UNIVERSITY OF RICHMOND PROFESSORS' RESEARCH YIELDS PRELIMINARY "CAR TAX" CONCLUSIONS
Feb. 6, 2001
Two University of Richmond economics professors have released preliminary conclusions about the efficiency of Virginia's "car tax" and the effects of phasing out the tax.
Erik Craft and Robert Schmidt found that the tax reduced the average vehicular capital per Virginian by 20 percent--that is, residents of the state own significantly less-valuable cars than they would have in the absence of the tax.
The tax also puts a disproportionate burden on the poor and reduces economic activity in the state's automobile marketplace, Craft and Schmidt found.
"There are two strikes against the car tax," says Craft. "The burden on low- and middle-income households is not significantly lower than on high-income households. The tax also distorts economic behavior by discouraging the purchase of new and more valuable vehicles."
Craft says phasing out the tax on the first $20,000 value of each vehicle could diminish the regressive nature of the tax. A phase-out or reduction of the tax also would lead to significant increases in the total value of vehicles owned by Virginia residents. Ironically, this increased value could lead to increases in local revenue, since locales are reimbursed by the state at 1998 tax rates.
"Furthermore," he says, "estimates of the cost of reimbursements could be low if this ownership response to the tax reform is not included."
"Our results have little bearing on the discussion of the overall level of taxes in Virginia. Nor do they address the issue of whether or not the phase-out of the car tax is economically warranted under present budget circumstances. Rather, we argue that to raise a certain amount of revenue, alternative sources are preferable to the car tax."
Craft says there are larger implications of his and Schmidt's research. The results call into question the desirability of any state's use of personal property taxes on vehicles as a source of state revenue.
"The social costs of such taxes could be reduced by substituting alternative revenue sources," Craft and Schmidt project. "There are fairer, more efficient methods of raising tax revenues."