Commentary

Abolish the Car Tax Today

By Dean Stansel and Stephen Moore
December 9, 1997

After being trounced at the polls by Governor-elect Jim Gilmore and his “No Car Tax” message, Virginia Democrats have a new plan. They want to eliminate the personal property tax on automobiles immediately, rather than phase it in over five years, as Gilmore proposed.

Unfortunately, there’s a catch. The plan proposed by Prince William County’s Democratic Sen. Charles Colgan would take back every single penny of tax relief by imposing a 33 percent increase in the sales tax rate and a 67 percent increase in the rate of the titling tax on the sale of cars. A higher sales tax clearly wasn’t what Virginians had in mind when they went to the polls. Paul Goldman, a former state Democratic Party chairman, calls Colgan’s plan “the most bizarre policy proposal ever made before or after a tax revolt.”

But the Democrats do have it half right. Virginians want the car tax ended immediately. After all, Gilmore’s bumper stickers and posters didn’t read: “NO CAR TAX — FIVE YEARS FROM NOW!” You had to have read the fine print in the Gilmore campaign material to have gotten that part of the plan. News accounts are reporting that many Virginians think that the car tax has already been eliminated. Clearly, the Gilmore administration can’t end that evil extraction soon enough for most residents.

Here’s the good news. The car tax can and should be ended this year without any new taxes and without any draconian cuts in high-priority government programs in Richmond. Even some of the more thoughtful Democrats seem to have recognized that. Senate Democratic floor leader Richard Saslaw is calling for Gilmore to propose killing the tax outright without increasing other taxes. Saslaw simply wants Gilmore’s January budget proposal to provide the roughly $600 million a year in budget savings needed to offset the lost revenue. We wholeheartedly agree.

Gilmore should take Saslaw up on that challenge. There are two aspects of the Virginia state budget that would allow the Gilmore administration to fast-forward plans to “ax the tax.” First, thanks to Virginia’s bustling economy, rivers of new revenues are pouring into the state coffers faster than anyone expected. Second, in fiscal year 1997 (which ended on June 30), that unexpectedly high revenue growth resulted in a $216 million revenue surplus. With Virginia’s revenue growth showing no signs of slowing, there should be a sizable surplus this year as well.

That provides a window of opportunity to implement a “NO CAR TAX — NOW” strategy with almost no budget pain. Just two simple steps are required:

1) Use surplus revenues for tax relief, not new spending. Such fiscal windfalls should be devoted to cutting the car tax. The money belongs to the taxpayers, and it should be returned to them in the form of tax relief.

2) Slow the growth of the state budget over the next three years to track the growth in population and inflation. That would restrict spending growth in Richmond to 4 percent per year, rather than the 6 percent rate at which it has grown over the past 10 years. This is a budget cap, not a budget cut.

As the table from a forthcoming study for the Virginia Institute for Public Policy shows, slowing the growth of spending in that manner would save the taxpayers more than $350 million next year. Added to the recent surplus revenue collections, that will produce sufficient savings to offset the first year revenue loss from implementing Gilmore’s car tax cut immediately.

The savings produced by the budget cap will grow larger in future years. In the second year, the budget cap alone would save taxpayers $740 million, more than enough to offset the lost revenue from the car tax cut. In fact, by the end of Gilmore’s term the entire personal property tax could be eliminated by the savings produced by a spending cap.

Other states already have similar statutory or even constitutional rules that prohibit state spending from exceeding the growth rate of population plus inflation. As a result, taxpayers in a variety of states, including Colorado, Missouri and Massachusetts, will be receiving tax rebate checks, rather than seeing politicians squander their surplus tax payments on new spending programs.

Despite what many observers claim, Mr. Gilmore would not have to cut funding for education or transportation in order to kill the car tax today, much less over five years. Nor are offsetting tax increases necessary. Gilmore’s new spending plans would have to be delayed for a year or two, but those should be lower priorities than ending the car tax, which was the centerpiece of the campaign.

If Governor-elect Gilmore were to follow these two simple budget steps, the hated car tax would be terminated — on budget and ahead of schedule. That would truly make this governor a new era politician.

Dean Stansel is a fiscal policy analyst at the Cato Institute, and Stephen Moore is Cato’s director of fiscal policy studies.