No, I’m not joking. David Levinson wrote about an often overlooked but important subsidy* given to drivers: the lack of sales tax on gasoline and auto/truck purchases. I’m surprised this hasn’t received more attention given the other distortions that see press. Yes, we pay a motor vehicle sales tax when buying a car, but that is supposed to be a user fee for funding roads (well, 60% of it at least). Yes, we also pay state and federal gas taxes, but again those are user fees (the MN gas tax is 100% dedicated to the Highway User Tax Distribution Fund).
*The word subsidy is often used when no direct subsidy is actually taking place. In this instance, like the mortgage interest deduction or similar policies, the lack of payment acts as a price distortion given lack of exemption for most other goods purchased. It’s not a subsidy per se, but the term works good enough.
We pay sales taxes on windshield wiper fluid, oil, tires, parts, and other necessities to keep our cars moving. We also pay a sales tax on refrigerators, stoves, lights, and thousands of other durable goods (and other not so durable ones) to live a modern life. Cars and gas shouldn’t be any different (in the author’s humble opinion).
Let’s evaluate what this would mean under politically possible scenarios. What do I mean by “politically possible”? Well, it’s very unlikely that we’ll see a statewide increase in total sales tax collected. Not only is the sales tax one of the more regressive taxes around (making it unpopular with liberals), raising taxes (on cars and gas, specifically) would not go over well with conservatives. So, I’ll limit my analysis to revenue-neutral only.
Nothing political here. Sales taxes are a much higher burden on lower income families. Source: ITEP
For my analysis, I will be referencing the current gas tax ($0.285/gal, assumed across all gallons sold – an incorrect but rough estimate) and MVST Rate (6.5%), gas tax, general sales tax and MVST revenue collected by the state in 2013, a rough estimate on 2013 average gas price of $3.20/gal taken from here, spending information from the 2013 BLS Consumer Spending report, and number of MN Households. Again, in all scenarios I hold total revenue collected constant, otherwise we’ll get into a debate on if the current amount raised is too high/low and if the programs the money goes to are necessary. Also, when I say “add a sales tax to MVST,” I am proposing keeping the current 6.5% as a user fee (we need a dedicated funding source for roads) and the resulting general sales tax rate would be on top of that.
Scenario 1) We add a sales tax to gasoline and motor vehicle sales, apply a lower rate to all goods.
Scenario 2) We add a sales tax to gasoline sales only, apply a lower rate to all goods. Why? 3 million Minnesota residents live within roughly an hour drive of Wisconsin. If a family only buys a car every 4-5 years, they’ll likely make the trip across the border.
Scenario 3) We add a sales tax to gasoline, motor vehicles, and clothing. I know, taxing clothing seems extremely regressive, since it’s basically a requirement to survive. I’m just testing the waters here to see how the numbers shake out, and since clothing only represents roughly 3-3.5% of household spend for families making less than $40,000 per year. That share is roughly the same as higher income households (making >$70k), who also spend 3.1%. Compare that to groceries, where lower income households spend around 11% of their income, while higher income families spend more like 6-8%.
Scenario 4) We add a sales tax to gasoline and clothing, but forego vehicle sales, apply a lower rate to all goods.
Here’s the outcome:
We see that we can reduce the general burden on the MN sales tax by anywhere between 0.8% and 1.6% with these four scenarios. I’m inclined to suggest Scenario 1 – as a state, we shouldn’t favor the purchase of automobiles over other consumer spending by under-taxing it. Clothing is a pretty small household expenditure (clothing spend in low income households is half that of just gasoline, for example), but pragmatically, this will never fly in a fairly progressive Minnesota (and one where a certain mall will lobby hard to keep visitors coming to buy their wares on the cheap). The net result for an average Minnesota family/individual would be no additional tax burden. If you buy a lot of cars and drive a lot, you will likely pay more in total sales tax. If you own fewer cars and/or drive less, you’ll pay less.
Yes, Wisconsin or North Dakota may say they’re “open for purchase” or something similar, that’s fine. We could make it a requirement to pay the sales tax when registering a vehicle purchased outside the state to avoid this behavior; presumably, nearly all cars bought in Wisconsin acquire new MN titles, no? We used to dedicate a significant chunk of the MVST to the general fund – as recently as 2002, 69.14% was sent to the general fund, with years prior to 1980 seeing none dedicated to transportation. My guess is the DOT and state began realizing that gas taxes alone weren’t covering system maintenance and expansion so they began searching for ways to pay for roads. Fine, keep the MVST as a user fee (though I disagree with using fixed costs like these instead of mileage– or congestion-based ones), but lower the sales tax burden on everything else we all buy.
Gas Taxes have a serious ripple affect across vast stretches of the economy, from shipping to agriculture. They necessarily affect costs for food, clothing, and a great many other things, most of which will hit lower income brackets hard.
Your analysis is only looking at one simple facet this tax issue. You need to extend this analysis to include the broader economic impact of a 50% tax increase on gasoline, from agriculture, to shipping, to grocer, etc.
You’re correct, there are broader implications to this. This was a simple analysis of what a revenue-neutral sales tax proposal would look like.
Though I suspect that the impact would be pretty low to most end-consumers. Most literature I’ve seen shows transportation costs for retail goods to be around 3-6% of the cost breakout (among raw materials, processing/packaging, marketing, profits in the value chain, etc). Assuming gasoline and vehicle taxes are an even smaller share of those business’ costs, the impact on consumers is likely less than the positive impact in their savings with a lower sales tax rate.
But, even if it isn’t, we shouldn’t necessarily view this as a bad thing. Our tax structure (among other things…) favors trucking as the best method of shipping goods. We used to move a lot more freight by rail – a far more energy and space efficient means of getting stuff around. Those railroads almost always paid property taxes. Shifting things back opens up other avenues for getting goods around the country.
**I forgot to finish the comment…
Even if you assume transportation/shipping makes up 15% of the cost of an average consumer good, and 50% of shipping costs resides in vehicle fleet and gasoline (both pretty generous assumptions), a 5.48% (scenario 1) increase on those costs makes for a 0.411% increase in final purchase price to the consumer. This is less than the savings of 1.4% savings by reducing the overall rate.
It’s a little hard to follow this. It starts as being about transportation revenue then seems to morph into complete sales tax reform. That said, it sounds like you’re talking about double-taxing car purchases. That’s never, ever going to gain traction. It’s not politically feasible and tax policy people would likely say it’s bad practice.
This post was always about sales tax reform. I only laid out that there exists a tax on gasoline and motor vehicle purchases today to frame the issue.
But those taxes are user fees. The revenue from them goes only to support building/maintaining highways (and yes, as of 2012, 40% of the MVST goes toward transit). I suspect the fact that the word “tax” is added to gas tax and mvsT is a clever way to convince people that we shouldn’t “double tax” them with anything more.
We tax snowmobiles, ATVs, boats, private airplane sales, building construction materials, manufactured homes, construction equipment, etc etc a sales tax that goes into the MN general fund. Why should buying cars be any different? We charge boat, snowmobile, etc license/registration fees to cover the costs of patrolling their use and building/maintaining certain facilities. That roads and bridges are vastly more expensive just means that the fees we charge car buyers/users are also much more expensive.
Besides, the whole point of this was to be revenue neutral. Sure, people may cry foul that they’re being “double taxed.” But they see savings in other purchases by lowering the overall rate.
The notion of sales tax is just a simpler way of collecting the what’s actually known as “use tax”. It is technically illegal to dodge “use tax” by making a purchase out of state and bringing it back for primary use within the state. Mostly, nobody cares, but for big ticket items like cars, the state most certainly does want proof of “use tax” payment. Generally you cannot register a car without a tax receipt.
Just a side note.
You’re right, and I should have clarified that. For those that want to know more, this document lays out what a use tax is and how it’s applied. http://www.revenue.state.mn.us/businesses/sut/factsheets/FS156.pdf
We should also distinguish a sales taxes from “user fees” in addition to the “use tax” distinction. A user fee is a tax in that it’s collected by the government, but is really no different than a fare for a bus or LRT. The fare is the user fee to cover operations – obviously this fall short for transit, but also falls short for highways/roads. I pay a sales tax on the bike that I ride to get on a bus, why shouldn’t we pay a sales tax on a car we use to drive on highways?
Using scenario 1, I just want to make sure I understand everything you’re proposing here. I’m going to round 5.48% up to 5.5% sales tax, because that’s probably the number the state would go with.
Proposed sales tax on general items = 5.5% (+.375% Legacy Amendment on top?, or was that integrated into your 5.5% rate?), a reduction from 6.5% (+.375% Legacy Amendment) today.
Proposed tax on motor vehicle sales = 12% (existing 6.5% use tax + added 5.5% sales tax)
Proposed tax on gasoline = existing $0.285/gal + 5.5% sales tax (collected on wholesale? or at the pump?)
Is that all correct?
Proposed 5.5% includes the legacy +.375%. I used existing 6.875% as the rate to back-calculate total spend in the state (ignoring local sales tax adders). So broadening the tax base by adding the different products works from that.
Yes on MV sales. 12% = 6.5% user fee dedicated to roads (and transit), 5.5% into the general fund.
Yes on gasoline. The calculations assumed at the pump (I used gas tax to back-calculate number of gallons based on an average gas price over 2013) – not sure how this changes if done wholesale instead.
An oversimplification perhaps, but “sales tax on auto/truck purchases” = MVST.