Analysis: Rental car industry's new 6% tax violates pro-growth principles
Pro-growth policy has greater economic freedom as its primary objective. To that end, the Bluegrass Institute recommends a three-part test in our “Lost Decades” report to drive tax policy in Kentucky:
1. Are the tax changes revenue neutral (at a minimum) and, therefore, won’t increase the overall tax burden on Kentuckians?
2. Do the tax changes favor taxing consumption over income, savings and investment?
3. Do the tax changes favor individuals and entrepreneurs over narrow special interests?
Changes to the tax code that meet all three of these criteria favor economic freedom and will generate the greatest enhancements to Kentucky’s long-term competitiveness. Applying a new 6% tax to peer-to-peer car sharing transactions would violate two of the three prongs of the test.
A new tax on peer-to-peer car sharing would be a net tax increase that adds to the overall tax burden born by Kentuckians. Kentucky ranks 22nd nationally in highest overall tax burden, more closely aligning us with Massachusetts (21st) than Indiana (33rd) or Tennessee (49th).
According to a study from the Center for Growth and Opportunity at Utah State University, in-state residents make up a significant share of users of peer-to-peer car sharing services and constitute most of the host market. The study concluded, “policymakers cannot justify a tax on peer-to-peer car sharing with an assumption that the burden mostly falls on non-residents.” Therefore, a new tax will add to Kentuckians existing tax burden.
Despite being a high tax state, a popular narrative exists in Frankfort that revenues are inadequate to support a sufficient level of services. This argument, which is being advanced as part of this discussion, willfully ignores important facts:
- Road fund receipts in FY ’21 reached historic levels, driven in large part by growth in the motor vehicle usage tax.
- People using vehicles through peer-to-peer platforms for their short-term transportation needs pay the same fuel tax they would if their vehicle was rented from a rental car company.
- Rental car companies don’t contribute to the road fund through the “U-Drive-It” tax. Their customers do.
A new tax would reward “rent seeking” by a narrow special interest to stifle competition from entrepreneurs. Legacy industries lobby government to create barriers to entry intended to hinder smaller competitors from becoming a threat to their market share. Their intention is to shackle innovative companies with burdens to disadvantage them in the marketplace.
Taxi companies attempted to block Uber and Lyft from getting a foothold in Louisville. Policymakers recognized ride-sharing services were an emerging part of the economy and adopted reasonable regulations to allow drivers to provide what was then an innovative service to consumers and is now so common it has worked itself into the daily vernacular.
A search on Turo’s platform indicates Kentuckians are building small businesses in the peer-to-peer car sharing space, sometimes purchasing multiple vehicles to list on peer-to-peer platforms. Under existing statutes, these entrepreneurs pay Kentucky’s 6% usage tax when purchasing their vehicles. Therefore, growth in peer-to-peer car sharing will enhance motor vehicle usage tax revenues going to the road fund.
Startup activity in Kentucky is generally unimpressive, with numbers that are all worse than the overall figures for the U.S. Independent small businesses historically power job creation. With Kentucky’s status as a laggard in economic growth, the General Assembly should do everything it can to promote entrepreneurship, not suppress it with more red tape, duplicative regulation and punitive taxation.
The motor vehicle usage tax is a consumption tax. An additional 6% tax on peer-to-peer car sharing transactions would amount to double taxation. The Bluegrass Institute supports shifting tax policy to favor taxing consumption over income and savings. However, levying new consumption taxes for the sole purpose of raising revenues undermines the pro-growth elements of that shift.
The states that have levied an excise tax on peer-to-peer car sharing have existing excise taxes on traditional car rentals, with most states choosing to levy a lower excise tax rate on peer-to-peer car sharing than their existing excise rate on rental cars.
To repeat one final time: peer-to-peer car sharing entrepreneurs pay the usage tax on the purchase price of the vehicle. That, by definition, makes it a consumption tax. Applying a “U-Drive-It” type tax on the car sharing transaction would be a second tax on the service and serve only to grow the size and scope of state government.
See the Bluegrass Instittute’s latest policy point at this link.