Bacon's Rebellion

James A. Bacon



 

You call that a

tax cut?

Car Tax Lotto

 

Car tax relief returned $819 million to Virginia taxpayers last year. But the payoff was arbitrary, depending on where you live and how expensive a car you drive.


 

Fairness, I'll be the first to admit, is in the eye of the beholder. But even the most ardent advocate of phasing out the car tax would be hard pressed to argue that, as currently administered, this particular form of tax relief is equitable. Just contrast the treatment of Bath and Fairfax counties.

 

In Fairfax County, the average per capita income in 2000 was $51,200. Last year, under the current arrangement for phasing out the car tax, the state of Virginia reimbursed Fairfax County motorists the equivalent of $190 per man, woman and child.

 

In Bath County, per capita income was half that of Fairfax, just shy of $24,500. Last year, the state of Virginia reimbursed the county the equivalent of $8 per resident. Yes, that's right: eight measly dollars.

 

It's an unavoidable fact of life that the burden of paying taxes cannot always be distributed fairly. However a levy is structured, there's always someone who thinks he's getting a raw deal. But even by the standards of an imperfect world, few initiatives have distributed benefits as arbitrarily and capriciously as Virginia's car tax relief.

 

The gap between rhetoric and reality is breath-taking: A tax initiative touted as helping average Virginians winds up favoring affluent professionals driving Beamers and SUVs. Making matters worse, car tax relief also conflicts with efforts to mitigate traffic congestion, a hot button in many parts of the state. Year in, year out, Virginians put more miles on the road, as measured by vehicles mile driven, than the previous year. Yet, rather than encouraging alternatives to driving -- telecommuting, riding mass transit or just living closer to where you work -- Virginia's tax policy reduces the cost of auto ownership.

 

When the solons in Richmond undertake the task of re-thinking the state's tax structure this year, they should start by throwing car tax reimbursement on the trash heap -- with the proviso, of course, that they figure out some other means of giving the money back into taxpayers' pockets, not steering it to their own pet projects.

 

Back in 1998, I agreed with then-Gov. Jim Gilmore's logic for getting rid of the tax. If he hadn't taken the money away from the politicians in Richmond, they surely would have spent it all. Politically, targeting the car-tax was brilliant. Opinion polls showed that voters loathed this particular levy more than any other. Given the incredible pressure to increase state spending to meet assorted "unmet needs," it was probably the only tax cut that Gilmore could have pushed through the General Assembly. Indeed, the measure proved so popular that even Gilmore's successor, Gov. Mark R. Warner, vowed to complete the phase-out as soon as it was fiscally responsible to do so.

 

However, the roll-back of the car tax had an intrinsic problem: Local governments levied the tax but state politicians were the ones who wanted to get rid of it. To put money back in the hands of taxpayers, legislators resorted to a Rube Goldberg mechanism: They did not actually eliminate the car tax -- rather, the state took over from local taxpayers the burden of paying it.

 

As car tax relief is currently structured, localities reimburse citizens for 70 percent of the personal property tax payments due on up to $20,000 of valuation. The state strokes a check to the localities to cover the reimbursement. The end result is that the state rewards rewards two groups of dubious merit: (1) localities that imposed the highest personal property tax rates on their citizens, and (2) motorists who buy the biggest and most expensive cars.

 

The following chart shows the total refund paid to each locality and the per-capita value of that refund. (Skip past chart.)

 

Car Tax Reimbursements 

(fiscal 2002; refund in $ millions)

Total Per

Rank

Locality Refund Capita
1   Loudoun 36.6 $192
2   Fairfax (county) 188.1 191
3   Falls Church 2.0 191
4   Fauquier 10.7 186
5   Alexandria 21.3 165
6   Buena Vista 1.0 162
7   Albemarle 12.9 161
8   James City 8.1 160
9   Frederick 9.8 159
10   Clarke 2.0 154
11   Arlington 28.6 152
12   Poquoson 1.7 148
13   Chesterfield 37.6 141
14   Hanover 12.3 137
15   Prince William 39.7 133
16   Dinwiddie 3.2 131
17   Fairfax (city) 2.9 131
18   Isle of Wight 4.0 130
19   Roanoke (county) 11.2 130
20   Franklin (city) 1.0 126
21   Greene 2.0 125
22   York 7.3 125
23   Hampton 18.2 125
24   Henrico 32.9 124
25   New Kent 1.7 124
26   Warren 4.0 124
27   Goochland 2.1 121
28   Chesapeake 24.7 121
29   Spotsylvania 11.6 119
30   Southampton 2.0 117
31   Rappahannock 0.8 116
32   Suffolk 7.7 116
33   Manassas Park 1.2 115
34   Fluvanna 2.4 112
35   Rockbridge 2.3 112
36   Nelson 1.6 107
37   Powhatan 2.5 106
38   Virginia Beach 45.4 106
39   Alleghany 1.4 105
40   Mathews 0.9 100
41   King and Queen 0.6 99
42   King George 1.7 98
43   Emporia 0.5 98
44   Botetourt 3.0 97
45   Essex 1.0 96
46   Salem 2.4 96
47   Colonial Heights 1.6 95
48   Caroline 2.1 94
49   Prince George 3.2 94
50   Northampton 1.2 93
51   Manassas                            3.3 93
52   Newport News 16.6 92
53   Bedford 5.5 90
54   Greensville 1.0 90
55   Cumberland 0.8 89
56   Fredericksburg 1.8 89
57   Portsmouth 8.9 89
58   Charles City 0.6 88
59   Waynesboro 1.8 88
60   Sussex 1.1 87
61   Orange 2.3 86
62   Covington 0.5 85
63   Shenandoah 3.0 84
64   Roanoke (city) 7.9 84
65   Craig 0.4 82
66   King William 1.1 82
67   Lynchburg 5.3 82
68   Richmond (city) 16.0 81
69   Lunenberg 1.0 80
70   Richmond (county) 0.7 79
71   Charlottesville 3.4 78
72   Rockingham 5.2 76
73   Danville 4.6 76
74   Petersburg 2.5 76
75   Amelia 0.9 75
76   Giles 1.3 75
77   Brunswick 1.3 73
78   Stafford 7.3 73
79   Lexington 0.5 71
80   Buckingham 1.1 70
81   Madison 0.9 70
82   Northumberland 0.9 70
83   Accomack 2.6 69
84   Gloucester 2.4 69
85   Culpeper 2.4 68
86   Lancaster 0.8 68
87   Westmoreland 1.1 68
88   Appomattox 0.9 67
89   Winchester 1.6 67
90   Amherst 2.1 65
91   Campbell 3.3 65
92   Norfolk 15.1 65
93   Middlesex 0.6 63
94   Pittsylvania 3.9 63
95   Staunton 1.5 63
96   Page 1.4 62
97   Surry 0.4 62
98   Highland 0.2 61
99   Prince Edward 1.2 61
100   Nottoway 0.9 60
101   Hopewell 1.3 60
102   Floyd 0.8 59
103   Augusta 3.9 58
104   Williamsburg 0.7 57
105   Tazewell 2.5 56
106   Charlotte 0.7 55
107   Smyth 1.8 55
108   Wythe 1.5 54
109   Louisa 1.4 53
110   Buchanan 1.3 51
111   Norton 0.2 51
112   Franklin (county) 2.4 50
113   Montgomery 4.2 50
114   Bland 0.3 47
115   Mecklenburg 1.5 46
116   Washington 2.3 45
117   Bedford 0.3 45
118   Pulaski 1.5 44
119   Martinsville 0.7 44
120   Halifax 1.6 43
121   Radford 0.6 42
122   Bristol 0.7 41
123   Russell 1.2 39
124   Galax 0.3 38
125   Carroll 1.0 35
126   Patrick 0.7 35
127   Harrisonburg 1.4 35
128   Dickenson 0.6 34
129   Wise 1.3 32
130   Scott 0.7 31
131   Henry 1.7 30
132   Lee 0.7 29
133   Grayson 0.5 25
134   Bath

NMF*

8
  Total 818.9 116

* $40,000 total

Source: Secretariat of Finance

Note: Reimbursements represent fiscal 2001-2002 figures; per capita income was calculated on the basis of 2001 Census Bureau estimates, the latest available.


As can be discerned by scanning the table above, affluent Northern Virginia localities received the biggest benefit from the tax relief, both in terms of absolute dollars and adjusted on a per capita basis. While accounting for just over 26 percent of the population, the nine Northern Virginia localities of the Washington metropolitan statistical area received more than 40 percent of all car-tax refunds. 

 

Northern Virginia Relief Act

(AKA the Personal Property Tax Relief Act)

 

% State

Reimbursement

% State

Population

Northern Virginia 40.2          26.4        
Richmond 14.0          13.8        
Hampton Roads 19.7          22.1        
Rest of VA 27.2          37.7        

 

Richmond MSA localities received a sliver more than their proportional share of the population on a regional basis, while Hampton Roads localities came out behind. The rest of Virginia, particularly poor, rural counties with low personal property rates, were totally hosed.

 

How rural legislators ever approved such an inequitable distribution of tax relief, I'll never understand. Perhaps it wasn't clear back in 1998 how the methodology for calculating the payments would shake out on a locality-by-locality basis. Whatever the case, there's no justification for tolerating the tax now: We have four years of historical payments to go by, and the evidence is crystal clear.

 

Gov. Mark R. Warner and Senate Majority Leader John H. Chichester, R-Fredericksburg, are forging ahead with plans to study Virginia's mix of state and local taxes. As long as it's not employed as a strategem for extracting more revenues, tax restructuring is a good idea. It provides lawmakers a chance to put into place a system that's fairer and more geared to growth. A good place to start would be to scrutinize the phase-out of the car tax.

 

There are a number of perspectives from which to analyze a tax.

  • How much money does it raise? This, of course, is the bottom line for politicians. They want to know how much money they get to spend.

  • How fair is it? Does the tax (or phase-out of a tax) apply equitably across the board, or do certain groups bear a disproportionate burden? If the burden is not spread evenly, is it at least related to the ability of people to pay it?

  • Does the tax encourage socially or economically desirable behavior, such as the accumulation of capital or the start-up of new businesses?

Observers of a liberal philosophical bent might insist that taxes be "progressive" in the sense that rich people pay more in taxes than poor people -- or, in the case of a tax cut, that poor people receive a greater benefit than rich people.

 

The car tax phase-out flunks the liberal fairness test. Viewed on a regional basis, the greatest benefits go to Northern Virginia, the state's wealthiest region by far. Viewed on a personal basis, the greatest benefits go to those who can afford to buy more expensive cars. If the aim is to help poor and working-class people, a reduction in the sales tax would do far more than phasing out the car tax.

 

Observers of a conservative persuasion might design a tax structure that stimulates economic growth. By this logic, taxes on consumption, such as sales and property taxes, are preferable to taxes on income and capital accumulation.

 

The car tax phase-out also flunks this test. By reducing the personal property tax, the phase-out rewards the purchase of expensive automobiles -- typically SUVs and high-ticket imports. Does Virginia tax policy really want to reward the purchase of gas-guzzling Suburbans, or foreign-made BMWs, Mercedes and Lexuses? Likewise, by reducing the cost of owning automobiles, the state subsidizes Virginians' penchant for commuting ever greater distances, putting ever more stress on the transportation system -- and creating traffic congestion that the state is expected somehow to solve.

 

A conservative approach would structure taxes to stimulate entrepreneurship and economic growth. A targeted reduction of small business profits or a reform of the business-license tax would do far more to encourage business formation, create jobs, raise incomes and broaden the tax base than phasing out the car tax.

 

In sum, the car tax phase-out has a single virtue: It puts money back into the hands of taxpayers. But it is manifestly unfair, and that unfairness is not offset by any pro-growth benefit. There must be better ways for the state to invest its $819 million in tax rebates. Let us hope that Gov. Warner, Sen. Chichester and their compatriots can agree what they are.

 

-- March 17, 2003

 

Bring Home the Bacon

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You can berate Bacon at jabacon@

baconsrebellion.com

 

Or read his profile here.

 

 

 

The Mighty Uthulu -- American made!

 

One Taxpayer's Story

 

I drive a dinged-up, 1995 Jeep Cherokee with an assessed value of $4,825. The car still runs pretty well, but its main virtue is that I own it outright. Starting a new business, I need to keep my bank payments low. Until I get firmly established, I have no intention of buying a new car.

 

Charging $3.50 tax per hundred dollars of assessed value, Henrico County nicked me for $168.88 this year. Thanks to car tax relief, the state paid $118.22 of that amount.

 

Don't think me ungrateful, but... Big Whoop.

 

Car tax relief doesn't help aspiring entrepreneurs like me. I reap about one quarter of the benefit that goes to the doctors and lawyers down the street who park snazzy new German and Japanese cars in their driveways.

 

If the Commonwealth wants to help people who are striving to build a business and hope to hire people some day, give our businesses an exemption on state income taxes. That's something we could take full advantage of.

 

-- Jim Bacon