RICHMOND STUDENT'S RESEARCH SHOWS CAR TAX REFORM WARRANTED; PROFESSORS SEE POTENTIAL COMPROMISE
May 1, 2001
Virginia's old car tax was regressive and fell more heavily on low-income households, according to honors research by a senior economics major at the University of Richmond.
In her study, Rebecca Bremer of Midlothian showed that low-income households paid about one percent of their income in vehicle property taxes. That is nearly twice as high as households earning $100,000 or more each year.
"The old car tax was regressive," says Bremer. "If the phase-out continues as planned, low-income households will pay almost nothing in vehicle property taxes. High-income households, on average, will pay less than 0.1 percent of their income. Remember that under present law, tax relief is limited to the first $20,000 of each vehicle's value."
Erik Craft, the economics professor who supervised Bremer's work, also has been researching car tax issues with University of Richmond economist Robert Schmidt. Craft says combining Bremer's research with his and Schmidt's suggests a compromise that "provides almost complete tax relief to nearly all families without stretching the state budget."
"Rebecca's research has important implications for determining how the car tax should be reformed," Craft notes. "There are two characteristics most policymakers seek in taxes. One is not distorting economic behavior-that is, not discouraging people from spending their money the way they want to, in this case buying more valuable cars."
"The second is not requiring low-income households to pay a higher percentage of their income than wealthy households. The car tax in its old form was regressive, so reform to some extent was good."
Craft and Schmidt's research suggests the car tax is slightly less distorting than the state personal income tax, and to the extent that some state revenue must be raised, vehicle property taxes are not a bad option.
"Our economic research shows that people will own more valuable vehicles on account of the phase-out of the tax, so the cost to the state is likely to continue to exceed estimates this year and in the future," Craft says. "The planned phase-out of the car tax might not be politically sustainable, since the rising cost is causing cuts in services and leading to lower real wages for state employees."
"There is a good compromise that provides almost complete relief to nearly all families, especially low-income households, and yet it would not be as costly to the state budget," he explains. "If the phase-out were limited to the first $15,000 of vehicle value, only a small percentage of households would pay the tax, and the cost to the state budget would drop. The phase-out would be complete for all but the most expensive and newest vehicles, and Gov. Gilmore could still boast that he effectively ended the car tax for most Virginians."