes have been levied to supplement teacher’s salaries, build sports stadiums, and to fund other general government services that bear no relationship at all to the rental car industry. That’s just poorly designed tax policy.

Government programs like roads, sports stadiums and theater arts centers that lawmakers argue will benefit all residents equally should be funded through broadly-based taxes. They should not be funded through high-rate, non-transparent, and politically expedient excise taxes on one particular industry.


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