Since the first excise tax was imposed on car rental in Oregon in 1976, 84 more excise taxes have been enacted and 45 are in discussion in 29 states. According to figures collected by Enterprise Rent-A-Car, over $3 billion in car rental excise taxes has been collected since 1993. What tools are at the industry’s disposal to counteract further legislation, and who is stepping up to the plate? What can you do about it?
Why Car Rental Excise Taxes Are Bad Policy
As rental car taxes have gained in popularity, tax experts and economists are increasingly showing in their research the pitfalls of targeting the car rental industry as a source of public funding.
The most widely publicized study on this issue in recent months is "Taken For a Ride: Economic Effects of Car Rental Excise Taxes," a paper published by economists William Gale of The Brookings Institution and Kim Rueben of The Urban Institute.
Prepared as a private consulting project for Enterprise Rent-A-Car in partnership with the National Business Travel Association (NBTA), the study concludes that car rental taxes are inconsistent with basic principles of good taxation.
Gale and Rueben draw connections between the recent slump in the national economy and state and local governments looking to non-traditional sources for revenue, particularly for expensive civic projects that could bring notoriety to their region, like sports stadiums or performing arts centers.
The study focuses on Kansas City, where a $4-a-day tax was imposed on rentals on the Missouri side of the border, but not in Kansas.
As a result, local demand for rentals was reduced between 41 and 50 percent at taxed branches, and the number of rental days for local customers was reduced between 69 and 86 percent. Overall rental at taxed branches decreased by 9 percent relative to untaxed branches.
"The study showed that people will vote with their pocketbooks and will take business elsewhere, and I think that’s an important lesson to local politicians who think they can raise tons of revenue," says Bill Connors, executive director of the NBTA. "They’re going to drive people out of their market." [PAGEBREAK] Under the Radar
Economists say that politicians are following the path of least resistance when they propose a rental car tax to fund public projects, taking advantage of the fact that the public is generally uninformed about these taxes.
"It goes under the radar, and that’s always the preferred thing to tax," says Terry Clower, associate director of the Applied Economics Department in the School of Community Service at the University of North Texas. "Folks just don’t think about it. They don’t even consider it when they’re first renting a car. But by the time they add all the taxes, it increases the cost of the rental by about a third."
The result is a tax that unfairly overburdens a narrow segment of the travel industry and exports a portion of the tax burden to non-local renters, resulting in taxation without representation.
Because outsiders are forced to pick up the tab for public projects, the true costs are hidden from voters, says Andrew Chamberlain, a staff economist at the Tax Foundation. That leads to inefficient over-spending on projects that voters would never support if they bore the full costs themselves.
"Taxes with narrow bases and relatively high rates—such as rental car excise taxes—are always among the worst ways of funding public projects," says Chamberlain, who is working on a policy study examining the growth of rental car excise taxes in recent decades.
[PAGEBREAK] Subsidizing the Competitors
Besides targeting a single industry to account for significant portions of big budget public projects, there are other specific ways that car rental taxes are an unfair and poorly designed tax policy.
Gale and Rueben point out that the taxes are often being used to fund the car rental industry’s publicly subsidized competitors, such as buses, trains, subways and other transit alternatives.
In addition, fixed per-day fees (like the one imposed in Kansas City) create higher tax rates on less expensive rentals and lower tax rates on more expensive rentals. This creates a distortion and inequity in the market by putting economic pressure on less-expensive models presumably being rented by lower income households, say Gale and Rueben.
A Fair Share
Gale and Rueben understand that if there is a state or local sales tax that applies to a broad range of goods and services, it is perfectly reasonable to apply that tax to rental cars.
Everyone who stands to benefit from the civic projects should help fund them, Chamberlain says, spreading the economic burden equally across the population. "Any broad-based tax with a relatively low rate is an excellent way to raise revenue for programs."
Chamberlain suggests alternative ways to raise revenue for civic projects that are better aligned with sound tax policy, including local property taxes, general retail sales taxes, gross receipts taxes, value-added taxes and local or state personal income taxes.
"We’re very willing to pay our fair share," says Connors. "When people rent a car, they pay a sales tax that goes to the local community coffers. But why should business travelers pay for a new culinary institute in Nevada when they are there attending a convention?"
[PAGEBREAK] Here Comes the Car Rental Tax SWAT Team
Chamberlain says that publicity is the first priority in fighting rental car excise taxes.
"The best hope of countering arguments in favor of rental car excise taxes is to simply engage their advocates in public debate through newspaper op-editorials and letters to editors, and by providing information to reporters, television and radio producers, and analysts in the public policy think-tank community," Chamberlain says.
Organizations with access to a national network of members, such as professional associations or political watchdog groups who oppose tax increases, look to be valuable allies in the fight against car rental taxes. These groups can support the car rental industry from a third-party perspective, lending credibility to anti-tax arguments.
"I think we offer the businessperson’s perspective and the consumer perspective," says Connors.
The NBTA has a stake in issues related to travel, not only for the sake of its members who spend millions of dollars annually on travel, but also for the Association itself, as it travels to a different city each year to host its convention. Connors says a city’s stance on taxing travelers is now taken into consideration when choosing the location of the annual NBTA convention.
"I raised this, not so much as an advocate of beating away these car rental taxes, but as an association executive. One of the things we’ve written into our bid process is ‘what’s the local tax situation like there? Is this a city that is friendly to its visitors in terms of taxation? What are the local car rental tax rates? What are the hotel tax rates? What are the airline or airport concession fees?’ We want to make sure when we go to a city that it’s being friendly in its tax policies. And I tell you, if more and more people start looking at where they do business based on the tax policy of a particular city, that’s going to shake some people up."
The NBTA has headed up a campaign to raise public awareness by organizing meetings that gather representatives from the major car rental companies (Cendant, Dollar Thrifty, Enterprise, Hertz and Vanguard) at one table to discuss the negative impact of car rental taxes on the industry as a whole.
With 43 chapters across the country, Connors says the association has also had success at the grassroots level.
When the State Legislature of Florida voted to raise the daily excise tax on car rentals from $2 to $4 this past summer, the NBTA initiated a letter-writing campaign to the governor’s office from its three Florida chapters, and Connors testified before the state senate.
The American Society of Travel Agents joined the anti-tax fight in Florida, sending letters to legislators, the governor and its association members in Florida.
The outreach paid off—Governor Jeb Bush vetoed the bill.
The ASTA lists car rental excise taxes on the Legislative Initiatives section of its Web site, along with a spreadsheet listing states with pending and enacted car rental tax bills.
Moving forward, Connors says the NBTA is preparing to unleash a car rental tax "SWAT team" that will travel from city to city, fighting tax proposals as they arise.
The NBTA will hire a staff person whose sole job will be to travel to different parts of the country to address state and local taxes wherever these proposals arise and rally NBTA chapter members in that region. In addition, the NBTA will sponsor further research and publish a Web site dedicated to the car rental tax phenomenon. [PAGEBREAK] The Tax in Charlotte – Fair and Balanced?
In July, legislators in the North Carolina House approved raising rental car taxes from 11 to as much as 16 percent in Mecklenburg County in order to help defray the $158.5 million cost of building five new cultural arts venues in Charlotte.
John Lassiter, a member of the Charlotte City Council and chair of the Economic Development and Planning Commission, supported the use of the car rental tax to help fund the arts complex.
"We have historically looked for public-private partnerships to pay for a number of needed tourism and cultural facilities in Charlotte," he says. "We have roughly a 50/50 match between tourism dollars and dollars that are being generated locally."
According to Lassiter, about $90 million will be raised from the 16-percent car rental tax, providing close to half of the needed funds for the entire project. Other funding will come from property-tax proceeds from a planned Wachovia tower, adding $60 million. About $19 million would come from the city, and $10 million from the sale of the building that houses the Mint Museum of Craft + Design, which would be relocated to the new Mint as part of the proposed arts facility.
"About half the rentals are made by local citizens, and about half are going to be businesspeople or folks who travel into our marketplace, so we tried to come up with something that matched that demographic of use of the cultural facilities. We are trying to provide the right balance of both the source and the use."
While Lassiter sees the tax as fair and balanced, the way the bill was passed was not, according to an opinion piece in The Charlotte Observer. The piece contends that while the arts facilities are a needed resource for the region, the funding bill was sneakily "slipped through" as a provision in a bill that does not identify Mecklenburg County or a rental car tax, and channels the resulting funds on a convoluted path.
The local legislative delegation was not unanimous in its support of the rental car tax hike, making it unlikely that the bill would have passed on its own, according to The Charlotte Observer piece. "That kind of manipulation and secrecy invites bad laws and poor policy, and it’s exactly how business should not be done in Raleigh."
Tax-Fighting Tips from Past Campaigns
How to mount a campaign to defeat a rental-tax ballot measure: