RALEIGH – There is yet another tax-hike proposal in the North Carolina General Assembly. And there’s a case for it.
Calm down. Don’t jump to conclusions.
The bill, filed by Sen. Dan Clodfelter (D-Mecklenburg), would raise the current Highway Use Tax on the sale of automobiles from 3 percent of the purchase price to the general retail-sales tax rate, which is currently 6.75 percent and is scheduled by law to drop to 6.5 percent in July. Furthermore, the bill would remove the current practice of allowing the value of a trade-in vehicle to be applied against the price of the new vehicle before applying the tax.
The North Carolina Automobile Dealers Association argues that the tax changes would cost $900 million a year, encourage some consumers to travel to neighboring states to purchase their cars, and make new cars more expensive relative to used cars, thus reducing fleet turnover and harming public safety and air quality. I haven’t seen any confirmation of the $900 million figure, but the association is surely right in its other points. Those who claim that changes in tax rates don’t affect consumer behavior, because the marginal costs are too small, must surely admit that the prospect of saving hundreds or even thousands of dollars, on transactions that consumers make only occasionally and rarely in a hurry, constitutes a strong incentive to hit the road for a lower-cost neighbor.
The state chapter of Americans for Prosperity is already organizing a petition drive against the car-tax increase. It may well be true, as some have suggested, that the bill was filed merely as a means of “encouraging” auto dealers to support the legislative push this year to hit homebuyers and real-estate agents with a land-transfer tax. However, since the proceeds of the home tax would go to local governments for schools and such, and the car-tax hike is being pitched as a way to boost revenue to the state Highway Trust Fund, one is not really a substitute for the other.
I think the major motivations have to do with transportation funding and a perceived tax inequity. On transportation, there are strong lobbies in favor of spending more on highways and transit programs. There are (of course) tens of billions of dollars in spending requests in excess of expected revenue from gas and car taxes at current tax rates. Politicians may well believe it easier to jack up the tax on a new car, which a given taxpayer buys only occasionally, than on gasoline. In reality, we don’t need to do either to address the state’s legitimate transportation needs.
The tax-equity argument makes a bit more sense. Recall that the Highway Use Tax is really just the old state sales tax. As part of a sweeping highway bill in 1989, lawmakers transferred revenue from sales taxation of automobiles from the General Fund to the new Highway Trust Fund, renaming the tax at the same time. Part of the deal was to reimburse the General Fund to the tune of $170 million, representing the take from the previous sales tax. Since then, while the General Assembly has raised the retail sales tax many times, to the current 6.75 percent, the Highway Use Tax has remained at the old rate of 3 percent.
Some have argued in recent years that car sales shouldn’t be taxed lower than other sales. All goods (and services) should be taxed at the same rate. Furthermore, the Easley administration has argued that the Highway Trust Fund transfer to the General Fund ought to be higher than $170 million to reflect what the old sales tax would be raising on today’s larger tax base.
This is all a muddy mess, but raising the car tax should gain no traction. At the very least, any attempt to bring cars into compliance with other taxable goods ought to be revenue-neutral – the sales tax rate should fall to offset it. But the best solution would be to phase out sales taxes over time in favor of a broad-based consumed-income tax. That is, households would report their income for the tax year, subtract their net savings (deposits minus withdrawals), and then pay a tax rate on the remainder, which is by definition their consumption. Thus, they would pay the same tax on money used to buy clothing, food, vehicles, phone service, legal representation, massages, haircuts, auto repairs – whatever.
Over in the highway area, then, we would eliminate the Highway Use Tax and rely on a combination of motor-fuels taxes and tolls – both bearing a proportional relationship to drivers’ actual use of the highways, unlike a tax on auto sales – to pay for highway needs without fear of contradiction or raids by politicians looking for revenue for other programs.
Hood is president of the John Locke Foundation.