Private Sector: Pain, no gain

Car rental excise taxes are discriminatory and bad policy

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History teaches us that discriminatory taxes -- the Boston Tea Party comes to mind -- are never popular. Yet one discriminatory taxing strategy has gained significant momentum during the past 30 years: Local governments have been enacting laws that impose excise taxes on car rental customers to fund new arenas, arts centers, highways and otherwise worthy civic projects.

For example, Gov. Ed Rendell signed a 10-year transportation bill that includes a provision authorizing Allegheny County to impose a $2-per-day car rental excise tax. It's hard to understand why so many cities and counties single out car rental customers.

Perhaps because there is a commonly held myth that car rental excise taxes are painless for local residents, as they are frequently sold by politicians to their constituents as "tourist taxes." In reality, more than half of all vehicle rental transactions occur at nonairport locations across the country, so these taxes burden local consumers and businesses as much as out-of-town travelers.

Moreover, the number of car rental excise taxes has doubled during the past decade, with nearly 100 currently in place in 42 states and the District of Columbia. Such blatantly unfair excise taxes can actually double the cost of a daily car rental. Consumers and businesses have paid more than $6 billion in discriminatory car rental excise taxes -- on top of the generally applicable taxes applied to goods and services -- for a diverse array of unrelated projects and initiatives.

These projects have no direct connection to renting a car, nor do they provide any special benefit to car rental customers. Just like the failed "Latte Tax" in Seattle -- which specifically targeted coffee drinkers in 2003 -- car rental excise taxes demonstrate that the way governments tax their citizens is just as important as the need for which taxes are created.

That's precisely why U.S. Reps. Chris Cannon, R-Utah, and Rick Boucher, D-Va., have introduced the first federal legislation aimed at prohibiting future discriminatory car rental excise taxes and protecting the rights of car rental customers.

We have taken the unusual step of joining together with the car rental industry and others in support of H.R. 2453. The National Consumers League agrees that car rental excise taxes are regressive and impose a burden on consumers traveling in the nation's interstate transportation system. The National Business Travel Association likewise supports the federal legislation, recognizing that such policies create a hidden tax on local citizens and businesses.

Furthermore, Congress historically has prohibited unfair practices by state and local governments that unreasonably burden or discriminate against interstate commerce and transportation. Examples include the Railroad Revitalization and Regulatory Reform Act (1976), Airports and Airways Improvement Act (1978), Motor Carrier Act (1980) and Bus Regulatory Reform Act (1982).

As a result, state and local lawmakers potentially interfere with the well-established principles of interstate commerce whenever they enact car rental excise taxes -- even under the guise of "states' rights" -- as a politically expedient means of shifting the tax burden to out-of-state renters. Consider that a Florida lawmaker said last year that a proposed car rental excise tax was attractive because it "essentially attacks those people out of state." No wonder the tax got vetoed.

It's important to note that H.R. 2453 prohibits discriminatory car rental excise taxes that are enacted after May 23, 2007, the date that Rep. Cannon and Rep. Boucher jointly introduced it in Congress. This means if Allegheny County officials decide to enact the proposed $2 daily tax, those revenue funds might be vulnerable and could put the financing bonds in jeopardy.

However, H.R. 2453 would not apply to any car rental excise taxes that were enacted prior to the bill's effective date. This "grandfather" provision means that no existing streams of local tax revenue would be affected, even if they come from discriminatory car rental excise taxes. H.R. 2453 would not affect standard state or local sales taxes, vehicle license fees or customary airport-related fees either.

Still, communities that already are tapping car rental customers might want to take another look at their long-term strategy. Two leading tax policy experts, William Gale of the Brookings Institution and Kim Rueben of the Urban Institute, completed a study last summer analyzing the impact of a $4-per-day rental car tax in Kansas City, Mo. They found that piling taxes onto car rental customers is both inefficient, because it can distort choices about modes of transportation, and inequitable.

Just more evidence that car rental car excise taxes are hurting American taxpayers far more than they help the states, counties and municipalities that enact them.

Linda Golodner is president and CEO of the National Consumers League. Bill Connors is executive director and COO of the National Business Travel Association.


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