Is Virginia Ready for Car Tax Reform?

Toyota Prius. Want greener cars? Try reforming the car tax.

Toyota Prius. Want greener cars? Try reforming the car tax.

by Bill Tracy

I was encouraged last week when Sen. Chap Petersen, D-Fairfax, joined the “car tax blues” chorus.* According to the Washington Post, Petersen filed bills proposing  to eliminate the car tax through a constitutional amendment and then giving localities the option of levying a local gasoline tax to make up for the lost revenue.

Many localities given the freedom to tax cars to balance their budgets went over-board with a car “super-tax.” That’s what’s happened in Northern Virginia, where the cumulative tax levy can approach 30% of a vehicle’s original cost over the 12-year average life of a vehicle. Of course, thanks to former Governor Jim Gilmore, the state of Virginia pays much of the local car tax for most residents. Unfortunately, the effect of the state subsidy has diminished as the cost of new cars escalates faster than the capped state payments.

Can you imagine up to $12,000 cumulative car taxes** on a $40,000 Ford F-150, America’s most popular vehicle? Even after Gilmore’s tax relief, the total tax bill still could be as high as $10,000 in NoVa. This compares unfavorably to our neighbors in Maryland and D.C. with a flat 6% excise tax ($2,400).

Parenthetically, Virginia’s car tax relief program does NOT reduce or solve the local car tax issue. It simply means that the state of Virginia, as a stop-gap corrective measure, sends a check to the locality on your behalf to help you cover your car tax bill.

Due to high local car taxes, many Virginians have learned to be modest in their new car selections, or they purchase used cars instead.  As a consequence, we are throttling new car sales.  In addition, the tax functions as a de facto green car penalty. For example, a hybrid typically costs about $4,000 more than an equivalent  non-hybrid. That price premium gets fully taxed.

Auto manufacturers believe that the Obama administration’s 54 miles-per-gallon standards for 2025 will force them to sell more electric plug-in cars to meet their regulatory quotas. California, the largest and most important U.S. car market, already mandates a substantial portion of electric car sales. Former GM executive Bob Lutz speculated that automaker were trying to recoup the cost of unprofitable plug-in sales by jacking up prices on other cars, especially trucks, SUVs and crossovers. Whatever the cause, we are seeing a trend towards more expensive conventional vehicles and more expensive green cars. As the average cost of a new car trends to $34,000 and higher, our current car tax system will prove increasingly painful to Virginia residents.

A year or so back, the McAuliffe administration invited me to submit my proposal for reforming the car tax to Transportation Secretary Aubrey Layne. The secretary nixed it on the logic that the localities, not the state, have ownership of the car tax issue.

To summarize my proposal, I said there is nothing wrong with a modest local car tax. At last count, about 18  states have some form of a local car tax.  I have studied the car tax formulas of many other states, and I strongly feel that we could devise an improved formula for Virginia.

As a fiscal “conservative” fearing another temporary, stop-gap solution, I am reluctant to totally kill off our car tax. As a possible alternative, perhaps we could move to a life-time 6% upper limit on the (tax deductible) local car tax in addition to the normal 4% Virginia state tax, for a total 10% total car tax. Perhaps give the buyer the option to pay a lump sum on the local tax.  I believe the lump sum approach is how Georgia weaned its localities from a prior “super-tax” approach.

I also agree with Petersen, and a related proposal by Sen. Frank Wagner, R-Virginia Beach, that allowing localities to charge more for local gasoline taxes at the pump might be a good idea. But, holy cow, let’s not give localities carte blanche on that.

Am I too bold to suggest that reducing the car tax would stimulate enough new car sales that localities might come out ahead? Only if we play our cards right, with good planning.

Bill Tracy is a retired engineer living in Burke, Virginia.  He owns a 2006 Prius and a 2009 Minivan (both white).


* The Virginia Car Tax Blues

(Parody song by Bill Tracy, 2013, to the tune White Christmas.)

 I’m dreamin’ of a white Prius, with every car tax check I write,
Where the hybrids pay more, and big cars pay less, 
To use, Virginia’s bumpy roads.

I’m dreamin’ of a new Prius, but I don’t think it makes sense here.
Low de-pre-ci-a-tion, high val-u-a-tion,
You pay, more car tax every year.

Now thinkin’ of a used Chevy, just like the ones Gramp used to drive.
If you think that’s crazy, you’re right!
But may all your Priuses…be White. 

** Calculations for 5% annual car tax, with and without 30% tax relief below $20,000 value, for a $40,000 vehicle at a low 15% depreciation rate. Cumulative total tax for 12-year ownership. Includes 4.15% state sales tax on cars.  Assumes no further local car tax rate increases.

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32 responses to “Is Virginia Ready for Car Tax Reform?

  1. The gasoline tax is THE BEST way for localities to deal with (and affect) urban planning and sprawl, defray the high cost of local road infrastructure and maintenance, and raise money for regional transportation fairly (those who impose the demand for roads also pay for them — to be completely fair a gas tax should be applied on a regional or Statewide basis, not just locally, but local is better than nothing). Compared to the personal property tax, or sales tax, it’s not even close how much fairer it is. The gas tax should be a lot higher, as a percentage of revenues, than it is now at the State level, and of course it’s non-existent at the local level. In fact I’m not sure why it should be capped as you propose.

    I’m all for the Prius (and hope that minivan is a hybrid too!). But let’s also hear it for denser, walkable neighborhoods with planned commercial centers and public transit. Pay that sales tax and put a car in the driveway, but just don’t use it often and let the other guy pay the gas tax.

    • I agree that gasoline taxes are probably too low in Virginia. For example, in NOVA, where Maryland has recently increased gasoline taxes, we may be paying more at the pump now due to the methods that wholesale gasoline distributors use try to hold status quo prices near state boundaries. We might as well increase our gasoline taxes to match Maryland, given that we might not see much price change at the pump anyways. Also, in areas like NoVA and Virginia Beach, we might as well try to get more taxes from outsiders…not to be unfair, just that our proclivity in Virginia to focus solely on internally hitting NoVA and Hampton Roads harder with taxes may tend to put us behind in the “sharing taxes with others” category.

      • Agree with you about matching Maryland, at least. The politics of increasing the gas tax is difficult, of course; it hits hardest those with the long commutes and there may be more of them voting than us close-in folks. But we badly need more of an economic incentive to encourage denser development; and a commitment to spend the proceeds on transportation would help politically, though we all know there’s more needed to get such a bill passed. Obviously now, with oil at extremely low prices worldwide, is the right time to raise the gas tax. IMHO a boost of 20 cents in the Virginia gas tax along with elimination of the remaining property tax on autos would be about right. For a state/state comparison:
        http://www.api.org/~/media/Files/Statistics/Gasoline-Tax-Map.pdf

        • That is really good API gaso tax data…keep in mind that map does not account for local tax differences, therefore add about 3 cents for NoVA and Hampton Roads and subtract about 3 cents for RoVA.

    • The best way must include forcing any landowner/developer who can obtain rezoning to a greater density to pay a significant portion of the costs for adding the transportation facilities that enabled the rezoning. Why should ordinary Janes and Joes subsidize profits for developers and purchase/rental prices for the new development. Then let’s talk about a gas tax hike.

  2. Good article! I have two problems with the current situation.

    1. – Gilmore’s “idea” was a BAD idea from several different perspectives.

    The state should have never got into that game and I think we should kill it all together. Put a stake The localities have used that State “rebate” as a hidden revenue that they turn right around and still tax cars – out the wazoo!!!

    And they are not the only ones. VDOT gets a tax on new cars also. And then add the insurance costs for a new car AND a tax on insurance ALSO – and it’s downright ridiculous.

    what”s that old adage – if you want less of something – tax it?

    ha hahaah bhahahahahhah !!!!

    when someone shows me data that Virginia citizen buy less new cars than other states with lower taxes – I’ll believe it!!!

    2. – Further, Most localities do not dedicate car taxes to transportation- instead spend it on other things – then blame the State and VDOT for not funding transportation.

    I LIKE the optional gas tax idea – except NoVa and Hampton already got that last go-around and I’m not sure they’re going to go for yet another tax on top on the ones already increased.

    but HEY – all this talk from Tea Party folks about smaller govt and holding it accountable – if we can’t do that at the LOCAL level – then what kind of a movement is that?

    where are the Va Tea Party Patriots on the car taxes?

    😉

    • Thank you…I had a lot of help from Jim to help clarify my points

    • To my knowledge, we do not have much good public car sales data for Virginia. The car sales data tends to be held proprietary for paying clients by various firms. However, it does not have to be that way. The California New Car Dealers Association puts out a detailed report every quarter, which is a favorite reference of mine. I like to be the first person to calculate the %plug-ins being sold in California (approaching 60% in 2015 – I give you the final number about mid-Feb ). I would propose to turn Virginia into a more healthy car sales market more like California (not saying exactly like California I am not a huge fan of forcing people to buy plug-ins with huge incentives including free HOV). But I feel this is an area we could help the economy. California is virtually the only state where we have data on how many hybrids are selling etc. Otherwise all we get is the rare blog article when someone splurges to buy state-by-state car sales data and report it.

    • Gilmore’s car tax plan was the best revenge on RoVA that ever happened. It saved countless state tax dollars imposed by the Commonwealth on Fairfax County residents from being spent in RoVA to keep their real estate taxes down.

  3. I don’t see new cars as priorities in people’s budgets when we have folks without health insurance – and we are paying for it and others going into hock for college.

    and besides – if the GOP had their way – we’d not have an auto industry anyhow!

    grump. grump. grump.

    we spend money on the wrong things …. IMHO.

  4. That sounds way too complicated and ambitious for our legislator, even with the long 60 day session. Maybe they could have greatly reduced the car tax if McDonnell had the guts to raise the gas tax and index it to inflation. I hope the millions of people living just above us enjoy our low taxed gas as they pass through the 150+? Miles of Virginia I-95 to and from their destinations

  5. re: funding for transportation + inflation index

    The first thing to recognize is that Virginia no longer taxes gasoline by the gallon – and that BoB McDonnell and the GA did fix that.

    we now tax at the wholesale level – a percent – 5.1% if I recall correctly and it has a “floor” if the price of gas goes too low.

    but WAIT , there’s MORE!

    we ALSO have a .5% exise tax that is gradually be increased each year to … .75% – I think. that tax brings in as much as the gas tax does – about a billion a year.

    but WAIT, there’s MORE!

    we also have a percentage sales tax on new cars….

    AND – we have a tax on insurance policies
    AND – both NOVA and Hampton have supplemental sales taxes of 1% I believe.
    AND we get about a billion a year from the Federal gas tax – which is now alone as a tax per gallon.

    so our taxes ARE indexed AND they are DIVERSE so that even if the price of gas plummets – we stil bring in significant money from the general sales tax and the sales tax on new cars as well as the two regional supplemental taxes.

    AND – we have already instituted dynamic tolling on major corridors and more are planned – i.e. the more congested – the higher the tolls.

    AND – Virginia DOES allow proffers and transportation districts with supplemental property taxes

    AND Virginia localities collect a crap load of property taxes on cars.

    I bet if we totaled up ALL the Federal, state, local taxes AND tolls , we’d find that we are spending multiple billions a year on transportation – and yet the more, more money – wailing and gnashing of teeth continues unrepentant!

    the more “free” roads we build – the more people will drive – that’s the ugly truth.

    and they hate tolls and taxes… but that don’t keep them from buying guzzlers and driving solo to/from work – some of them with round-trip commutes of 100 miles a day.

    In a supply/demand world – there is no denying that we remain a car-centric world – by choice AND are willing to spend out the wazoo to keep it that way.

    • The Va. car tax system has always been kind and gentle to lower income folks (and I understand if we want to keep that idea). Basically if you have a 10-yr old car depending on depreciation you have zero car tax. Some states like Va. at least charge $50 for older cars, but the “Virginia way” is if you drive an older vehicle, we give you free car tax. Not to mention our tax relief below $20000 really makes cars under $20k quite affordable in most areas. We essentially have the only progressive car tax system in the entire USA. And it is very progressive, hitting expensive cars really hard.

      Imagine a new $150K Tesla Model X electric vehicle in say Alexandria, whereas Alexandria has no green car discount, and has chosen to make their car tax even more progressive with a sliding relief scale, hitting more expensive cars with less relief (40%) while cheaper cars get 60% relief.

      My theory is Virginia must be lousy for Tesla sales, but some people tell me the Google employees in Reston are not deterred by the car tax. In that case I wonder if the Teslas are part of their compensation package, or owned by Google. Whenever someone tells me they know someone with a Tesla, I always say I predict they do not live in Virginia, so far I am always right.

  6. The white Prius in the picture above is the new 2016 4th Generation Prius, which will be available in Virginia around January 29. Notice the aerodynamic air dams where the parking lights are, helps to give the new Prius very low drag coefficient and about 54 MPG EPA combined. The CAFE MPG scale (which is the nutty political MPG basis that Congress uses) the new Prius is probably well over 80 MPG. Early gen4 Prius owners in California are reporting the EPA MPG is easy to beat, they are having trouble using up their first tank of gasoline. And this is not a plug-in, this is a 100% gasoline vehcile. And no tax credits (except tax free in DC).

    • On a related subject, the GW TPB staff has modeled the impact of the 54 MPG CAFE standard, application of MPG standards to large trucks, and increased transit use, on greenhouse gas reductions. When fully implemented, the transportation sector is largely tapped out for further greenhouse gas reductions from transportation for the Greater Washington area. According to the study, the only areas left are power production and buildings.

      While I continue to have questions about the CO2 “party line,” the staff has said greenhouse gas reduction strategies would need to produce substantial other benefits (such as the reduction of particulate matter or traffic congestion) to be affordable. To me, we are having an adult discussion about energy efficiency and greenhouse gas. My bottom line takeaway is a seemingly over-focus on transportation.

      • TMT – how would it be “tapped out” if not everyone has a Prius type car yet?

        Perhaps that”s what should also be taxed – i.e. how much your particular car pollutes, and/or rebates for low polluting cars, right?

        • As I heard it explained, vehicles become so energy efficient at 54 MPG & at the related level for big trucks that moving even higher produces very little more reduction in CO2 emissions and becomes extremely unaffordable. Meanwhile, according to staff, achieving the goal would effectively require retrofitting or replacement of virtually all buildings, including houses. I’m not arguing for or against these statements; just passing along what I heard.

          And, yes, the gas tax is doomed. The Virginia approach is much superior to those states that just raise the gas tax. And what about land speculators who make hundreds and hundreds of millions when they can rezone only due to new transportation improvements? Do they get to ride free?

          Back a few years ago, the McLean Citizens Association persuaded the Fairfax County BoS to shift $403 M in transportation costs, over 40 years, from taxpayers to property owners in Tysons from the staff’s recommendation. Guess what? Developers are still building. And Tysons will be an expensive place to live and/or work. But with easy access to rail, improved roads and non-rail transit, shouldn’t it be?

          • I agree with Larry the GW study seems a little off. A target of 54 EPA (actual) MPG would of course be very hard, but 54 CAFE MPG is much less stringent, more like 35-40 MPG EPA for cars per se, whereas light trucks – minivans etc – have a much easier target. I would agree it may be impossible to meet 54 CAFE as proposed from a practical viewpoint of what Americans and US auto makers are willing to accept, but as far as being the theoretical minimum CO2 for a society, I don’t see it.

    • Isn’t the Prius proof that the gas tax as a revenue source for transportation is doomed?

      • May require some increase or restructuring. If you look at UMich data on fleet average MPG trends, it suggest some decline in revenue but nothing that could not be addressed with modest gaso tax increases. Australia does not charge gaso tax, but they charge about $1000/yr reg fee for all vehicles. I suspect that’s a non-starter here but that shows one way to move to restructure the tax.

  7. I think you have to be very careful when comparing taxes in one state to another. Maryland may have a low car tax but they have county income taxes. Texas may have no state income tax but they have high real estate taxes. If you reduce the car tax then the state either has to spend less or raise some other tax. I see nothing in our state legislature’s recent history to indicate any interest in frugality. Therefore, I think that lowering the car tax while raising the gas tax would be the best option.

    • OK. Depends on if we get enough from gaso taxes to make up the difference. Virginia is not the only state with high local car tax, although ours probably takes the cake. If you look at Maine, their equation has worked without change over 70 years I believe. In Maine you pay 5% sales tax and then about +10% local spread out as follows (from Year-1) 2.4%; 1.8%; 1.4%; 1%; 0.6%, 0.4% of orig purchase price. So about 15% but without some of the issues of the Va. program. I am hoping we could get it down to 10% car tax to improve sales, but could be hard.

      Maine’s system is a little like what many Virginians actually pay, but unfort. that does not cover the total amount with state subsidy that localities need to balance their budgets.

  8. I agree with DonR. Localities have to provide services and they have to fund them – if not one way then another way.

    and I don’t see them cutting in any significant way the services they do provide – primarily education and public safety ( law enforcement, fire, rescue).

    On the gas tax – virtually all of the states have concluded that increasing the gas tax will further motivate people to buy more fuel efficient cars – like Prius. It’s not an argument any more with the States.

    When the GA (or was it McDonnell?) gave NoVA and Hampton regional transportation taxes -they came from the general sales tax not gasoline.

    http://taxfoundation.org/blog/virginia-legislators-approve-increases-sales-tax-car-tax-regional-taxes

    • The 2013 action in Virginia was, indeed, a step in the right direction. The gas tax is not going to be a reliable source of funding. What needs to happen is more action towards forcing overweight trucks to pay the full cost of the damage they cause to roads and bridges and higher proffers or fees on any landowner who can rezone to higher density due to the construction of transportation improvements that permit the rezoning. And, what about another penny on sales of bicycles and related products to fund additional bike improvements? Sort of like the fees paid by hunters to protect and expand game habitat.

  9. I just don’t think trucks are the issue. It’s not like we have to rebuild I-495 and I-95 every few years because of truck damage.

    Our complaints seem to be most often that we do not have enough roads – enough capacity – i.e. the I-66 issue!

    trucks did not cause the I-66 problem – nor in my view – most of the other ones that we hear complaints about.

    we agree on the percentage approach to gas taxes. That approach has two important advantages.

    Self-indexing, the more expensive that gas becomes – the more transpo funding we have – and at some point there ought to be a crossover where the price of fuel affects demand for more roads – AND the percentage can be easily changed in the GA without near the political upheaval that upping a per gallon tax would cause.

    If the GA were smart – they’d put a better modifier on the index. Right now, they have a floor level where the percent actually goes up if revenues drop below a floor threshold. They should do the top end the same way – i.e. don’t generate more revenues than the 6yr plan needs – otherwise – we’re going to create de-facto slush funds.

    • With a direct index in the gas tax, Larry’s floor and ceiling make sense. If “excessive funds” develop, the bottom feeders will seek financing for projects that don’t reduce traffic congestion or avoid landowners from paying fair amounts towards the projects that triggered their ability to rezone.

    • My engineer friends tell me that damage caused by added weight per axle causes increases exponentially. And that cars and light trucks don’t start causing damage to roads and bridges until there is some initial damage caused by heavy vehicles and/or weather.

  10. Why a huge car tax though? I mean its just a property tax like 1% on a house real estate, but you owe 5% on a car here (NoVA – as low as 3.5% elsewhere). There’s the problem. Just asking, why not have 1.1% on all property including cars? Why hit cars so hard? In other words, what is the fundamental source of the obvious resistance in Virginia to balance car tax and real estate tax?

    I know one answer, just heard the Gov say the FBI should come to Va. because of our low taxes. But is it just bragging rights? So we slam cars so people can say real estate tax is low? It think we have to give up on the low tax bragging and just admit NoVA/Hampton Roads has graduated from low to medium tax rates, maybe heading for medium-well.

  11. without expanding this out too much – we have a ton of people moving from NoVa to the Fredericksburg Area because they say they cannot afford a traditional home in a subdivision – that such a home costs 750K and up whereas down in our area 300K will buy an equivalent house.

    now – in that context – think about the real estate tax between Fairfax and our area. Ya’ll are bringing in TWICE the revenues for the same tax rate – AND on top of that the car tax! So folks take to the suburbs on all points of the compass in a big way whether it’s Fredericksburg, Culpeper, Winchester or Maryland – to escape the high taxes and in the process have pretty much destroyed the utility of the interstate highway system for anyone outside our area trying to transit through it.

    The north and south of the East Coast are pretty much cut off from each other – at many times of the day – now.

    People go all the way to I-81 west and 301 east to try to avoid the mayhem.

    and let me finish with this – if you think the car tax is problematic – did you realize that when you buy/sell real estate – that you’re paying for US 58 in southern Virginia AND some guy in the General Assembly want to expand on that idea to build a new Interstate down that way also!!!

    😉

    http://www.dailypress.com/news/politics/dp-nws-ga-real-estate-highway-20160120-story.html

    • The people I know that leave here, car tax is a bigger gripe than real estate tax. Agree that cost of a house is part of escape to X-burbs but not sure how that argues in favor of a questionably designed heavy car tax.

  12. Update:
    Chap Petersen lost this round as the GA has apparently declined car tax reform this session (below). If it was me, I would have asked for a study of car sales in Virginia (state-by-state data is pay-only). I would also ask for development of a Virginia DMV tool for estimating total cat tax over life of vehicle. Hopefully next year this issue can be addressed with a bit more advance planning.

    http://www.richmond.com/opinion/our-opinion/article_e7bd8698-630a-558d-9221-384a854c47d3.html

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