What will become of the car tax?
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What will become of
the car tax?
by John L. Knapp
During the 1997 gubernatorial election, the car tax proposal
championed by Republican candidate James S. Gilmore III John L. Knapp is professor emeritus at the University
became the central campaign issue. Gilmore called for state of Virginia and senior economist, Business and Eco-
reimbursement to localities in exchange for mandated cuts nomics Section, at the University’s Weldon Cooper
in personal property taxes on cars and light trucks used for Center for Public Service. His professional positions
personal transportation. The campaign proposal was made at a have included deputy director of the former Tayloe
time of strong state revenue growth and was sold on the prem- Murphy Institute, deputy director of the Common-
ise that it would not divert state funds from ongoing programs wealth of Virginia’s Division of State Planning and
because there was plenty of money to provide taxpayer relief Community Affairs, economist with the Virginia
and to maintain state expenditure programs. Division of Industrial Development and Planning,
assistant economist with the Federal Reserve Bank of
About the “car tax” Richmond, and budget analyst with the U.S. Depart-
No tax is popular, but even in the company of other taxes, 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
car tax—was especially unpopular. Four factors contributed to president of the Council of Professional Associations
taxpayers’ distaste for this source of revenue. on Federal Statistics, the Association for University
www.via.vt.edu
First, unlike many other local taxes, the state imposed no Business and Economic Research, and the Virginia
restrictions on the rate. Localities had raised effective rates so Association of Economists.
Winter 2006 | Virginia Issues & Answers 27they were much higher than real property taxes. In 1997, the taxpayers. According to a 1998 survey, 19 states, including
median effective tax rate on motor vehicles was $2.54 per Maryland and the District of Columbia, did not impose a
$100 of market value versus $0.61 for real estate.1 Thus, the state or local property or value-based tax on motor vehicles.
tax rate on motor vehicles was more than four times greater Since then, one state—Washington—has eliminated its
than for real estate. tax. Populous states without such taxes include New York,
Second, a much higher proportion of households own Florida, Illinois, and Pennsylvania.4
motor vehicles than homes. According to the Census
Bureau, in the year 2000, 85.8 percent of the nation’s house- The reality of abolishing the tax
holds owned motor vehicles while 67.2 percent owned After winning the election, Gilmore introduced legislation
homes.2 The wider ownership of vehicles meant that the car to implement his car tax proposal. The proposal, treated as
tax was directly imposed on a larger population than the an electoral mandate, was enacted as the Personal Property
real estate tax, assuring a larger share of aggrieved voters. Tax Relief Act of 1998. The act provided for phased elimi-
Third, unlike the real estate property tax, which many nation of the tax on vehicles with an assessed value of less
households pay monthly via a mortgage escrow account, the than $20,000. The tax was to be reduced by 12.5 percent per
motor vehicle tax is collected as a lump sum either annually vehicle in tax year 1998, 27.5 percent in 1999, 47.5 percent
or semi-annually. When car tax relief was being promoted, in 2000, 70 percent in 2001, and 100 percent thereafter,
nearly four-fifths of the total number of cities and counties provided that sufficient funds were available to finance the
collected the tax annually with the remainder relying on program.
semi-annual collection.3 It is noteworthy that in populous 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
on Oct. 5, only a month before the election. (i.e., loan, trade-in, or retail value), the assessment ratio, and
Fourth, property taxes on motor vehicles are not widely the tax rate employed by the locality in 1997. The program,
used in the nation, an unwanted distinction for Virginia which was considered as non-categorical state aid, had one
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28 Virginia Issues & Answers | Winter 2006of the most unusual state aid distribution formulas in the counties and eight cities have raised their effective tax rates
nation. Because the program provided reimbursements for on motor vehicles.7 In contrast, two localities have reduced
foregone tax revenue, localities were not eligible for reim- their effective rates. Regardless of these changes, the state
bursements to individual taxpayers in a particular year until aid is based on the tax year 2004 distribution, which was
taxpayers had paid the portion of the tax not covered by the tied to 1997 effective rates.
reimbursement plan. Figure 1: Car tax disbursements, FY 1999-08
When implementation of the tax began, the state found
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 govern-
ment 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 Source: Office of the Comptroller, General Fund Preliminary (Unaudited) Annual Report for the
be greater than the estimated costs, and the state’s revenue Fiscal Year ended June 30, 2006 (Aug. 15, 2006).
picture dimmed. For tax year 2002, the General Assembly 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
continued to deteriorate, the General Assembly capped the 99, the first-year distribution was $181 million.8 Disburse-
amount of state aid to localities at $950 million annually ments reached $907 million in FY 05 before dropping to
with the pro rata share of each locality based on its propor- $724 million the next year. The large decline was attribut-
tion of the tax year 2004 distribution. How the aid would be able to a shift in reimbursement payments from a tax year to
applied to individual taxpayers’ car tax bills was left up to a fiscal year basis. This saved $277 million in payments not
the localities. Based on a recent survey, localities have over- made during the last six months of FY 06.9 The $950 million
whelmingly chosen to use a specific relief method providing cap is reflected in the projections for 2007 and 2008.
the same percentage for all qualifying vehicles. Thus, what
6
Figure 2: Car tax reimbursements as a percentage of the General Fund,
had started out as a state aid program based on reimbursing FY 1999-08
localities for foregone personal property taxes with no dol-
lar limit on the total amount expended by the state instead
had morphed into a state aid program based on the histori-
cal 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
passage of time, normal inflation would have assured that 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
more vehicles exceeded the limit unless the law was amend- (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.
restrict localities from raising the rates that applied in 1997. The strain of car tax reimbursement on the state’s General
www.via.vt.edu
The state would not reimburse the additional revenue from Fund is shown in Figure 2. Starting with 1.9 percent of the
higher rates, but it would allow them. In fact, since 1997, 34 total in FY 99, disbursement rose to 7.9 percent in 2003. After
Winter 2006 | Virginia Issues & Answers 29that 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 $950 million is
fully funded, the share of the car tax will rise to 6.1 percent
in 2007 before decreasing to 5.9 percent in 2008. Assuming
future General Fund growth and no changes in the current
legislation, the share of the car tax reimbursement will drop
further in subsequent years.
Disparate benefits
The lion’s share of state aid for car tax reimbursements
goes to a handful of urban localities (see Table 1). In fact,
Sources: Auditor of Public Accounts, “Personal Property Tax Payments, Fiscal Year 2003” as
seven urban localities located in the three major metropoli- shown on APA website; Department of Taxation, Annual Report, Fiscal Year 2005—Revised July
tan areas account for one-half of the state payout to cities 13, 2006; Weldon Cooper Center 2003 population estimates.
and counties.10 Fairfax County alone will receive 22.5 per- The car tax formula now in place also penalizes localities
cent of the aid in FY 2007. Rural, sparsely populated locali- with strong population growth because the distribution will
ties, however, will receive the lowest shares: 0.004 percent make no allowance for change after tax year 2005. A look
for Bath County and 0.018 percent for Highland County. to the past illustrates the problem. From 2002 to 2005, the
Table 1: Localities that will receive the largest reimbursements, FY 07 localities with the fastest population growth were Loudoun,
Culpepper, King George, Prince William, and Stafford. Con-
Locality Amount ($) % of City/county Total
sequently, all increased their percentage share of total car tax
Fairfax County 211,995,999 22.5 reimbursements. However, under the new law, their shares
Virgina Beach City 55,673,386 5.9 will remain the same in future years.
Prince William County 55,102,349 5.9
Loudoun County 41,503,640 4.4 What next?
Chesterfield County 40,987,452 4.4 Since its birth, personal property tax relief has been a
Henrico County 37,415,217 4.0 contentious issue because of the high cost to the state gov-
Arlington County 31,313,980 3.3 ernment. The $950 million cap was a response to a program
Subtotal 473,992,023 50.4 that exceeded available resources. However, as state fi-
City/county total 940,662,429 100.0 nances improve, car tax reimbursement is likely to return as
Source: Virginia Department of Taxation, Personal Property Tax Relief Act of 1998, Estimates of
a major issue.
Reimbursements to Localities, Fiscal Year 2006 Through 2010 (November 2005), pp. B-25 to B-27. There are three major policy alternatives. First, the origi-
www.finance.virginia.gov/KeyDocuments/PPTRA/index.cfm (Oct. 16, 2006).
nal provisions of the property tax relief act could be reinstat-
When standardized by dividing by population, the ed. If that were done, it is likely that the $20,000 per vehicle
disparities are greatly reduced but still substantial. Aid limit would be raised. Taking such a step would push the
per capita varies from $217 in Fauquier County and $207 annual cost of relief over $1.5 billion, a cost that would
in Fairfax County to only $28 in Grayson County and $8 in continue to rise year after year as the number and value of
Bath County. Since car values and frequency of ownership vehicles increased.
rise with income, it is not surprising that state aid for car tax Second, fundamental changes could be made in the
reimbursement is strongly correlated with income. 11
original Personal Property Tax Relief Act so that all locali-
Figure 3 shows plots for per capita car tax reimbursements ties would be reimbursed on the basis of retail value, a
www.via.vt.edu
and per capita state income tax liability for 2003, the most uniform assessment ratio of 100 percent of retail value, and
recent year for which income tax data are available. a standard tax rate. Such changes would make the distribu-
30 Virginia Issues & Answers | Winter 2006tion more fair but they would move away from the original org/CLAY/Art/05PPTRA.pdf, accessed on 10/16/06.
concept of reimbursing localities for actual costs. 7
Ibid, p. 72.
Third, the personal property tax on vehicles could be 8
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
on income tax collections by locality. Such a program would year payout went directly to individuals who had already
result in a distribution similar but not identical to the cur- paid their car tax for tax year 1999. The full amount of the
rent system but far simpler to administer. disbursement, $119 million to individuals plus $62 million
When car tax reimbursement was inaugurated, the op- to local governments, is shown in Figure 1.
portunity to change the local taxation of vehicles by requir- 9
Auditor of Public Accounts, Personal Property Tax Relief
ing localities to keep effective rates in line with those on real Act Special Review, September 2004, p. 10, available at www.
estate was lost. Now, the question of how to deal with state apa.state.va.us/data/download/reports/audit_local/PPTRA04.pdf,
aid related to the property tax promises to be a major issue accessed on 10/16/06.
in the future. 10
The total payout will be $950 million. Of that amount,
$941.1 million will go to cities and counties with the remain-
Endnotes der for incorporated towns.
1
Virginia Department of Taxation, “The 1997 Virginia As- 11
The equation is Y = 23.8472 + 0.0941 X
sessment/Sales Ratio Study” (April 1999), Table 3, pp. 21-24; (5.3592) (0.0073)
and the Weldon Cooper Center for Public Service, 1997 Tax Adjusted R2 =0.558 where Y is car tax reimbursement
Rates: Virginia’s Cities, Counties, and Selected Towns, 16th An- per capita and X is income tax liability per capita.
nual Edition, February 1998, Table 9.1, pp. 91-95.
2
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.
(For a good analysis of payment options for local govern-
www.via.vt.edu
ments, see Virginia Municipal League, Personal Property Tax
Relief Guide and Model Ordinance, May 2005, at www.vml.
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