By Kimberly Pinter and Callahan Burton
Governor Gilmore was right. His “No Car Tax” slogan resonated with all Virginia vehicle owners and catapulted him to the Virginia Governor’s mansion in 1997 with 56% of the vote.
The tax is universally hated and perceived as unfair. You pay good money for a car (plus sales tax!), more to insure it and fill up the tank, and even more to maintain it (and perform mostly unnecessary annual inspections). And then you’re hit with an annual tax for the pleasure of owning the vehicle. Worse, Virginians pay the highest car tax rate in the country, with an average effective rate of 4.05% and an average annual bill of $1,011. No wonder young people are moving out of the Commonwealth.
Car Tax Day for Commonwealth residents has a similar significance as April 15 does to all Americans nationwide. It is a day that every Virginia car owner dreads. It is the day when the locality where you live demands its pound of flesh simply because you own a car.
Why, in 2024, are we still paying this tax? What happened to Governor Gilmore’s promise?
Governor Gilmore did his best to deliver on his “No Car Tax” promise. In 1998, The Personal Property Tax Relief Act (PPTR) was enacted. The goal was to phase out the car tax by 2002. However, the new law didn’t really end the car tax, it just shifted the burden. It was also capped at the first $20,000 of the vehicle’s assessed value. Because the localities that collect the tax were so heavily dependent on its revenue, the Virginia government tried to replace the revenue rather than trying to wean the local governments off the windfall it provided.
Starting in 1998 at 12.5% of taxpayers’ car tax liability and steadily increasing to 70%, the strain on the Commonwealth’s budget ballooned well beyond the projected cost. In 2002, the General Assembly froze the reimbursement at 70% rather than fully covering the tax, as was originally envisioned. The cap was not sufficient to address the continued rapid rise in the cost of the program, so the General Assembly further undermined relief to the taxpayer by capping the entire pool of relief paid to the localities to $950 million per year starting in 2006. And that is where it remains to this day.
As a result, as populations grow and the number of cars increases, relief rates have steadily decreased. In addition, inflation acts to further dilute any relief, as the $20,000 per vehicle cap and the $950 million cap on the available pool are not indexed for inflation and become worth less and less with every passing year.
Logically, population growth along with a higher number of cars that are increasingly more expensive would allow localities to rely more on volume for needed revenue than on high car tax rates. But the political pressure for increased spending for education, infrastructure, and other public services has limited the desire to forgo that additional revenue. In fact, many jurisdictions have actually increased their car tax rates over the last 20 years.
As universal as the hatred of the car tax is, its application is equally diverse depending on where you live. In each locality, there are several moving parts that operate in conjunction to determine the ultimate tax liability.
The first is the tax rate, expressed as $x.xx per $100. This can range anywhere from $0.55 to $9 per $100.
The second is the valuation method. Typically, localities rely on JD Power and use one of three valuations: 1) retail value, 2) trade-in value, or 3) loan value. Each of these valuations are further categorized by vehicle conditions – clean, average, and rough.
Third is the relief rate. Relief rates vary widely, generally ranging between 14-58%, although relief may be up to 100% depending on the assessed value of your vehicle.
Fourth is the assessment ratio. This is the percentage of the assessed value on which the tax is levied. This seems to range anywhere from 30-100%, with many jurisdictions levying on the full 100%.
The final factor is the method of disbursement. Most localities simply apply the first four factors and distribute accordingly. However, the City of Alexandria is an outlier in that it employs a declining percentage method. The more expensive the vehicle, the less tax relief you will receive. Vehicles valued at $5,000 or less incur no car tax liability (100% relief). Vehicles worth $5,001-20,000 qualify for 52% relief. Once you hit $20,000, the difference really becomes apparent. Vehicles worth $20,001-25,000 get 26% relief, but only on the first $20,000. Once your vehicle surpasses the $25,000 mark, it qualifies for only 12% relief and only on the first $20,000.
The resulting interaction of all these factors produces a stunning lack of transparency in that the lowest or highest tax rate doesn’t necessarily translate to the lowest or highest car tax liability in the final analysis. In fact, low-income communities in Virginia are disproportionately affected by the car tax. Vehicle owners in the City of Buena Vista, which has a median household income of $36,634, pay a 31% higher effective tax rate than Loudoun County, the richest county in the country by median household income. This is insane.
The real question is, is it worth it? While the car tax clearly brings in a significant amount of revenue, it is not without cost on the other side of the ledger. The most obvious, as indicated above, is the cost to the Commonwealth’s finances to reimburse the localities for the relief provided. This mechanism ensures that there are administrative costs at the state level as well as all the administrative costs to collect the tax incurred at the local level. It doesn’t appear that anyone has published an analysis of what those numbers are, but they certainly should be a significant consideration in any discussion of the car tax’s effectiveness.
There are also clear behavioral incentives at either end of the income scale. On the lower end of the spectrum, blue collar workers who can’t afford to live in urban centers with mass transit must rely on their cars to make a living. In cases where they don’t have access to a car, the tax adds an additional hurdle to obtaining one and possibly being able to travel to a better, higher paying job, which would yield more income to the Commonwealth in terms of income taxes, etc. At the higher end of the spectrum, those who love and are inclined to purchase very high-end, expensive vehicles are going to do all they can to avoid registering and garaging these cars in Virginia. Go to any high-end car show and admire all the Montana plates. Wouldn’t it be preferable to have them purchase (sales tax) and register those cars here rather than in another state?
Finally, the car tax provides a clear incentive for taxpayers to hold onto older, less efficient vehicles rather than buying newer, more fuel efficient or electric cars. This is in direct conflict with environmental concerns about reducing carbon emissions.
The car tax is not political; it is hated by more than 80% of Virginia voters. It is high time that Governor Gilmore’s original vision became a reality.
Kimberly Pinter is a Fellow in Tax Policy at the Thomas Jefferson Institute and Callahan Burton is a Research Fellow at the Thomas Jefferson Institute finishing his degree at the University of Virginia. Comments can be sent to dmax@thomasjeffersoninst.org.
