(Winter 2006): What Will Become of the Car Tax?

What will become of
the car tax?
by John L. Knapp
championed by Republican candidate James S. Gilmore III
John L. Knapp is professor emeritus at the University
reimbursement to localities in exchange for mandated cuts
nomics Section, at the University’s Weldon Cooper
personal transportation. The campaign proposal was made at a
have included deputy director of the former Tayloe
ise that it would not divert state funds from ongoing programs
wealth of Virginia’s Division of State Planning and
and to maintain state expenditure programs.
Division of Industrial Development and Planning,
About the “car tax”
Richmond, and budget analyst with the U.S. Depart-
became the central campaign issue. Gilmore called for state
of Virginia and senior economist, Business and Eco-
in personal property taxes on cars and light trucks used for
Center for Public Service. His professional positions
time of strong state revenue growth and was sold on the prem-
Murphy Institute, deputy director of the Common-
because there was plenty of money to provide taxpayer relief
Community Affairs, economist with the Virginia
No tax is popular, but even in the company of other taxes,
assistant economist with the Federal Reserve Bank of
ment of Agriculture. He is a former member of the
the personal property tax on motor vehicles—known as the
Governor’s Advisory Board of Economists and a past
taxpayers’ distaste for this source of revenue.
on Federal Statistics, the Association for University
restrictions on the rate. Localities had raised effective rates so
Association of Economists.
car tax—was especially unpopular. Four factors contributed to
First, unlike many other local taxes, the state imposed no
president of the Council of Professional Associations
Business and Economic Research, and the Virginia
Winter 2006 | Virginia Issues & Answers
www.via.vt.edu
During the 1997 gubernatorial election, the car tax proposal
27
they were much higher than real property taxes. In 1997, the
taxpayers. According to a 1998 survey, 19 states, including
$100 of market value versus $0.61 for real estate.1 Thus, the
state or local property or value-based tax on motor vehicles.
median effective tax rate on motor vehicles was $2.54 per
tax rate on motor vehicles was more than four times greater
than for real estate.
Second, a much higher proportion of households own
motor vehicles than homes. According to the Census
Since then, one state—Washington—has eliminated its
tax. Populous states without such taxes include New York,
Florida, Illinois, and Pennsylvania.4
Bureau, in the year 2000, 85.8 percent of the nation’s house-
The reality of abolishing the tax
homes.2 The wider ownership of vehicles meant that the car
to implement his car tax proposal. The proposal, treated as
real estate tax, assuring a larger share of aggrieved voters.
Tax Relief Act of 1998. The act provided for phased elimi-
holds owned motor vehicles while 67.2 percent owned
tax was directly imposed on a larger population than the
Third, unlike the real estate property tax, which many
households pay monthly via a mortgage escrow account, the
motor vehicle tax is collected as a lump sum either annually
or semi-annually. When car tax relief was being promoted,
nearly four-fifths of the total number of cities and counties
collected the tax annually with the remainder relying on
semi-annual collection.3 It is noteworthy that in populous
After winning the election, Gilmore introduced legislation
an electoral mandate, was enacted as the Personal Property
nation of the tax on vehicles with an assessed value of less
than $20,000. The tax was to be reduced by 12.5 percent per
vehicle in tax year 1998, 27.5 percent in 1999, 47.5 percent
in 2000, 70 percent in 2001, and 100 percent thereafter,
provided that sufficient funds were available to finance the
program.
Reimbursements to individual localities were based on
Northern Virginia, most localities collected the tax annually
the number of vehicles, their value, the method of valuation
Fourth, property taxes on motor vehicles are not widely
the tax rate employed by the locality in 1997. The program,
on Oct. 5, only a month before the election.
www.via.vt.edu
used in the nation, an unwanted distinction for Virginia
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Maryland and the District of Columbia, did not impose a
Virginia Issues & Answers | Winter 2006
(i.e., loan, trade-in, or retail value), the assessment ratio, and
which was considered as non-categorical state aid, had one
of the most unusual state aid distribution formulas in the
counties and eight cities have raised their effective tax rates
foregone tax revenue, localities were not eligible for reim-
their effective rates. Regardless of these changes, the state
nation. Because the program provided reimbursements for
bursements to individual taxpayers in a particular year until
taxpayers had paid the portion of the tax not covered by the
reimbursement plan.
When implementation of the tax began, the state found
on motor vehicles.7 In contrast, two localities have reduced
aid is based on the tax year 2004 distribution, which was
tied to 1997 effective rates.
Figure 1: Car tax disbursements, FY 1999-08
that initial estimates of the cost of the new law were far
below actual outlays—a case that had been made by foes
during the campaign. Based on survey results, local government associations argued, the cost would be $1.4 billion per
year when fully phased in after five years, more than double
the $620 million annual cost originally forecast by Gilmore.5
Funding the expensive program became progressively
more difficult with the passage of time. As the phase-in
reductions were implemented, outlays indeed proved to
be greater than the estimated costs, and the state’s revenue
picture dimmed. For tax year 2002, the General Assembly
Source: Office of the Comptroller, General Fund Preliminary (Unaudited) Annual Report for the
Fiscal Year ended June 30, 2006 (Aug. 15, 2006).
As shown in Figure 1, car tax disbursements rose sharply
froze reimbursement at 70 percent. When the state’s finances
in the early years as the phase-in took hold. Starting in FY
amount of state aid to localities at $950 million annually
ments reached $907 million in FY 05 before dropping to
continued to deteriorate, the General Assembly capped the
with the pro rata share of each locality based on its propor-
tion of the tax year 2004 distribution. How the aid would be
applied to individual taxpayers’ car tax bills was left up to
the localities. Based on a recent survey, localities have over-
whelmingly chosen to use a specific relief method providing
the same percentage for all qualifying vehicles. Thus, what
6
had started out as a state aid program based on reimbursing
99, the first-year distribution was $181 million.8 Disburse$724 million the next year. The large decline was attribut-
able to a shift in reimbursement payments from a tax year to
a fiscal year basis. This saved $277 million in payments not
made during the last six months of FY 06.9 The $950 million
cap is reflected in the projections for 2007 and 2008.
Figure 2: Car tax reimbursements as a percentage of the General Fund,
FY 1999-08
localities for foregone personal property taxes with no dollar limit on the total amount expended by the state instead
had morphed into a state aid program based on the historical distribution of reimbursements in tax year 2004.
Although the popular perception was that the car tax
would be eliminated, that outcome would not have hap-
pened under the original legislation because reimbursement
was limited to the first $20,000 of vehicle value. With the
more vehicles exceeded the limit unless the law was amend-
Sources: Office of the Comptroller, General Fund Preliminary (Unaudited) Annual Report for the Fiscal
Year Ended June 30, 2006 (Aug. 15, 2006) and Secretary of Finance, report to the money committees
(Aug. 28, 2006).
ed to provide a higher limit. Also, the original act did not
Note: General Fund excludes transfers. Plots for fiscal years 2007 and 2008 are forecasts.
The state would not reimburse the additional revenue from
Fund is shown in Figure 2. Starting with 1.9 percent of the
restrict localities from raising the rates that applied in 1997.
higher rates, but it would allow them. In fact, since 1997, 34
The strain of car tax reimbursement on the state’s General
total in FY 99, disbursement rose to 7.9 percent in 2003. After
Winter 2006 | Virginia Issues & Answers
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passage of time, normal inflation would have assured that
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that the share dropped to a low of 4.9 percent in 2006 as the
Figure 3: Car tax reimbursements and income taxes per capita, 2003
General Assembly cut back aid. If the cap of $950 million is
fully funded, the share of the car tax will rise to 6.1 percent
in 2007 before decreasing to 5.9 percent in 2008. Assuming
future General Fund growth and no changes in the current
legislation, the share of the car tax reimbursement will drop
further in subsequent years.
Disparate benefits
The lion’s share of state aid for car tax reimbursements
goes to a handful of urban localities (see Table 1). In fact,
seven urban localities located in the three major metropolitan areas account for one-half of the state payout to cities
and counties.10 Fairfax County alone will receive 22.5 per-
cent of the aid in FY 2007. Rural, sparsely populated localities, however, will receive the lowest shares: 0.004 percent
for Bath County and 0.018 percent for Highland County.
% of City/county Total
211,995,999
22.5
Virgina Beach City
55,673,386
5.9
Prince William County
55,102,349
5.9
Loudoun County
41,503,640
4.4
Chesterfield County
40,987,452
4.4
Henrico County
37,415,217
4.0
Arlington County
31,313,980
3.3
Subtotal
473,992,023
50.4
City/county total
940,662,429
100.0
Source: Virginia Department of Taxation, Personal Property Tax Relief Act of 1998, Estimates of
Reimbursements to Localities, Fiscal Year 2006 Through 2010 (November 2005), pp. B-25 to B-27.
www.finance.virginia.gov/KeyDocuments/PPTRA/index.cfm (Oct. 16, 2006).
When standardized by dividing by population, the
disparities are greatly reduced but still substantial. Aid
per capita varies from $217 in Fauquier County and $207
in Fairfax County to only $28 in Grayson County and $8 in
Bath County. Since car values and frequency of ownership
rise with income, it is not surprising that state aid for car tax
www.via.vt.edu
reimbursement is strongly correlated with income.
30
11
Figure 3 shows plots for per capita car tax reimbursements
and per capita state income tax liability for 2003, the most
recent year for which income tax data are available.
Virginia Issues & Answers | Winter 2006
with strong population growth because the distribution will
make no allowance for change after tax year 2005. A look
localities with the fastest population growth were Loudoun,
Amount ($)
Fairfax County
The car tax formula now in place also penalizes localities
to the past illustrates the problem. From 2002 to 2005, the
Table 1: Localities that will receive the largest reimbursements, FY 07
Locality
Sources: Auditor of Public Accounts, “Personal Property Tax Payments, Fiscal Year 2003” as
shown on APA website; Department of Taxation, Annual Report, Fiscal Year 2005—Revised July
13, 2006; Weldon Cooper Center 2003 population estimates.
Culpepper, King George, Prince William, and Stafford. Con-
sequently, all increased their percentage share of total car tax
reimbursements. However, under the new law, their shares
will remain the same in future years.
What next?
Since its birth, personal property tax relief has been a
contentious issue because of the high cost to the state gov-
ernment. The $950 million cap was a response to a program
that exceeded available resources. However, as state fi-
nances improve, car tax reimbursement is likely to return as
a major issue.
There are three major policy alternatives. First, the origi-
nal provisions of the property tax relief act could be reinstated. If that were done, it is likely that the $20,000 per vehicle
limit would be raised. Taking such a step would push the
annual cost of relief over $1.5 billion, a cost that would
continue to rise year after year as the number and value of
vehicles increased.
Second, fundamental changes could be made in the
original Personal Property Tax Relief Act so that all localities would be reimbursed on the basis of retail value, a
uniform assessment ratio of 100 percent of retail value, and
a standard tax rate. Such changes would make the distribu-
tion more fair but they would move away from the original
concept of reimbursing localities for actual costs.
Third, the personal property tax on vehicles could be
org/CLAY/Art/05PPTRA.pdf, accessed on 10/16/06.
7
8
Ibid, p. 72.
Reimbursements did not start until the last half of tax
eliminated and replaced with a new state aid program based
year 1998, which was in FY 99. A large part of the first fiscal
result in a distribution similar but not identical to the cur-
paid their car tax for tax year 1999. The full amount of the
on income tax collections by locality. Such a program would
rent system but far simpler to administer.
When car tax reimbursement was inaugurated, the op-
portunity to change the local taxation of vehicles by requir-
ing localities to keep effective rates in line with those on real
estate was lost. Now, the question of how to deal with state
aid related to the property tax promises to be a major issue
in the future.
Endnotes
1
Virginia Department of Taxation, “The 1997 Virginia As-
sessment/Sales Ratio Study” (April 1999), Table 3, pp. 21-24;
and the Weldon Cooper Center for Public Service, 1997 Tax
Rates: Virginia’s Cities, Counties, and Selected Towns, 16th Annual Edition, February 1998, Table 9.1, pp. 91-95.
2
year payout went directly to individuals who had already
disbursement, $119 million to individuals plus $62 million
to local governments, is shown in Figure 1.
9
Auditor of Public Accounts, Personal Property Tax Relief
Act Special Review, September 2004, p. 10, available at www.
apa.state.va.us/data/download/reports/audit_local/PPTRA04.pdf,
accessed on 10/16/06.
10
The total payout will be $950 million. Of that amount,
$941.1 million will go to cities and counties with the remainder for incorporated towns.
11
The equation is Y = 23.8472 + 0.0941 X
(5.3592) (0.0073)
Adjusted R2 =0.558 where Y is car tax reimbursement
per capita and X is income tax liability per capita.
Bureau of the Census, U. S. Statistical Abstract: 2004-2005,
October 2004, Table 691, p. 456.
3
Weldon Cooper Center for Public Service, 1998 Tax Rates:
Virginia’s Cities, Counties, and Selected Towns, 17th Annual
Edition, December 1998, Table 9.3, pp. 126-130. (The 1998
study was referenced because information on payment
schedules was not provided in the 1997 edition.)
4
National Conference of State Legislators, “State and
Local Value-Based Taxes on Motor Vehicles,” January 1998,
available at www.ncsl.org/programs/fiscal/autotaxs.htm, ac-
cessed on 10/17/06; Georgia State Andrew Young School of
Policy Studies, “Personal Property Tax on Motor Vehicles,”
Fiscal Research Center Policy Brief, July 2006, Number 130,
p. 10, available at http://frc.gsu.edu/frpreports/brief130/index.
htm, accessed on 10/17/06.
5
Spencer S. Hsu, “Virginians Clash on Auto Tax Cut,” The
Washington Post, June 24, 1997, Final Edition.
6
Weldon Cooper Center for Public Service, Virginia Local
Tax Rates 2006, 25th Annual Edition, November 2006, p. 73.
www.via.vt.edu
(For a good analysis of payment options for local govern-
ments, see Virginia Municipal League, Personal Property Tax
Relief Guide and Model Ordinance, May 2005, at www.vml.
Winter 2006 | Virginia Issues & Answers
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