Abolishing Car Taxes

The car tax is the last vestige of an abusive and long ago discarded tax system. It's the old personal property tax - when the tax assessor pawed through your belongings and told you how much you had to pay to keep them. The USA and European Commission are currently calling for significant changes in the way passenger cars are taxed. The intention is to gradually apply the user pays principle to motorized transport. According to DG TAXUD, the envisioned taxation system will ensure a more appropriate internalization of the external costs of private cars - an important principle for which T&E has long been arguing. Taxing the actual use of private cars is an important step towards sustainable transport. But charges on car user ship ought to complement the already existing taxation of car ownership, and not just replace it. A full internalization of all environmental costs of cars must recognize the problems that result from the still growing sum total of cars on national and international roads. Road capacity in many regions has reached its limits - a fact that is most illustratively expressed by the continuous congestions on national highways and trunk roads. Capacity limits are reached as well in almost all urban areas, where evermore space is consumed by car-infrastructure such as parking spaces, car-dealers or car repair-, maintenance- and washing-facilities - not to mention streets themselves. Therefore a taxation system is needed that restricts both private user- and ownership by making sure that road passenger transport pays for its external costs. The positive response with which carmakers have welcomed (and had lobbied for) the abolition of registration taxes illustrates how auto-friendly the proposed legislation eventually may be. This, however, means that transport in general will not become more expensive - but that the sector will just pay differently and still not properly.

Thus to create harmonization it will make the economy more efficient, but does not automatically entail environmental improvement. As they stand now, the plans of the Commission to replace Registration Taxes by Annual Circulation Taxes may partially reduce private car use and thus lower the annual emissions of a single car. However, they will not provide any incentive at all to refrain from owning a car. In fact, the opposite is the case, because abandoning registration taxes will further stimulate the production and consumption of cars. This will be most tangible in countries like Denmark that were able to limit the growth of motorization rates and maintain a "greener" modal split by ways of higher registration rates.

It is to be noted that The Government has announced that with effect from 6 April 2002, the basis of taxation on cars provided by employers for employees' business and private use, will be changed to an emissions based system. Pool cars, provided for business use only, and which are returned to site at the end of the working day are currently not liable to benefit in kind taxation, and this will continue to be so. Carbon Dioxide (CO2) emissions will be used as the measure to calculate benefit in kind taxation on company cars from that date. A tax discourages economic activity, such as work or investment. The tax is cut, leading to increased economic activity. Liberals then assume that previous rates of tax would still be collected at the higher rate of activity -- which, of course, only came about because of the lower tax rate -- thus depriving the government of vast revenues it is justly entitled to. It makes no difference to them that economic activity often expands by more than tax rates are cut, thus increasing total revenues. Liberals always still believe that even more would have been collected if only tax rates had not been cut. In the case of the car tax, liberals assume that additional cars would have been purchased anyway, without any change in the tax. And by multiplying the old car tax rate times the larger number of cars registered, they come up with mythical revenues that could pay for more teachers, police, and roads.

Thus, in this paper, we discuss the abolition of car taxes rule in context of California - one of the major and highly populated city of United States of America.

History: In 1935, the Motor Vehicle License Fee Act established a state car tax of 1.75 percent of the value of an automobile in lieu of the personal property tax then assessed on all personal property. The taxes collected under this act were limited to state purposes, including highways. The personal property tax was subsequently abolished, but the car tax remained. In 1948, the fee was raised to two percent. In 1957, the law was clarified to limit the use of these funds for law enforcement, regulation and control of highway traffic, and other state purposes.

In 1988, the law was amended to allow the use of car taxes for any purpose, and in 1993, 25 percent of the funds were earmarked for realignment of health and social services programs. Thus, any linkage between the car tax and roads was obliterated. Worse for taxpayers, in 1991 California's car tax was radically restructured to provide additional tax resources to balance the state budget as part of an $8.2 billion increase in taxes and fees that year. Prior to 1991, automobile owners were charged on a ten-year depreciation schedule, based on the original purchase price of the automobile. The 1991 legislation made three dramatic changes. First, the depreciation schedule was stretched from ten to eleven years. Second, the act provided for a permanent tax on fully depreciated automobiles amounting to 0.3 percent of the price in perpetuity beginning in the 11th year. Third, the new law triggered a restarting of the depreciation schedule, virtually assuring that very few cars would ever reach the bottom of the schedule. The net effect was a $60 per year increase in the VLF paid for an average car.

Another historical note about the 1991 tax increase is also relevant to this discussion. The overall tax increase that year was the largest by any state in the history of the nation. According to revenue estimates made at the time, the entire package amounted to $8.2 billion in additional taxes and fees, or roughly $1,100 per family. The tax increase, enacted in the midst of a recession, broke the back of California's economy. Although some of those taxes were repealed or expired, many are still on the books. Thus, California's Vehicle License Fee began as a substitute for the personal property tax. When the personal property tax was abolished, the tax was maintained under a new name. It was originally limited to state purposes, principally for highways and highway-related services. Today, it is devoted to purposes entirely unrelated to highways. It now consumes $3.3 billion of California family earnings, at a time when they are paying $3.6 billion more than they would have paid without the 1991 tax increases.

Meanwhile, the onerous and outdated automobile tax has proven to be highly unpopular across the country. In the 1997 Virginia gubernatorial campaign, Republican James Gilmore's campaign was stalled until he unveiled a proposal to abolish Virginia's car tax. Gilmore won a dramatic victory for Governor and swept a majority of Republicans into the Virginia state Senate. He has now set about to fulfill his signature campaign promise, backed by an overwhelming mandate from Virginia voters. Meanwhile, in Texas, Democrat Gary Mauro is campaigning against Republican Gov. George Bush, Jr., on a platform to abolish the state's sales tax on motor vehicles. Bush opposes the plan. In Georgia, Republican Guy Millner has proposed ending that state's car tax for a saving to taxpayers of $475 million. In South Carolina, Gov. David Beasley proposed in his State of the State address last month to phase out the car tax over a period of six years.

Abolishing the Car Tax: AB 1776

A car represents security of transport. Even if public transport is adequate for most journeys, people still want a car for the odd occasion or emergency. There will always be places and times when public transport doesn't run. The Government could make a contribution immediately by abolishing car tax and increasing fuel taxes to offset the loss of revenue. This would have the added benefit of doing away with an absolutely pointless and tedious administration system. The point is that public transport will never be able to emulate the flexibility of private transport and that at present the car has so many advantages.

The Virginia experience makes a strong case for California to abolish its car tax. By doing so, California could reduce the overall level of taxation to what it would have been without the tax increases imposed during the 1990's, while still providing for some $14 billion in additional general fund revenues in the last eight years. It would abolish a tax that long ago ceased to bear any resemblance to its original purpose and intention. It would remove a strong disincentive in current law that keeps motorists from shedding older, higher polluting automobiles. It would provide a significant spur to economic activity by reducing the cost of new vehicles in California. It would reduce costs to California families of what is a practical necessity in the Golden State: the family car. The problem in doing so is the built-in special interests that depend on the tax. A $4 billion saving to taxpayers is also a $4 billion cut in the governor's proposed budget. In this case, the beneficiaries are local government budgets, which are still recovering from a multi-billion dollar raid by the state government in 1992 and 1993. In order to back-fill this amount, reductions in the proposed state budget would have to be taken from non-education funds under constitutional provisions enacted by Proposition 98. The "non-98" side of the budget also funds the Department of Corrections, a sacred legislative cow.

In abolishing California's car tax, it would be a desirable policy and a practical necessity:

 To hold local governments harmless by back-filling their losses with state funds

 To work within the revenue projections of the Department of Finance

 Not to affect Proposition 98 funds for schools

 Not to affect the administration's proposed funding for state prisons

 Not to affect the administration's proposed budget reserve.

The next question is how the funds should be preserved, protected and restored to local governments to replace the VLF taxes they will be losing. This is a particularly important question, since Proposition 47 of 1986 constitutionally earmarked VLF subventions for local governments, providing a relatively tamper-proof and expanding source of local revenues. Even though VLF subventions could be redirected away from local governments in future budgets simply by using them to supplant other sources of local funding, a suitable replacement to the VLF is an understandably important objective of local government.

AB 1776 establishes a strong protection against state government raids by phasing in a dedicated portion of future sales tax revenues to replace the lost VLF subventions. To protect against anomalies occurring between high-sales tax and low sales tax communities, the replacement revenues are placed into a dedicated state sales and use tax account that will replace lost VLF subventions on a dollar-for-dollar basis. When fully phased in, the sales tax rate required to replace the lost revenues will lock, and the subventions from the fund will naturally expand as the economy expands. Indeed, this reform greatly enhances the flexibility of local governments to use these funds by eliminating the straightjacket effect of the 1991 re-alignment legislation. Furthermore, to provide additional protection for local governments, the sales tax provisions of AB 1776 will be placed in a "Local Government Independence Act," a constitutional amendment to be introduced in the Assembly later this month.

Californians pay the third highest combination of automobile taxes in the nation, and they pay $3.6 billion more in overall taxes than they would have without the net tax increases of the 1990's. The largest portion of the automobile taxes is the Vehicle License Fee, also called the "car tax," accounting for an average of $185 per automobile annually. None of this money is used for highways or highway-related services. It goes instead to local government general funds and local health and social services programs. Abolishing California's car tax would make California families whole for the massive tax increases they suffered in 1991. In this period of economic growth, abolition of the car tax could be done while protecting local government from any revenue loss, preserving state funding for schools and prisons, and maintaining the proposed budget reserve. It would require an overall reduction in the 1998-99 proposed general fund budget of just 9/10ths of one percent, or no budget reductions at all if additional revenues materialize in the May Revise.

The state's booming economy makes it possible to abolish the tax without touching the state's school budgets or even the growth rate in the schools' funding guarantee. The bill to abolish the tax even protects local governments from any revenue loss; it replaces every dollar lost through the car tax with an equal amount from the state's share of existing sales tax revenues. To answer local government concerns that the replacement fund might be reduced in future years, a constitutional amendment has been proposed to protect against raids by future legislatures. In response, on 1997 Virginia voters just delivered a resounding mandate for abolishing the car tax in that state by electing James Gilmore, who made that objective the signature theme of his campaign. The support for abolishing the car tax from an impressive coalition of taxpayer groups suggests that strong organizational structure exists for taxpayers to channel their outrage at California's abusive car tax.

Putting the real cost of using a car before the commuter might change a lot of minds and, incidentally, is a lot more democratic than road pricing where a flat rate will have to be paid to get into the city center. The good news is that California is enjoying a period of economic expansion. A combination of projected revenue growth and a one-year postponement of new social spending while meeting all of the above criteria can accommodate a five-year phase-out on the car-taxation. It is now established that even a much reduced rate of economic growth than California is currently experiencing would be more than enough to cover the phase-out of the car tax, without affecting Proposition 98 funding guarantees.

Holly Odom is a freelance writer working for essaymart.com - on line Custom Writing/Research company. She specializes in Social sciences, Arts, History and English literature. During 2005, earned became one of 10 best writers at essaymart.com.