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Is Gilmore's least-favorite tax really worth all this fuss? An expert makes a ruling.

Car Tax for Dummies


Erik Craft is an associate professor of economics at the University of Richmond. For the past two years, he and a colleague, Robert Schmidt, have been among the few economists attempting to analyze the car tax and its real-world effects.

Does your research have any implications for the debate on the state budget and continued phaseout of the car tax?

Yes. Since our research shows the car tax caused Virginians to choose to own vehicles that were on average 20 percent less valuable, removing the car tax will lead people to replace cars sooner and buy more expensive models.

This prediction is above and beyond any other effects such as rising incomes. Since the state government is compensating local governments for lost revenue due to the phaseout of the car tax, a higher tax base — caused by a lower effective cost of owning vehicles — will lead to even more revenue for local governments [than if they had not cut the car tax]. But this also implies that the cost to the state government is probably greater than originally anticipated. [The costs of the car-tax cuts] will likely significantly constrain the next governor and future General Assemblies.

What got you interested in the economics of the car tax?

Nearly four years ago when [Gov. Jim] Gilmore ran for governor, I was looking at buying a new Saab 900, purchase price around $27,000. I made a rough calculation in my head and determined that I would pay around $800 in property tax the first year if I purchased the vehicle. That is not a trivial amount of money to me —. especially when I would have to pay it each year. …

I decided to look into the details of vehicle taxes. There was no research on the subject, yet 31 states have similar property taxes on vehicles. So it is an issue of concern in many states, not just Virginia.

How much do you pay?

Up until last fall, I was driving a 1984 Saab 900, which had nearly dropped off the charts in terms of value, so I have not been paying much car tax. ... Now I own a much newer Saab 9000CSE, and I will be paying a modest amount. But it is still a used vehicle. So with the car-tax phaseout half implemented, the tax burden should only be about $200.

Does the tax really affect people's purchases? It seems so small, in the scheme of things.

A lot of people I've talked to, until we did our research, said no way. Car dealers have told me that even people going to buy a $70,000 BMW have so much money they don't care if they're going to be paying thousands of dollars a year in property tax. But our statistical research is showing that people will change their purchases, and people do own less valuable vehicles, because of the car tax.

It really will affect behavior. Usually when a tax alters behavior a lot economists consider the tax inefficient and unusually distortionary. But since people own vehicles for so long, and the vehicles depreciate slowly, the normal conclusion may not hold in this particular case. We have not yet come to a firm conclusion on the efficiency of the tax relative to most other revenue sources.

You've said there are fairer, more efficient ways of raising tax revenues than the car tax. Like what?

Taxes on gasoline and other fuels. Those are much more efficient from the point of view of an economist. Fuel is especially a good thing to tax because it discourages activities that harm others. Taxing gas and other types of fuel leads to lower congestion and lower air pollution. That provides extra benefits to the state.

You say the tax has costs. But how far should we go to roll it back?

Although our research is suggesting it is good in the long run to phase out a portion of the car tax … that does not imply that the present phaseout should continue under this budgetary situation … if it means cuts in education or other important services. It's better to raise funds from other sorts of taxes that don't cause such a distortion and don't cause people to change their

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