Policy Documents

Research & Commentary: Car Rental Taxes

June 25, 2014

Tourism taxes have become increasingly popular with city and state governments as a source of new revenue. Tourism taxes such as those on car rentals have advantages for politicians because they are seen as taxing out-of-state visitors, who are unlikely to complain with a vote against them. The first car rental tax was enacted in 1976, and since then the number has skyrocketed: Today 43 states and the District of Columbia impose a tax on car rentals, and a total of 118 special rental car excise taxes are enforced. 

According to the Cost of Government Center, taxes account for roughly 38 percent of the average cost of renting a car. Car rental levies usually consist of two separate taxes: the conventional state or local sales taxes that are imposed on most goods and services, plus the newer state and local excise taxes imposed specifically on car rental consumers. These excise taxes, which are applied only to car rentals, are rarely used to improve auto travel infrastructure, which could benefit rental companies and consumers paying the tax. Instead, these funds are often used on projects such as sport stadiums, convention centers, or other boondoggles. 

Sally Greenberg of the National Consumers League noted in a Fox Business article the number of car rental taxes and revenue has grown by eight times since 1990. William Gale of the Brookings Institution and Kim Reuben of the Urban Institute studied the impact of a local car rental excise tax in Kansas City and found a “41 to 59 percent drop in rentals and a 69 to 86 percent drop in the number of rental days at branches affected by the tax.” 

When the cost of renting a car increases, tourists are unable to spend their money elsewhere, on lodging, food, entertainment, and the like. And rental car taxes don’t affect only tourists. According to Auto Rental News magazine, more than half of rental car consumers are local, not tourists. This local consumer base includes people waiting for auto repairs or doing short-distance household moves. 

Now under consideration in Congress, the End Discriminatory State Taxes for Automobile Renters Act would restrict state and local taxes on rental cars. This would be a step in the right direction. Car rental taxes are poorly designed and discriminatory levies that hinder tourism, harm local economies, and fuel unnecessary government spending. State legislators should eliminate or reduce these taxes. 

The following articles examine car rental taxes from multiple perspectives.

Congress Can and Should Put a Stop to Discriminatory Rental Car Taxes
http://www.forbes.com/sites/patrickgleason/2014/05/20/cartaxes/
Writing in Forbes, Patrick Gleason opines on car rental taxes and legislative efforts to end them: “Reps. Graves and Cohen’s bill would put an end to discriminatory state and local rental car taxes for good and Congress should pass it. In the meantime, Louisiana lawmakers can help stop this practice by rejecting the rental car tax bill that they will vote on this week.” 

Congress Considers Restrictions on State and Local Rental Car Taxes
http://taxfoundation.org/blog/congress-considers-restrictions-state-and-local-rental-car-taxes
Xander Stephenson of the Tax Foundation examines a piece of legislation under consideration in Congress, the End Discriminatory State Taxes for Automobile Renters Act, which would restrict state and local taxes on rental cars. 

Taken for a Ride: Economic Effects of Car Rental Taxes
http://heartland.org/policy-documents/taken-ride-economic-effects-car-rental-taxes
William G. Gale and Kim Rueben analyze several aspects of the economics of car rental excise taxes, considering the following questions: Why is the use of car rental taxes increasing? Are actual and proposed car rental excise taxes economically sound means of collecting public monies? Does the taxation of the customers of one industry place an unfair and disproportionate burden on too few members of society to fund a “public” project? What are the effects of car rental excise taxes on local consumers and businesses? 

Research & Commentary: The Damaging Effects of Tourism Taxes
http://heartland.org/policy-documents/research-commentary-damaging-effects-tourism-taxes
Heartland Institute Government Relations Director John Nothdurft examines tourism-related taxes and their negative effects on tourism and a city’s economy. “Instead of kicking an industry while it is down, states and localities should focus on reining in their budgets by eliminating subsidized development schemes such as sports stadiums and convention centers,” Nothdurft writes. “In order to promote tourism as part of a strong state or local economy and have a stable budget, it is vital to create a non-distorting tax code with low rates and a broad base, coupled with spending reforms.” 

Effects of Discriminatory Excise Taxes on Car Rentals
http://heartland.org/policy-documents/effects-discriminatory-excise-taxes-car-rentals
This study conducted by the Brattle Group found car rental taxes fall disproportionately on minority households, raise auto insurance costs, and reduce purchases of cars by rental companies. A 10 percent increase in tax relative to the base rental rate reduces rental demand, and, therefore, purchases of new cars by rental car companies, by approximately 12 percent. 

The Case Against Special Rental Car Excise Taxes
http://taxfoundation.org/blog/case-against-special-rental-car-excise-taxes
Andrew Chamberlain of the Tax Foundation explores the rapid growth in taxes and fees imposed on rental cars in recent years, often in an attempt to fund municipal projects that have no clear relationship to the rental car industry. He argues car rental taxes are a predatory tax policy that is impossible to defend as sound public finance. 

Transportation Discrimination: Local Taxes Target Car Rentals
http://www.atr.org/transportation-discrimination-local-taxes-target-car-a5837
Mattie Duppler of Americans for Tax Reform argues car rental companies have been subjected to unfair and excessive taxation to fund extraneous spending in localities: “Moreover, auto rental companies are unique victims of unfair municipal and local tax regimes—other enterprises in the transportation industry, such as railroads and airlines, are granted federal protection from such discriminatory taxation.” 

Tax Bites: The Toll of Hidden Taxes on Car Rentals
http://news.heartland.org/newspaper-article/2008/09/01/tax-bites-toll-hidden-taxes-car-rentals
The nonpartisan taxpayer-advocacy group Americans for Tax Reform (ATR) estimates the average prices and taxes imposed on 13 popular targets for multiple layers of hidden taxes. The analysis includes “sin” taxes, telecommunications taxes, and taxes on tourists. 

Cohen Reintroduces “The End Discriminatory State Taxes for Automobile Renters Act”
http://cohen.house.gov/press-release/cohen-reintroduces-end-discriminatory-state-taxes-automobile-renters-act
Rep. Steve Cohen announces his reintroduction of the End Discriminatory State Taxes for Automobile Renters Act. “During these tough economic times, state and local governments are looking to raise revenue.  But there is no place for discriminatory taxes in business,” Cohen states. “These taxes raise prices for consumers and harm our local employers. This is an unfair practice that must stop.” 

Promoting U.S. Tourism: Taxes Are the Wrong Approach
http://www.heritage.org/Research/HomelandSecurity/wm2492.cfm
Heritage Foundation Senior Policy Analyst Jena Baker McNeill explains why creating a government-run tourism agency funded by foreign travelers is a bad idea. Such efforts should be left up to the private sector, she concludes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.