Imposing New Taxes on Peer-to-Peer Car Sharing Will Not Help Texas Economic Recovery

April 19, 2021

Like most states, Texas is beginning to grapple with how to effectively reopen its economy and ensure there is sufficient revenue to cover state services. New sources of revenue under consideration by the Texas state legislature include a tax on peer-to-peer car sharing, which would undermine Texas’ ability to attract travelers just as they are emerging from the house-bound coronavirus pandemic.

House Bill 2415 would impose the state’s rental car excise tax on peer-to-peer car sharing services, which give Texans the opportunity to share their car with others through an online platform. That allows them to monetize their vehicle when it would otherwise not be used. Advocates of this proposal may argue that it makes sense to tax peer-to-peer car sharing like the rental car industry. But the existing rental car tax in Texas already harms the state’s ability to attract business or leisure travelers looking for effective transportation when visiting the Lone Star state.

While many states impose excise taxes on goods and services enjoyed by non-resident visitors, like hotels and rental cars, Texas imposes one of the highest rental car excise taxes in the country at 10 percent of the service. Additionally, local governments like Amarillo, Austin, and El Paso impose a 5 percent tax on top of the state tax to fund venues like stadiums and convention centers. El Paso’s Sun Bowl game is well-known as the second-oldest bowl game in college football, but it is also one of the biggest beneficiaries of El Paso’s local rental car tax.

Excise taxes should be used to reduce harms caused by certain activities or tied to the use of specific goods, such as infrastructure. An excise tax on rental cars or peer-to-peer car sharing accomplishes neither of these objectives. Demand for transportation from travelers and tourists is a boost to Texas’ economy, and those renting a sedan or picking up a convertible through a peer-to-peer service are paying gas tax when filling up at the pumps to pay for their use of the roads. Instead of imposing a user fee, rental car excise tax revenue is used for projects mostly unrelated to the use of rental cars, such as El Paso’s favorite football game.

While gig economy firms and workers were vital during the pandemic, travel-related services such as peer-to-peer car sharing were badly hit last year. Due to the pandemic, many rental car companies sold their vehicles, and that is resulting in an explosion in prices at popular destinations. Excise taxes on the cost of renting cars further increases the cost of travel, pushing travelers to consider transportation alternatives. Or, in the age of Zoom, opt for virtual communication over in-person travel, to the state’s economic detriment. Extending these flawed taxes onto peer-to-peer car sharing platforms further increases the harm these taxes impose. Rather than extend the tax, Texas should consider finding alternative revenue sources and repeal the economically damaging rental car excise taxes.

In addition to levying the rental car excise tax on peer-to-peer car sharing arrangements, House Bill 2415 would permit motor vehicle owners to credit the sales or use tax paid when purchasing the vehicle onto rental car excise tax that is owed. This provision is like a proposal in 2019 that would have also rebated part of the sales tax paid to owners. Often, a person sharing a vehicle may have paid sales tax when originally buying the vehicle because it was for personal use. When the car is used on a peer-to-peer car sharing platform, it is being used for business purposes and the vehicle ideally would not be subject to sales tax. The mixed-use of the vehicle makes it hard to impose the proper amount of sales tax when the vehicle is purchased. Additionally, HB 2415 would only provide the credit for vehicle owners who only use their vehicles for business purposes, which means those using their vehicles for car sharing and personal use would not see a benefit from the credit.

While providing a credit for sales tax paid is creative and better than providing no relief for sales taxes paid on vehicles used for commercial purposes, it would not be an even trade for those engaged in peer-to-peer car sharing. Once the sales tax has been completely offset, peer-to-peer car sharing will still be taxed under the rental car excise tax, raising the cost of the service and likely reducing the return to sharing one’s vehicle in Texas.

Rather than imposing the rental car excise tax on peer-to-peer car sharing, Texas policymakers could consider including car rentals and peer-to-peer car sharing within the state’s sales tax base. Currently, these services are not subject to sales tax, which is not the ideal tax treatment. Broadening the sales tax base would provide additional revenue and offset some of the revenue loss from repealing rental car excise taxes.

Texas has many options for reforming its tax code to ensure a robust economic recovery and maintaining revenue over the next few years. Imposing the rental car excise tax on peer-to-peer car sharing would be a move in the wrong direction by expanding a costly and distortive tax for visitors whose business will help Texans recover post-pandemic.

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A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and make up a relatively small and volatile portion of state and local tax collections.