L An alternative appr 26 taxation of light car s and trucks 10(*3± MT in Montana . ----- Montana State Library . ■ -— — :— - I o (=3^ UCtfTAKA LfiGISLATIVE LIBRARY AN ALTERNATIVE APPROACH TO TAXATION OF LIGHT CARS AND TRUCKS IN MONTANA Office of Research and Information Montana Department of Revenue July 15, 1996 si Mf'*-■'«'-t1 ■ ■ ■ AN ALTERNATIVE APPROACH TO TAXATION OF LIGHT CARS AND TRUCKS IN MONTANA Introduction Under current law, light cars and trucks are taxed for property tax purposes on the basis of "Blue Book" values. This requires re-establishing the value of each vehicle each year. Current approaches to simplifying the taxation of light cars and trucks in Montana have focused on applying a depreciation schedule to the manufacturer's suggested retail price (MSRP), and then applying a 2% tax rate to the depreciated value. This greatly simplifies taxation in that only one value is associated with each vehicle over it's lifetime, the MSRP. Recent attempts at this approach have generally applied a single, arbitrary depreciation schedule for all vehicle types over a ten-year period. While overall revenue neutrality is attainable under this approach, the use of a single depreciation schedule limited to a ten- year period results in shifts in tax liability between vehicle types, as well as between vehicle age groups. This paper presents an alternative approach to taxing light cars and trucks that is designed specifically to optimize property tax revenue neutrality overall, across vehicle types, and across vehicle age groups. As the following analysis shows, this also results in a very high degree of property tax revenue-neutrality across counties in Montana, as well. Also, previous proposals have attempted to maintain revenue neutrality overall for the combined revenue from both the new car sales tax and the property tax on used vehicles. This analysis recognizes that these are two fundamentally different taxes, and treats each separately. Revenue from the new car sales tax accrues to the state highway account, while revenue from the property tax on used vehicles is distributed to state and local governments in proportion to relative state and local mills levied on personal property. Motor Vehicle Database Data for the analysis was obtained from Department of Justice computer files on light cars and trucks. Once vehicles not pertinent to the analysis had been excluded from the database, a sample of one out of every five vehicles was drawn for the analysis. This resulted in a total of 117,327 observations in the sample data set. This extremely large sample was drawn to ensure statistical veracity overall; but also within vehicle types, across age groupings, and across counties. New Car Sales Tax Under current law "new" vehicles are taxed at the rate of 1.5% of market value, as specified by the dealer. In order to make the system of taxing motor vehicles as simple as possible, 1 ■ ' 5 this proposal applies the new car sales tax rate of 1.5% to the MSRP, rather than the market value as specified by the dealer, in order to maintain the principle of one value associated with each vehicle over the life of the vehicle. As the following analysis shows, this will result in a revenue loss for the new car sales tax. Table 1 shows current law information for all vehicles in the database that paid new car sales tax in 1995. Almost 33,000 vehicles paid new car sales tax. These vehicles had a total market value of $631 million and paid $9.2 million in tax, for an effective tax rate of 1.46 percent. (The effective rate is below 1.5% because new vehicles registered as part of rental fleets are taxed at 0.75%, and certain other vehicles are taxed on rates prorated relative to 1.5% depending on the calendar quarter in which they are purchased. The effective rate is lowest for passenger cars, probably because a larger proportion of these vehicles are registered as part of rental fleets.) Table 1 Current Law New Car Sales Tax Data Vehicle Tvpe Number Market Value CL Sales Tax Effective Tax Rate Passenger Car 12,995 230,535,481 3,276,628 1.42% Light Trucks 12,435 231,288,275 3,439,183 1.49% Vans 2,785 55,313,771 807,028 1.46% Sports-Utility 4.725 113.873.496 1.694.531 1.49% All Vehicles 32,940 631,011,023 9,217,370 1.46% Table 2 shows the revenue that would be generated if the effective new car sales tax rate was applied to the vehicle's MSRP. Revenue is reduced across all vehicle types, but particularly so for light trucks, where the revenue loss approaches a half a million dollars and represents a nearly 12% reduction. Table 2 New Car Sales Tax Revenue Loss Using MSRP and Current Law Tax Rate Vehicle Tvoe MSRP PL Sales Tax Chanqe in Tax % Chanae Passenger Car 227,370,465 3,231,643 (44,985) -1.37% Light Trucks 203,965,700 3,032,905 (406,278) -11.81% Vans 53,882,385 786,144 (20,884) -2.59% Sports-Utility 107.617.425 1.601.436 (93.095) -5.49% All Vehicles 592,835,975 8,659,735 (557,635) -6.05% 2 . . . > 4 Table 3 shows the total number of vehicles paying new car sales tax in 1995, and the number and percentage of new cars whose current law market value used for tax purposes is greater than the vehicle's MSRP. Nearly two-thirds of all vehicles have an MSRP that is lower than the value currently used for tax purposes. For trucks, 86% have an MSRP that is lower than the value currently used for tax purposes. Apparently, trucks command a premium price in Montana relative to the MSRP. Table 3 New Cars with Current Law Market Value Greater Than MSRP Number With Percent With Market Value Market Value Vehicle Tvpe Number Greater Than MSRP Greater Than MSRP Passenger Car 12,995 6,035 46% Light Trucks 12,435 10,700 86% Vans 2,785 1,385 50% Sports-Utility 4.725 3.140 66% All Vehicles 32,940 21,260 65% The following general observations can be made with respect to a proposal for applying the new car sales tax to MSRP: 1) two-thirds of all new vehicles, and 86% of light trucks, have an MSRP that is lower than the market value currently used for new car sales tax purposes, and, consequently; 2) two-thirds of all new vehicles, and 86% of light trucks, would experience a reduction in tax liability if the current law new car sales tax rate is applied to MSRP; 3) applying the current law new car sales tax rate to MSRP results in a tax reduction of about $560,000 annually to owners of new cars (at current prices and buying rates), and a similar reduction in revenue to the state highway accounts; and 4) applying the new car sales tax to MSRP would require an increase in the tax rate from 1.5% to 1.55% to maintain revenue neutrality. 3 Digitized by the Internet Archive in 2018 with funding from Montana State Library https://archive.org/details/alternativeappro1996mont